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Macy's has a shocking number of poor-performing stores

Brian Sozzi
Editor-at-Large

Maybe Macy’s (M) should only have 150 stores.

The struggling department store retailer’s CEO Jeff Gennette told analysts on an earnings conference call Wednesday that sales continue to grow strongly at its ‘Growth 50’ stores. Hatched in 2018 as a means to jump start growth via new ideas, ‘Growth 50’ reflects Macy’s decision to invest an outsized amount in its top 50 stores. These stores — which reportedly are getting a cool $200 million investment — have received improved fixtures, updated in-store technology, better flooring and product assortments more tied to local shopping preferences.

Gennette said Macy’s is moving forward with these type of upgrades at another 100 stores. Their overhaul is expected to be completed by October just ahead of the crucial holiday shopping season.

All in, Gennette noted these 150 stores — essentially in the very best locations — collectively represent about 50% of Macy’s bricks-and-mortar store sales.

So, all of this begs the question: What is going on at the other 500 or so Macy’s stores (or 50% of sales) not getting shown a ton of love? And more importantly, what’s their future look like if Macy’s doesn’t deem them worthy enough for snazzy remodels?

The short answer to both those questions is not too hot. While Macy’s is adding its no frills ‘Backstage’ off-price model in many of these lower-tier stores, it doesn’t appear to be enough to dial up the growth.

IMAGE DISTRIBUTED FOR MACY'S - Macy's at Chula Vista Center prepares for the Grand opening of its off-price shopping experience, Macy's Backstage, on Wednesday, Sept. 12, 2018 in Chula Vista, Calif. Grand opening events to take place on Saturday, September 15 at 9 am (Sandy Huffaker/AP Images for Macy's)

“The neighborhood stores, I would expect those to continue to negatively comp, but they’re becoming more profitable because we’re operating them more efficiently with less square footage. The customers are moving through fulfillment, so we are handling their expectations in those particular stores,” Gennette said.

Macy’s top executive downplayed the need to close more of these lagging stores, reiterating an importance to serve a national customer in a digital shopping world.

Fair point.

But the fact is Macy’s has what may be hundreds of stores where sales continue to decline and may do so for the foreseeable future. As many Macy’s shoppers can attest, there remains scores of stores that are very underwhelming to visit. Indeed, all of that certainly took its toll on the second quarter, and will likely continue to do so for the balance of the year.

Macy’s reported second quarter adjusted earnings of 28 cents a share, missing analyst forecasts for 45 cents a share. Earnings plunged from 70 cents a year ago. Same-store sales rose a meager 0.3%. Full-year earnings guidance was slashed to $2.85 to $3.05 a share from $3.05 to $3.25 previously.

“While Macy's is gaining traction with its various initiatives, we remain sidelined given secular headwinds. We believe realizing sizable, sustainable margin gains may be challenging as Macy's invests in [long-term] initiatives,” said Jefferies retail analyst Randy Konik.

Brian Sozzi is an editor-at-large and co-host of The First Trade at Yahoo Finance. Follow him on Twitter @BrianSozzi

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