What Macy’s 150 Store Closures Say About Retail and the Consumer

Vicki M. Young
·7 min read
1

Macy’s Inc. is shrinking, and so too is the level of U.S. household spending on goods.

“Inflation has slowed but so has labor and wage growth. As such, we expect our consumer to remain under pressure,” Macy’s new CEO Tony Spring told investors in a conference call on fourth quarter earnings last week. “It is against this backdrop that we share our vision from modern Macy’s, Inc. that takes a holistic view of our portfolio of brands.”

More from Sourcing Journal

That vision is a new going-forward strategy dubbed “A Bold New Chapter” designed to strengthen the Macy’s nameplate and return it to top-line growth over the next three years. The department store chain is also battling activists Arkhouse Management and Brigade Capital Management, which on Sunday upped their per-share offer to buy Macy’s to $24 a share in a deal valued at $6.6 billion.

The vision of a much smaller Macy’s—shrinking the store network by 150 “underproductive” doors by the end of 2026—leaves the retailer with 350 locations that includes its full-line, furniture and off-mall locations, Spring said. He added that the stores identified for closure combined—including its San Francisco flagship store—account for less than 10 percent of sales in 2023.

Meanwhile, the more luxurious Bloomingdale’s and Bluemercury banners combined are expected to see 20 percent growth, or a total of 15 new smaller store Bloomie’s and outlets and at least 30 new Bluemercury locations, in the store network. The retailer is also expected to close a distribution center or two now that it has fewer stores.

Modernizing its supply chain, reducing fulfillment cost through increased automation, and improving inventory planning and allocation changes are expected to enhance both product flow from Macy’s vendors to customers as well as quick replenishment at the store level.

National Retail Federation (NRF) chief economist Jack Kleinhenz said Friday in the trade organization’s Monthly Economic Review that inflation and the Federal Reserve’s efforts to bring it under control will be a key economic theme this year.

“While inflation is down from its peak, it has slowed less than expected and is still an important problem that remains to be solved,” Kleinhenz said.

NRF’s chief economist noted that while January’s 3.1 percent year-over-year inflation, as measured by the Consumer Price Index, was better than December’s 3.4 percent, it remains far from the Fed’s target of 2 percent. He noted that 65 percent of consumer spending in December was focused on services. Overall consumer spending slipped in January due to a decline in spending on goods, which was coupled with lower prices, while the rise in services spending was matched with an elevation in prices.

Kleinhenz said that strength in services spending along with inflation in the sector suggests that the “Fed will likely be cautious about rate cuts.” He thinks the next rate cut might occur either at the end of April or in June.

Meanwhile, the Conference Board’s Consumer Confidence Index fell in February to 106.7, down from a revised 110.9 in January, after three consecutive months of gains. Both components of the Index fell, with the Present Situation portion falling to 147.2 from 154.9 last month and the Expectations part slipping to 79.8 from a revised 81.5 in January. The expectations component represents the short-term outlook over the next six months, and a reading below 80 often signals that a recession is ahead.

“The drop in confidence was broad-based, affecting all income groups except households earning less than $15,000 and those earning more than $125,000,” the Conference Board’s chief economist Dana Peterson said, adding that the decline reflects “persistent uncertainty” about the U.S. economy.

“February’s write-in responses revealed that while overall inflation remained the main preoccupation of consumers, they are now a bit less concerned about food and gas prices, which have eased in recent months. But they are more concerned about the labor market situation and the US political environment,” Peterson noted.

Although spending on goods may be down, consumer credit appears to be in good shape, according to Telsey Advisory Group’s chief investment officer Dana Telsey. She said on Monday that while bankcard balances and delinquencies are ticking up to pre-pandemic levels, the St. Louis Fed’s Debt Service Ratio in the third quarter of 2023—its most recent available data—at 9.8 percent remains below the 13.2 percent in the fourth quarter of 2007, right before the Great Recession.

“We are predicting a relatively smooth sailing in 2024, which is shaping up to be a [slightly] down year. We’re already seeing a contraction in manufacturing,” said Lauren Saidel-Baker, an economist at ITR Economics, in a telephone interview. She said GDP will slow, but doesn’t expect a full recession this year. “But then in 2025 we’ll see a recovery, and growth beyond [that], really for the rest of this decade. So we do have a pretty rosy outlook for the remainder of the 2020’s,” Saidel-Baker said.

As fashion firms and retailers think about how to grow their business and improve profitability for investors, Macy’s isn’t the only fashion firm trying to do more with less.

Kontoor Brands, the owner of Lee and Wrangler, on Wednesday disclosed its new Project Jeanius, also a three-year initiative aimed to drive investment in accretive growth opportunities, improve profitability and leverage data analytics to enhance decision making.

Kontoor chairman, president and CEO Scott Baxter said the plan “is not a cost-cutting exercise,” noting that the moves take the firm toward its next phase of growth and away from reliance on its legacy infrastructure. The steps are expected to increase Kontoor’s profitability and create a “true multibrand platform” for both brands. But the company also needed to fine-tune operations following a fourth quarter that saw an 8.1 percent decline in revenue to $594.4 million, versus analysts’ expectations of $726.9 million. The decline was driven by reduced wholesale shipments for both brands as retailers tightly managed inventory levels.

With consumers watching their purse strings, retailers in the discount channel are taking a closer look at how they can grab more market share to grow in the years ahead.

In January, Walmart U.S. president and CEO John Furner said the mass discounter will “build or convert more than 150 stores over the next five years, with plans to remodel 650 doors in the next 12 months, which the company said will bring jobs to communities where it will open new locations. Some of the doors converted or opened will be Supercenters, which Jefferies analyst Corey Tarlowe said will help with “Walmart’s growth prospects ahead, while the company also invests in profit-generating efficiencies across the enterprise.”

Walmart is also including healthier fast-food options—the latest is with Uncle Sharkii Poke Bar—at its stores to help increase traffic with local health conscious consumers. Charvi Gupta, a Getzler Henrich director in the retail group, said the companies that can tap into emerging shifts show their commitment to meeting consumer needs.

And Getzler’s managing director and consumer products practice leader Robert Gorin said that as the economy and other factors impact consumers’ buying power, stores are looking for ways to increase traffic and give customers a “reason to come inside so that they can multitask.” Gorin cited Sephora and Amazon Returns at Kohl’s, CVS at Target and Toys ‘R’ Us at Macy’s as examples of “cost-sharing and hoping that the rising tide lifts all ships.”

So long as the fashion firms and retailers can execute on their plans, they stand a good chance to show the beginnings of improved profitability in 2025, the time when ITR’s Saidel-Baker expects the U.S. economy to show growth for the balance of the 2020’s.