Macy's (M) shrinking stores are having a similar effect on the company's stock on Wednesday.
Investors seldom like to hear words like "downsizing" or "reducing." That appears to be part of the problem for Macy's shareholders as executives broke that cardinal rule in an earnings call on Wednesday morning.
The stock is sliding about 7% in late afternoon trading despite a strong earnings release that was highlighted by a substantial beat on earnings per share and revenue that came in line with expectations.
CEO Jeff Gennette noted that the company is shifting more towards its "magnet" and "neighborhood" stores, which were described as being smaller than the "flagship" locations that occupy the largest amount of its real estate.
"The last bucket is our neighborhood stores. These tend to be smaller," Gennette said. "We are currently testing four different investment models for our neighborhood stores that are aimed at increasing shopping ease and convenience, including more self-service options. And in 2019, we will test and iterate until we land on the right formula to scale the neighborhood stores in our fleet."
Unfortunately, part of that formula includes walling off sections of stores and leaving sections of shelf-space empty to reduce inventory costs.
The company's initiative to "right-size" its stores in this way is making the market cautious, as it brings up thoughts of walled-off Sears (SHLD) stores that tried to hide the company's contraction from its heyday.
One-Time Win
Real Money contributor David Butler noted that the company's downsizing also offers a view of profitability that can't be pushed through to upcoming quarters.
"Macy's Q3 results definitely benefited from real estate sales," he wrote in his column. "It contributed $42 million to operating income, and $0.10 to earnings per diluted share. While selling off underperforming real estate is a perfectly acceptable exercise, it's not a sustainable long-term trend."
Thus, the blow-out earnings beat is a bit illusive given its one-time nature. It also becomes more problematic given the raised bar executives have set for themselves in the fourth quarter.
Less is More
To be sure, many see the move as a rational and positive adaptation to the company's needs.
"Macy's has done a great job rationalizing its store space," Jan Rogers Kniffen, president of J. Rogers Kniffen Worldwide Enterprises told Real Money. "How that can be bad news is a mystery to me."
He noted that the move to a smaller store is similar to a move made by Kohl's (KSS) in which it rented out store space to German grocery chain Aldi. Kniffen espoused his befuddlement at the bullish reaction of the market to Kohls' move given its smaller store footprint.
He noted that stores like Macy's and Kohl's that are adapting to their changing needs will be the companies to progress healthily into the shifting retail environment.
"These are the survivors; Macy's, Kohl's, Nordstrom (JWN) . How can you not like them?" he said.
