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Why Shutters are Coming Down at Macy’s

Aug 16 2016
Macy’s M 0.57 % may not have found the solution for the woes of U.S. department stores, but it has moved beyond the hand-wringing phase into action.

The company said Thursday that it is closing about 100 stores, or 15% of its base, with most expected to close early next year and the remainder as leases expire. It is also “examining opportunities” for four downtown flagship stores across the country and is in negotiations over the sale of its men’s store on San Francisco’s Union Square.

The moves represent a dramatic shift for the retailer, which has for years been weighing potential strategies for monetizing its real estate. They are an important defensive step as it tries to prevent itself from being further squeezed between Amazon.com AMZN -0.58 % and discounters such as TJX TJX -5.80 % Cos. Shares rose 18% Thursday afternoon. They remain down by 40% over the past year.

The urgency of the situation has become increasingly clear for Macy’s as same-store sales have fallen for six consecutive quarters. Second-quarter results reported Thursday beat analysts’ expectations, but same-store sales fell by 2.6%.

In addition to tougher competition from Amazon’s push into clothing, Macy’s and other department stores have effectively been competing against themselves as they expand online. Furthermore, variable shipping costs associated with online sales mean they tend to come with lower margins than in-store sales. The only way to combat the rise of e-commerce is to close physical locations, thereby eliminating costs and freeing up capital.

Of course, closing stores means ceding market share, which some retailers have been reluctant to do. The news pushed up shares of competitors J.C. Penney, JCP -1.20 % Nordstrom and others. But Macy’s said the reduction in earnings before interest, taxes, depreciation and amortization will be offset by cost savings beyond those associated with store closings.

Macy’s still needs to prove it can effectively target the right stores for closure. It said some of the locations slated to be shuttered sit on real estate worth more than the store itself. Still, moving forward is better than standing still.

By Miriam Gottfried, via Wall Street Journal

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