Macy’s Could Have 50% Upside in a Sale – from Barron’s – worth dig deep into it
http://www.barrons.com/articles/macys-could-have-50-upside-in-a-sale-1486789444?wsjhp
Macy’s is known for promoting marked-down merchandise with bright red tags. After dropping to a recent $31.99 from $73 in mid-2015, its stock sports a bright, 60%-off red tag. Investors might think twice before bypassing this bargain.
Doomsayers believe that the Internet spells the death of traditional retailers, but Macy’s (ticker: M), which owns plenty of bricks and mortar, is fighting back. In recent years, the nation’s largest department-store operator has also become the sixth-largest online retailer. As Macy’s downsizes its physical-store operations, the stock could rise by 20% to 30%. And in a potential sale, particularly one involving the spinoff of the company’s real estate assets, it could be worth $45 to $50. Given Macy’s 4.7% dividend yield, investors are being paid to wait.
Macy’s sales have been in a funk for the past two years, largely due to consumers’ accelerating shift to online shopping. The Cincinnati-based company is expected to report that sales at stores open at least a year fell 3% in the fiscal year ended on Jan. 31, just as they did in fiscal 2016. Wall Street is gloomy about prospects for both the industry and the company, with just seven out of 28 brokerage analysts following Macy’s rating the stock a Buy. That’s an even lower percentage than during the 2008 recession.
This pessimism, combined with Macy’s aggressive steps to turn around its business, suggest that the shares could be near a bottom, and poised to rally. Management plans to cut up to 10,000 jobs out of 157,900, and close 100 poorly performing stores, including 68 this year. That could reduce costs by $550 million annually, freeing funds to invest in the company’s formidable, fast-growing online business and finance other growth strategies.
Barron’s isn’t the only observer to see value here. According to recent press reports,Hudson’s Bay (HBC.Canada), the Canadian company that bought Saks Fifth Avenue and Lord & Taylor, is interested in acquiring Macy’s, as well. Management’s resistance to selling could be weak, as President Jeffrey Gennette is set to succeed CEO Terry Lundgren shortly.
A DEAL MIGHT NOT HAPPEN, but if it does, Macy’s could command $45 a share, or more, given its attractive real estate. Hudson’s Bay had no comment, and Macy’s declined to make senior officials available.
Macy’s property portfolio is estimated to be worth as much as $21 billion, significantly more than the company’s $16 billion enterprise value (stock market capitalization plus net debt). Macy’s has 142 million square feet of retail space, and owns about 400 of 730 Macy’s stores. Among its holdings are trophy properties in New York’s Herald Square and on Chicago’s State Street. Overall, the retailing giant has 880 stores, including those of high-end Bloomingdale’s, beauty-products purveyor Bluemercury, and discounter Macy’s Backstage.
Activist investor Starboard Value, which owns 1% of Macy’s, has pushed the company since 2015 to monetize its real estate. Starboard issued a report early last year valuing the properties at up to $21 billion, depending on how the stores are disposed.
Macy’s could sell the stores through joint ventures with real estate firms and then lease them back via an operating company. The “opco” could be structured with little or no debt, and retain 95% of Macy’s free cash flow, even after the additional rent expense, according to Starboard, which said such a move would create $10 billion of shareholder value. Starboard didn’t respond to a request for comment. Separating into an opco and real estate investment trust would be another way to create value.
Even if Starboard’s estimate is cut by 25%, it suggests that investors are putting a negative value on Macy’s retail operations. Despite the head winds, that’s harsh.
In the past, Macy’s has been resistant to selling property, but that could change. In November, it signed a deal giving Brookfield Asset Management (BAM) a 24-month window to create a development plan for 50 mostly mall-based properties, both owned and leased.
Macy’s has been well managed, and is a “really good brand,” says Michael LaChapelle, a portfolio manager at FoxForge Capital, which owns the stock. The timing is right for a sale, as property prices are high and interest rates low, he says. With the retailer’s sales drooping and big changes needed, that could incentivize Macy’s to “get aggressive on real estate.”
Amazon.com (AMZN) is traditional retailers’ biggest threat. But the market’s anxiety about the Seattle-based e-commerce giant has obscured bullish online trends elsewhere. Macy’s rang up $6.2 billion in e-commerce in fiscal 2016, the latest year with available data. That was equal to 23% of overall sales and up from 19% the previous year, according to internetretailer.com. Macy’s online sales are growing by 15% a year, almost as much as Amazon’s (see nearby table).
Macy’s reports fiscal 2017 results on Feb. 21. Analysts expect revenue of $25.9 billion, and net income of $945 million, or $3.05 a share. That compares with $27 billion, $1.1 billion, and $3.22 in fiscal 2016. Revenue could fall to $24.9 billion in fiscal 2018, producing net income of $907 million, or $3.20 a share, on fewer shares outstanding.
Macy’s trades at an undemanding 10 times fiscal-2018 earnings. If it can shrink and show growth from a smaller base, the shares could get a higher price/earnings ratio, argues Christian Ledoux, director of research at South Texas Money Management, a Macy’s holder. For example, using Macy’s median P/E of 12 would imply a stock price of $39, over 20% above today’s.
ANOTHER THREAT to department stores is the rise of “fast fashion” outlets, such asHennes & Mauritz ’s (HMB.Sweden) H&M, and Inditex ’s (ITX.Spain) Zara, which maintain low inventories and can react relatively quickly to changing fashions. According to a recent Credit Suisse report, department stores accounted for 35% of retail sales in 2015, down from 45% in 2007, with off-price and specialty retailers gaining share.
Here, too, Macy’s is fighting back. It bought the Bluemercury luxury beauty chain in 2015, and expanded it to 117 mostly freestanding boutiques from 60. Macy’s doesn’t break out Bluemercury sales.
Macy’s Backstage, which has 22 stores, is also growing. The unit could help combat rival discounters and perhaps expose a younger consumer to the Macy’s brand.
According to George W. Hebard III, a director of research at Barington Capital Group, another activist firm that owns Macy’s stock, the retailer needs faster execution and more exclusive brands to generate traffic. He’d also like to see Macy’s spend less on printed marketing materials and more online. Hebard calls the stock significantly undervalued.
Macy’s problems aren’t easy to fix, but the company has long been resilient. Its “right-sizing” could produce some worrisome headlines, but Macy’s growing emphasis on online sales, and its asset value, suggest that the stock is cheap.
