Want to fix retail? Close more stores

Very upbeat on retail sector: Pro
Very upbeat on retail sector: Pro

As retail earnings start to trickle in, there's a common theme bubbling below the surface that's weighing on even the strongest performers: There are still too many stores.

Despite the third quarter representing Wal-Mart's first domestic same-store sales gain in a year and a half, the strength at its bricks-and-mortar locations came from its smaller-format stores, while its growing supercenter base continued to lag.

In fact this segment, which has been called out by analysts and company executives alike as a drag on sales, has grown its store count by more than 100 since the end of October 2013.

An employee rings up sales at a cash register of a Walmart store in Los Angeles.
Robyn Beck | AFP | Getty Images

Meanwhile, Wells Fargo analyst Paul Lejuez said the slower-than-anticipated rate of store closings by Macy's competitors Sears and J.C. Penney is likely weighing on Macy's sales. In the latest quarter, the department store reported weaker-than-expected sales, while earnings handily beat expectations.

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In a similar vein, Lejuez said that Macy's itself probably needs to close more stores, or at least reduce their size as more shopping shifts to the Web. These factors contributed to his decision to downgrade the company's stock from "outperform" to "market perform."

"We have long cited structural issues in the department store sector ... but we had hoped these issues might be alleviated [at least partly] as competitors such as Sears [and] J.C. Penney closed large portions of their store bases," Lejuez wrote in a note to investors.

"We expected these closings to provide a sales boost to Macy's—but store closings are not happening at the rate we expected, at least in the near term."

Too early to call Wal-Mart turnaround?
Too early to call Wal-Mart turnaround?

By May, J.C. Penney closed 33 underperforming stores, but analysts have called for it to cut its footprint further.

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Last month, reports surfaced that Sears would close more than 100 stores, many before Christmas—a move some investors would welcome. However, company spokesman Chris Brathwaite said "the reported store count and list of closures isn't accurate" and the company will update its store count when it releases its third-quarter earnings in December.

In Sears' second-quarter earnings release, the retailer reiterated that it had already announced the closure of about 130 underperforming stores this year, and that it "may close additional stores during the remainder of the year."

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For Wal-Mart's part, the company announced at its analyst day in October that it would slow the pace of its supercenter openings next year. Following the company's earnings release on Thursday, Belus Capital Advisors analyst Brian Sozzi said that he predicts Wal-Mart will also begin closing underperforming stores in 2015.

"Theoretically, its own investments in its future of mobile buying is crippling the sales potential of new, and old, supercenters," he said.

"In our view, Wal-Mart must reduce its cost and expense base as it reinvests in price ... and lays global technological infrastructure."

Wal-Mart shares rose about 4 percent in afternoon trading; Macy's shares were slightly lower.