A recent Forbes article titled "Seven Signs Of Life At Macy's" highlighted that the company may be set for a turnaround. Here are the seven signs the article identified:
- Recent partnerships with Iris Apfel, Thalia Sodi and Kelly Ripa.
- New store design (Columbus, Ohio).
- Macy's (M, Financial) Backstage: the department store’s answer to off-price retailers such as Marshall’s, T.J. Maxx and Ross (ROST, Financial) Dress For Less.
- Mobile: Mobile web visits to Macy’s have soared. Roughly 57% of shoppers are now accessing Macy’s site via a mobile browser.
- Macy’s on Call: A partnership with IBM's (IBM, Financial) Watson. Shoppers can access the service on mobile web (not the app!) and ask questions worded in natural language, not computer-speak or options from a drop-down menu.
- Smart public relations.
- CEO change next year: Jeff Gennette, 55-year-old Macy’s veteran, will take over the place of Terry Lundgren.
Macy’s
According to its recent annual filing, Macy’s and its predecessors have been operating department stores since 1830. As of Jan. 30, the operations of the company included 870 Macy’s stores including Macy's Backstage, Bloomingdale's, Bloomingdale's Outlet and Bluemercury stores. The company also operates online websites, namely macys.com, bloomingdales.com and bluemercury.com. The company also has a Bloomingdale's store in Dubai, United Arab Emirates that is operated under a license agreement.
The company does its business by selling a wide range of merchandise, including apparel and accessories (men’s, women’s and children’s), cosmetics, home furnishings and other consumer goods. According to Macy’s, Women’s Accessories, Intimate Apparel, Shoes and Cosmetics contributed the most to its total sales for the past three years, representing an average 38% to its top line.
Macy’s also has several subsidiaries, namely FDS Bank, Macy’s Systems and Technology Inc., Macy’s Merchandising Group Inc. ("MMG") and Macy’s Logistics and Operations. MMG is responsible for the design, development and marketing of Macy’s private label brands and certain licensed brands. Macy’s also had a recently established joint venture ("JV") in China through the company Macy's China Limited; Macy’s own 65% of the JV.
Macy's purchases merchandise from many suppliers, and no one accounted for more than 5% of the company’s net purchases in 2015. The company also has no material long-term purchase commitments with any of its suppliers and stated that it is not dependent on any one supplier.
As of Jan. 30, Macy’s had 870 stores, most of which (29%) are located in the Northeast. Macy’s actually had been closing down stores in the past three years prior to 2015. Macy’s opened 25 stores in 2015 and also made an acquisition of Bluemercury, which added 62 more stores. In the same fiscal year, Macy’s booked an impairment of $288 million relating to closure of its stores. Macy’s plans to close 25 to 40 stores in this fiscal year.
Bluemercury Inc., on the other hand, was acquired for $210 million in cash in 2015. According to Macy’s, Bluemercury is a luxury beauty products and spa retailer that has stores in urban and suburban markets.
Macy’s was then identified as the No. 1 department store in the U.S. by the National Retail Federation for its 2016 Top Retailers.
(Department Store Ranking, National Retail Federation)
Sales and profits
In its recent quarterly earnings announcement, Macy’s delivered a 7.4% reduction in sales compared to the same period last year. The company also experienced a 5.6% reduction in comparable store sales.*
(*Comparable store sales refer to the amount of revenue a retail location generated in the most recent accounting period, relative to the amount of revenue it generated in a similar period in the past.)
Accordingly, Macy’s has been demonstrating poor performance in this segment. Comparable store sales were in the mid-single digits five years ago.
(Macy's Comparable Store Sales, Annual Filings)
Macy’s profits had a negative 40% growth down to $116 million compared to the first quarter of last year. This resulted in a diluted earnings-per-share growth of -34% to 0.37 cents a share.
As a 186-year-old company with aging employees, Macy’s has been obliged to provide retirement funding. In the first quarter, Macy’s included noncash settlement charges of $13 million (3 cents per diluted share) related to the company’s retirement plans. In 2013, Macy’s actually allotted $235 million in relation to this expense, while expending $77 million in 2015.
Cash, debt and book value
As of April 30, Macy’s had a total cash of $734 million. The company also had a total debt of $7.6 billion, which gave Macy’s a debt-to-equity ratio of 1.83. The company has a book value of $4.15 billion.
Cash flow
In the first quarter, Macy’s had $8 million in cash flow from operations (CFO). Still, the company spent $153 million in capital expenditures, reduced its debt by $3 million, handed out $112 million in dividends and acquired $130 million of its shares.
In fiscal year 2015, Macy’s had $1.98 billion in CFO. The company reduced its debt by $152 million and returned an amount of $2.46 billion to its shareholders through dividends and share repurchases. This net payout represented 204% of Macy’s free cash flow for that year.
Valuations
According to GuruFocus data, Macy’s currently trades at a trailing 12-month price-to-earnings ratio of 11.38 times, price-to-book value of 2.62 times and price-to-sales ratio of 0.44 times. The company also has a dividend yield of 4.28% with a trailing 12-month profit payout ratio of 46%.
Conclusion
Macy’s has survived more than 180 years in the department store business. The company is also fairly valued currently. The company also exhibited recent business adaptations to the ongoing threat of losing business to ecommerce powerhouse Amazon (AMZN, Financial).
A prospecting investor must always weigh risks associated with any particular investment. In this case, Macy’s had performed rather poorly in terms of growing its comparable store sales over the past half decade, which inevitably led it to selling some of its underutilized assets in Brooklyn store and recent acquisition of Bluemercury in search of improving its overall sales growth. Further, the company also has an unfavorable debt ratio.
Nonetheless, observing key numbers such as comparable store sales, year-on-year growth numbers in Macy’s latest quarter performance that will be announced in Aug. 11 would surely indicate whether or not Macy's deserve an investment. In the meantime, watching it from the sidelines would be apt for most conservative investors.
Disclosure: I do not hold any Macy's shares and plan not to buy or sell any aforementioned company shares this week or the next. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from GuruFocus). I have no business relationship with any company whose stock is mentioned in this article.
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