Macy’s stock will fall as the company’s physical store sales deteriorate, according to one top Wall Street firm.

Morgan Stanley lowered its rating to underweight from equal-weight for Macy’s shares, predicting the retailer will report lower than expected earnings this fiscal year.

“Macy’s continues to undergo core operating challenges, similar to peers in the department store space. Despite closing stores proactively, store-only comps remain negative and we forecast them to remain so in the future,” analyst Kimberly Greenberger wrote in a note to clients entitled “Post Q1, 2018 Could Be an Uphill Battle” Thursday.

“Expense cuts, real estate monetization, and secondary growth initiatives are encouraging, but we think the market needs to see core retail EBIT stabilization and a return to strong cash flow generation in order to become more constructive on the stock,” she wrote.

The company’s shares are down 2.9 percent Thursday after the report.

Greenberger reduced her price target for Macy’s shares to $25 from $27, representing 17 percent downside to Wednesday’s closing price.

The analyst said Macy’s return on invested capital (ROIC), which measures how efficiently a company is profitably allocating its resources, has declined by 4.3 percentage points from 2014 to 2016. She noted ROIC also fell during the first three quarters of 2017 before rebounding in the fourth-quarter due to real estate gains.

“We expect ROIC to deteriorate in 2018 after 1Q and thus expect the stock price to decline once again. Furthermore, Macy’s increased reliance on private label credit card income and real estate gains masks the underlying deterioration in core retail EBIT (-63% since 2014),” she wrote.

The analyst said they are “cautious” on the department store subsector, pointing to competition from online retailers and lower apparel prices.

Greenberger estimates Macy’s will generate earnings per share of $3.55 in its fiscal 2019 versus the Wall Street consensus of $3.61.

— CNBC’s Michael Bloom contributed to this story.