Macy's CEO Jeff Gennette says America's weak malls 'continue to decline rapidly'

Macy’s is getting out of America’s weakest shopping malls.

“We see a bifurcation of malls,” Macy’s CEO Jeff Gennette told investors Wednesday during a meeting at the New York Stock Exchange. “The lower-tier malls continue to decline rapidly.”

The meeting came a day after Macy’s announced it will close 125 stores over the next three years, most in so-called C- and D- rated malls, which bring in fewer sales per square foot than A- and B-rated properties.

Macy’s said its stores in A-rated malls, along with unrated properties, represent about 49% of stores today and 66% of sales. As Macy’s shutters unprofitable shops, those percentages are expected to grow over time.

“We see many malls that are thriving,” Gennette said. “We believe the best malls have a real and growing place in U.S. retail. … We believe these malls are here for the long run.”

As it looks to open some new stores, Macy’s will be growing outside of shopping malls. It is testing a new smaller-format shop, called Market by Macy’s, in open-air shopping centers. The first opens Thursday in Southlake, Texas, and includes a restaurant and sells a mix of up-and-coming brands — like sock maker Bombas and children’s apparel line Rockets of Awesome — along with some of Macy’s private labels.

Macy’s is also planning to open more freestanding Backstage locations in shopping centers. Backstage is Macy’s off-price concept that competes with the likes of T.J. Maxx, Burlington and Nordstrom Rack. Macy’s has more than 200 Backstage shops within Macy’s stores today. It will open seven Backstage locations outside of Macy’s stores in 2020, bringing the total of freestanding Backstage shops to 13.

But even with the closures, Macy’s will be left with about 500 department stores in malls, which one firm says is still far too many. That is “a number that we believe is too high in a world where mall traffic continues to decline,” Citi analyst Paul Lejuez wrote in a note to clients.

Macy’s said that by 2021, its top 250 stores will represent 78% of sales. Those are the locations receiving upgrades such as self-checkout kiosks, new lighting and fresh flooring.

Some U.S. mall owners have been echoing Gennette’s sentiment.

“Over the past 10 years … we have seen the heightened value and improvement of the best centers, and a substantial deterioration of everything else,” mall owner Taubman COO Bill Taubman told CNBC late last year. “What was good is even better, and what is not good has gotten much worse.”

Within the roughly 1,110 malls in the U.S., 80% of “mall value” is at properties rated A- to A++, according to an analysis by commercial real estate services firm Green Street.

“Accelerating department store closures over the next decade seem inevitable, which imposes a sizable capex burden on landlords,” Green Street analyst Vince Tibone said. “Reinventing the mall with new anchor tenants will be a significant challenge.”

Macy’s shares were up than 2.7% at midday Wednesday. The stock has fallen more than 36% during the past 12 months. Macy’s has a market cap of about $5.2 billion.