Macy's, famous for being big, is shrinking stores

Macy's, once billed as "the world's largest store," is betting that smaller is better. 

The famous retailer is shrinking some of its stores, cutting down on their square footage as consumers increasingly shift to online shopping. The company didn't disclose which stores will be cut down, but said it plans to disclose more details next year about what it calls its "neighborhood stores."

"We're currently testing four different investment models for our neighborhood store that are aimed at increasing shopping ease and convenience, including more self-service options. In 2019, we will test and iterate until we land on the right formula to scale the neighborhood stores in our fleet," said chief executive Jeff Gennette on a Wednesday conference call to discuss the company's latest financial results. 

The company is segmenting its stores into three types of shops: the smaller neighborhood stores; its flagship, such as its original store in New York City's Herald Square; and "magnet" stores, or locations that carry heavily curated merchandise and are often in popular locations or malls. One such neighborhood store is its Stamford Town Center location in Stamford, Connecticut, which The Wall Street Journal noted has reduced square footage by 8 percent. 

That strategy could pay off, said Neil Saunders, managing director of GlobalData Retail, in a research note.

"One of the factors that necessitate a reduction in space is Macy's success in digital, where online sales continue to grow at a good clip," Saunders wrote. "However, the flip side of this is that, in many locations, Macy's does not need to carry so many options and choice -- especially in categories like fashion. As such, the right-sizing of its store estate is a natural part of this evolution."

On Wednesday, Macy's logged its fourth consecutive quarter of sales growth at existing locations. The company also upped its annual earnings expectations. 

Still, Macy's shares fell more than 5 percent in early afternoon trading. Some analysts noted that the company's physical stores nee more attention and investment. 

"We are conscious that Macy's has a long tail of underinvested-in properties, many of which are underperforming and do not reflect the company's latest thinking," Saunders said.

Updating the brick-and-mortar

Department stores like Macy's are under intense pressure to adapt as more shoppers migrate online or divert their spending to other pursuits.

Macy's is taking a number of steps to improve the experience of customers and boost sales. Those include expanding its store brands to differentiate itself from rivals, adding more of its off-price Backstage stores and using technology that allows customers to skip lines at the cash register. And it's rolling out multiple layers of technology to offer people something they can't get online, including the use of virtual reality in its furniture and cosmetics sections.

Macy's is also trying to become more nimble. It acquired Story, a concept store, which rotates themes and what it sells every few months. As part of that deal, the retailer brought Story founder Rachel Shechtman aboard to help create a more vibrant shopping experience across its stores.

Kohl's, J.C. Penney, and other department stores are reporting quarterly results over the next couple of weeks.

Macy's reported third-quarter profits of $62 million, or 20 cents per share. Per-share earnings adjusted for one-time gains and losses were 27 cents, or 13 cents better than industry analyst expected, according to a survey by Zacks Investment Research. The Cincinnati chain's revenue of $5.4 billion also beat expectations.

The company said that sales at stores opened at least a year rose 3.3 percent, its fourth straight quarter of gains after a three-year slump. The figure included sales from its licensed departments.