Macy’s is rebuilding its operating model around a defined store fleet, an automated network spine and emerging AI tools, with supply chain decisions now determining how much of that redesign reaches the P&L under tariff and margin pressure.
In Brief
- Macy’s is engineering its store base as a 350-location omnichannel grid, using targeted exits and a capital-light Reimagine model rather than carrying a legacy fleet.
- The new China Grove distribution centre and end-to-end initiatives have reset delivery speed and cost-to-serve, supported by tighter inventory composition and open-to-buy discipline.
- With closure-led SG&A relief fading and tariffs quantified as a structural drag, the next phase of margin improvement has to come from network productivity, inventory mix and applied AI rather than footprint cuts.
The Structural Break: From Inherited Fleet To Designed Network
The decisive change at Macy’s is not a single project but a shift in how the network is defined. The company has drawn a line around an explicit go-forward fleet of roughly 350 Macy’s locations and is treating everything outside that perimeter as expendable. Around 150 underproductive stores are slated for exit, with about 65 still to close through 2028.
This is no longer a defensive reaction to declining sales. Management has made clear that the recent decline in reported revenue is primarily a function of those closures. In the fourth quarter of 2025, approximately 200 million dollars of lost sales was attributed to the 64 stores closed at the end of fiscal 2024. Excluding that impact, Macy’s Inc. sales grew 0.9 percent. Underlying demand on the trimmed network is positive; the fleet change is about economics and coverage, not retreat.
At the same time, Macy’s has deployed its Reimagine programme across the core fleet at scale. What started as 50 upgraded stores, expanded to 125, is now a 200-store cohort. According to management, these locations represent around 60 percent of the go-forward Macy’s store base and about 75 percent of go-forward Macy’s store sales. Over the past eight quarters, Reimagine stores have delivered growth in seven of them, and the investments are said to be meeting return expectations while remaining capital light.
The operating logic is clear: exit low-productivity real estate that does not justify omni investment, and concentrate capital and operating attention on a standardised store archetype that can play multiple roles in the omnichannel system.
How The End-to-end Reset Works In Practice
Macy’s describes end-to-end modernisation as a strategic pillar and points to more than 35 AI use cases identified across the organisation. Stripped of programme language, three operational layers are moving in tandem: distribution network design, inventory mechanics and store execution.
On the network side, the completion and ramp-up of the China Grove distribution centre is the most concrete change. China Grove is described as a state-of-the-art, automated facility that has streamlined how Macy’s works and will reduce cost-to-serve. Capex stepped down from 882 million dollars in 2024 to 740 million in 2025, largely because long-running infrastructure projects such as China Grove shifted from build to use.
Operationally, a DC of this kind typically introduces:
- Automated storage and retrieval, which increases pick density and reduces touches per unit
- Tighter integration between warehouse management, transport management and order orchestration systems, so that network decisions (DC versus store fulfilment, carrier selection, cut-off times) are made against consistent data
- Standardised cartonisation and routing logic, allowing accurate delivery promises and lower shipping cost per dollar sold
Macy’s states that delivery times have materially improved and that it now provides specific delivery expectations to customers. That signals that lead-time performance is now stable enough to be codified into service thresholds and surfaced in the front end of the commerce stack.
Inventory practice has been recalibrated to fit this network. Year-end inventory was 4.4 billion dollars, down 1.3 percent on the prior year. Management emphasises composition more than volume: more newness, fewer aged goods and meaningful open-to-buy flexibility. The brand matrix has been refined with 60 new brands added in 2025 and less productive brands edited out or contained. Average unit retail and basket size are both rising, while total units are slightly down.
In operational terms, this requires:
- A planning cadence built around frequent open-to-buy reviews, with space to chase into trends and pull back from slow sellers without breaching service thresholds
- SKU policies that prevent uncontrolled proliferation as new brands and exclusives are introduced, preserving allocation quality and store capacity
- Allocation and replenishment logic that directs high-AUR, high-attachment product into Reimagine and Bloomingdale’s locations where selling and omni fulfilment capability can support it
Stores are being configured and staffed to serve this design. Macy’s has rolled out enhanced education, a tiered staffing model and dedicated frontline colleagues for specific merchandise areas. It is layering localised event series, such as prom activations, on top. For the supply chain, this changes how demand is generated and fulfilled. Stores are not just terminals; they are calibrated nodes in a network where assortment, staff, and event calendars must align with inventory depth and fulfilment rules.
Digital volume, now about one third of total sales, is described as profitable. That profitability depends on the physical network. Management notes that stores provide the market-by-market presence that underpins digital, pulling everything into one system. At network level, that implies unified inventory visibility, an order management layer that chooses between DC and store based on cost, lead time and stock health, and store processes that execute ship-from-store, pickup and returns within defined labour envelopes.
AI is being attached to this stack, not floated above it. The company points to use cases across supply chain, merchandising, marketing, call centres and customer-facing channels. While it does not break out individual projects, the areas named strongly suggest investment in demand forecasting, allocation optimisation, safety stock tuning and intelligent order routing. Authorities in other large-format retail groups have already shown that such tools can deliver measurable gross margin gains through reduced markdowns, better availability and lower logistics drag without relying on further price inflation.
What Others are Doing and What It Implies
Peer experience in the last year shows how much of margin can be driven by supply chain execution in a low-growth environment. One major general merchandise chain expanded gross margin by more than 100 basis points in 2025 largely through shrink reduction and inventory discipline. Another large off-price operator reported a 40 basis point gross margin increase, with about half of that from shrink improvement alone. Several big-box players are guiding to further margin expansion built on retail media, marketplaces and automation, while holding product margins broadly flat.
Macy’s 2026 outlook for gross margin of 38.3 to 38.6 percent, even after a guided 20–30 basis point tariff drag, sits in this pattern of supply chain as margin engine. The company expects first-quarter gross margin to be down year-on-year because tariffs will hit that period by 40–60 basis points, but forecasts improvement from the second quarter onwards as end-to-end initiatives, assortment and AUR do more of the work.
The comparison is not about superiority. Department store networks have heavier fashion and tariff exposure than most mass merchants, and they carry the complexity of multi-brand, multi-category, multichannel models that span off-price to luxury. The benchmark value here is in showing that similar levers are being pulled elsewhere and that Macy’s is now applying them against a more constrained, explicit network design.
The Hard Constraint: Tariffs and Fading Closure Dividends
The most immediate constraint on Macy’s reset is external. Tariffs are a measurable drag on both gross margin and earnings. In the fourth quarter of 2025, gross margin was 35.2 percent versus 35.7 percent a year earlier. Management states that excluding an approximate 60 basis point tariff impact, underlying gross margin would have expanded by about 10 basis points. The same quarter saw around 13 cents of EPS eroded by tariffs.
For 2026, Macy’s expects tariffs to reduce gross margin for the year by 20–30 basis points and to hit first-quarter gross margin by 40–60 basis points with a 5–10 cent EPS effect. Full-year EPS guidance of 1.90 to 2.10 dollars already includes 10–20 cents of expected tariff drag. The company assumes that current tariff structures remain in place for the rest of the year after the existing inventory cost base works through.
This matters because it caps how much of the end-to-end work appears as reported margin. It also coincides with a normalisation of closure benefits. Macy’s closed 64 stores in fiscal 2024 and only 14 in 2025. The company notes that SG&A savings from closures are now less pronounced, and guides SG&A up 1–2 percent in dollars for 2026, albeit below inflation.
With closure-led SG&A relief flattening and tariffs absorbing a visible share of gross margin, further profitability gains have to come from:
- Distribution productivity at China Grove and across the network, measured in cost per unit processed and adherence to promised delivery windows
- Store labour productivity under Reimagine configurations, measured in sales and fulfilment activity per labour hour
- Inventory productivity, measured in gross margin return on inventory investment rather than sheer sales volume
- Mix and sourcing work, including the redesign of private brands, which currently account for about 12 percent of sales and are being positioned to offer better quality and value despite tariff input costs
The multi-brand, multi-category nature of Macy’s is an asset and a constraint here. It allows the company to flex across price tiers and formats as demand shifts, but it also multiplies the planning and sourcing decisions that must be synchronised if tariffs are not to bleed into uncontrolled markdowns or availability gaps.
What This Operating Model Now Makes Possible
Macy’s has moved from an inherited network to a designed one. A defined store fleet, a capital-light yet standardised store format under Reimagine, an automated DC backbone at China Grove, and a profitable digital channel integrated with physical assets now form the core of its operating system. Inventory is being managed with more emphasis on freshness and open-to-buy, and AI is beginning to be applied to the planning and orchestration processes that connect customer demand to stock and fulfilment.
The model does not remove external constraints. Tariffs remain a structural headwind and closure-led SG&A savings are diminishing. Execution risk is real: rolling out AI into core supply chain processes, maintaining inventory discipline while adding brands, and keeping store operations aligned to omni promises all require sustained governance rather than one-off initiatives.
What has changed is where Macy’s expects value to come from. The supply chain is no longer a background utility for a legacy store estate; it is now the primary mechanism through which Macy’s is attempting to reset its cost-to-serve, service thresholds and capital intensity across stores and digital. The extent to which the company can convert that design into stable margins under tariff pressure will define how durable this end-to-end reset proves to be.
