Dive Brief:

• Morgan Stanley analysts suggested Macy's might need to quicken the pace of its store closures and downgraded their estimates for the department store retailer's stock, which since September has outperformed the average for sellers of softline goods. "While Macy's has proactively closed stores, ongoing negative store-only comps lead us to question if it is closing them fast enough," the analysts wrote in a wide-ranging report on the return on retailers' capital spending.
• The analysts pointed to a slowdown in the expansion of store fleets across retail, with current growth at less than 1% as compared to a 2% to 3% expansion over the past five years. And even as retailers make fewer risky decisions about capital spending, their margins are eroding as the "lion's share of retailer growth" comes through e-commerce, which has lower margins than store sales, the analysts note.
• All that leaves the more "e-commerce resilient" retailers in a better position to draw returns from their investments in stores and other spending, according to the Morgan Stanley team. Among them are the off-price sellers — namely TJX Cos., Ross Stores and Burlington Stores — which have been rapidly expanding their store fleets and posting enviable sales gains. The analysts also include in this group Home Depot, Lowe's, Costco, Ulta, Michaels and auto parts sellers.

Dive Insight:

The Morgan Stanley team, led by analysts Simeon Gutman and Kimberly Greenberger, are the latest to question the long-term performance potential for some traditional retailers.

In a report earlier this week, Deutsche Bank analysts wrote that department stores may already be overvalued by investors, given that the "fundamental upside is limited" for the sector. They pointed out that mall-based retailers and department stores remain "structurally challenged" given the expansion of e-commerce, the growth of off-price retail, and shifts in consumer spending to restaurants and other experience-based services.

In some ways, the Morgan Stanley report may present cause for even deeper pessimism. As they point out, even retailers making investments to adapt to a more e-commerce-heavy retail environment do so at a major cost to their margins. Their sales may outperform those retailers that are loaded with debt and treading water, or even teetering toward bankruptcy, but those sales increases might yield less profit than capital spending in the past.

As the Morgan Stanley team frames it, retailers have been caught in a "margin downdraft" since 2012 — during which time their earnings margins have shrunk by 230 basis points — due mainly to e-commerce competition, the rise of price transparency, shifts in their own sales from stores to online and the high cost to retailers of free shipping.

The analysts describe the retailers in this boat as "e-commerce challenged," as they are "the most at risk from the growing presence of Amazon" and falling returns on the investments they make to compete. The group, in the analysts' view, includes: Pier 1 Imports, Williams-Sonoma, Bed Bath & Beyond, Dick's Sporting Goods, Walmart, Target, Sally Beauty, Macy's, Nordstrom, Kohl's, L Brands, Chico's, Tiffany, Lululemon, Michael Kors, Urban Outfitters, Gap, Tapestry and American Eagle.