Which local Macy's Inc. (M) store is most likely to close?

Tri-County has demographic challenges

CINCINNATI - Tri-County is the oldest local Macy’s store. Kenwood the biggest. Macy’s has closed six urban stores since 2013 and its lease in downtown Cincinnati expires at the end of 2017.

But as Macy’s refines the list of 100 stores it plans to close -- starting at the end of this year -- it’s anybody’s guess whether the region’s six local Macy’s department stores will survive the cut.

“Market demographics change over time and this country is over-stored,” Macy’s Chief Financial Officer Karen Hoguet told Wall Street analysts Thursday. “We believe we can benefit from right-sizing the company.”

The news overshadowed a strong earnings report for Macy’s, which exceeded Wall Street expectations with a $9 million profit on revenue of $5.9 billion. Its revenue figure was $130 million better than analysts expected and its earnings per share of $0.54, excluding unusual charges, was 9 cents better than forecasted.

Macy’s shares jumped 17 percent to $39.81, as investors celebrated positive earnings reports by Macy's and Kohl’s Corp. and applauded Macy’s plan to shutter about 15 percent of its department store doors.

Cincinnati has dodged the bullet on more than 40 store closures announced by Macy’s since 2013, but now the company is closing about one in six stores. The region has six Macy’s department stores. You do the math.

Macy’s did not identify any of the 100 stores on its preliminary list of closures, but it did provide some insight on the process that identified candidates. It used a two-step process that included an evaluation of each store’s cash flow and financial strength followed by a separate analysis of the “strategic importance” of all stores.

Given those parameters, Downtown and Tri-County appear to be the two locations most likely to be on Macy’s closure list.

Macy’s looked at the “quality of the market, quality of the malls, the competition in the malls and the market, what was happening in terms of growth of income and population in all the markets,” Hoguet said.

It’s the first time Macy’s ran both kinds of analysis to evaluate store closures and it led to a bigger number of store closings than in prior years. While the final list won’t be known for months, those tagged for potential closure “are both underperforming and not in good locations for the long-term,” Hoguet said.

Macy’s added to the list stores that could be sold to real estate developers, fetching higher rate of return than Macy’s could achieve by operating a store at that location.

“So in those cases, they're not under performers but the long-term, they're not critical to the Macy's footprint,” Hoguet said. “So, we will be taking advantage of the real estate demand for those locations as well.”

What does that mean for Cincinnati? Hoguet did not say and Macy’s declined further comment. But Tri-County is already an under-utilized Macy’s store. The company has been using it as an online fulfillment center since 2012.

Beyond that, its Springdale zip code has a lower median household income, lower population growth and lower housing values than every other Macy’s store in the region except the city of Cincinnati.

“Tri-County probably faces the most challenging set of demographic conditions,” said Shaun Bond, a University of Cincinnati professor and director of the UC Real Estate Center. “The concern would be the growth potential for that area and the challenge faced by that center from newer developments in Liberty Township and up the I-75 corridor.”

The Downtown store has its own peculiar hurdles. Not only has Macy’s made a habit of closing urban locations in recent years, but the city of Cincinnati lags other Macy’s locations in population growth, median household income, housing values and retail spending per capita.

However, the Downtown Macy’s is just a few blocks from its Cincinnati headquarters and urban retail is “a hot commodity at the moment,” Bond said.

“This whole trend towards downtown living bodes well for downtown retail,” he said. “So, there might be a question in what’s the right size for a downtown department store” in Cincinnati, as opposed to whether a store should exist there.

 

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