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Department stores admit they've gotten too big, but they have different ideas about how to fix it

Major department stores finally agree that they need less square footage in the U.S. Yet as each of these chains trims their fleets for the digital era, they're taking slightly different approaches.

J.C. Penney on Friday said it will close between 130 and 140 stores over the next several months, allowing it to invest in locations that are more meaningful to its top line. The decision marked a major pivot point for the company, which shuttered just seven stores in 2016.

Penney's long-anticipated announcement is in line with Macy's decision to close 100 locations, which will begin going dark this spring. CEO Terry Lundgren reiterated the importance of paring down the chain's fleet on a call with investors Tuesday, saying it will give the company a "healthy physical portfolio."

Kohl's, however, is taking a slightly different approach. CEO Kevin Mansell said Thursday that his company will trim its square footage not by closing stores, but by shrinking them down.

Meanwhile, both Kohl's and Macy's are opening stores related to emerging concepts, including Off/Aisle and Bluemercury, respectively.

"There's merit to each of these strategies," David Bassuk, co-head of the retail practice at AlixPartners, told CNBC.

Wall Street has been pressuring department stores to shrink their footprints amid competition from the internet and off-price retailers. The chains' struggles have been amplified by a glut of inventory, which has led to widespread discounts and lower profitability.

Yet while shrinking to grow sounds like a simple concept, it's much more complex to execute. Macy's, for example, incurred a $230 million charge in its fiscal fourth quarter related to store closures, severance, and other costs. The retailer meanwhile expects to give up $575 million in annual sales from its exit of 60-plus locations.

The JCPenny Department Store with a Store Closing banner
Robert Barnes | Getty Images

While the company is finding ways to hang onto more of the sales it loses when it shutters a shop, it is still forfeiting revenue that doesn't shift to a nearby location. Like most retailers, Macy's also sees a decline in an area's online sales when it closes a store there.

That dropoff is part of the reason Penney's has been so reluctant to trim its store fleet. Roughly 75 percent of its online orders touched a physical store at some point in 2016, whether through returns or in-store pickup.

"Maintaining a large store base gives us a competitive advantage in the evolving retail landscape," CEO Marvin Ellison said in a statement.

Kohl's management expressed a similar sentiment about the importance of stores. CFO Wes McDonald said the sales decline his chain experienced after closing 19 stores last year reinforced his thesis that it needs to maintain a broad footprint, but can make its shops smaller.

As opposed to going totally dark, reducing a store's size allows Kohl's to maintain its physical presence in a given market and improve its productivity. The company has been moving away from its 80,000-square-foot shops in favor of stores that measure 35,000- and 55,000-square feet. It uses customer data to determine which brands and product types will perform best in an edited-down version of its assortment.

"There's great power in stores in an omnichannel world," Mansell said.

Yet even that strategy has its drawbacks. While operating smaller locations gives Kohl's the opportunity to hold onto more market share, it eats up some of the money it could spend on other initiatives.

Macy's, for instance, said it will use some of its $550 million in annual expense savings to invest in its off-price and beauty businesses, as well as the web. And at Penney's, Ellison has earmarked some of its cash to spruce up better-performing stores. That includes refreshing its Sephora shop-in-shops and rolling out an additional 100 appliance showrooms.

Saving money is particularly important for Penney's, which is trying to pay down debt.

"It's the tradeoff retailers are forced to make and to be honest there's no easy answer," Bassuk said. "The investment [to build excitement in stores] is huge, and the payoff is questionable."

As Kohl's and Macy's close the doors at some of their namesake shops, they're also adding locations. When factoring in openings related to Kohl's small shops, its Off/Aisle bargain concept and its Fila outlets, the company added four net stores last year. That trend, some argue, will cause retail's biggest underlying problem — an imbalance of supply and demand — to persist.

Yet while that may indeed be the case, Bassuk said it's understandable why these chains would look for new ways to juice their revenues.

"Traffic is down and sales are down and revenue is hard to come by, but it's also a story of market share shifts," Bassuk said. "Retailers are trying to capitalize on that."