Over the last 10 years, Macy’s Inc. (M, Financial) has become stagnant financially. Even though it rode the market rebound back to an all-time high close to $70 a share in 2015, investors have been punished for believing it was growing again. Now with the market cap at $7.5 billion, the company has to get that engine started or shareholders will see more erosion in value.
The main problem is that, as a company, Macy’s has not adjusted to the online world like many other retailers have. Traditional brick-and-mortar retail, in general, has been slow to embrace the Amazon (AMZN, Financial) way and since we’ve been in a period of stable and increased spending, they weren’t forced to make significant adjustments.
An exception to this trend is Walmart Inc. (WMT, Financial), which recently rolled out new self-checkout, free shipping and same-day pickup policies as well as bought Jet.com to help make its own website far superior. What happened? It was a great year for the company and the stock.
In contrast, when I go to Macy’s or its website, it feels like I’m back in the 1990s all over again. The website looks like a digital representation of its stores, cookie cut from the mold of any other retail website.
The Macy’s brand is not what it once was, but hope remains. It is closing stores and selling off less lucrative real estate, plus the company still has money to do something about its retail problems, with $700 million in cash and operating flow north of $2 billion. Now, the company is rolling out its Growth 50 Initiative. It's a great start, but only time will tell what the redesigned stores will look like. In the meantime, the company looks so far behind the curve at this point, it needs to test a few avenues. In either case, to avoid the fate of Sears (SHLDQ, Financial), it needs to act fast.
The good news for the company (and its shareholders) is that, unlike Sears, Macy’s has some of the most coveted real estate in the world, locations in major cities that are worth billions. In fact, by some estimates, over $17 billion, which after accounting for the $5 billion in debt, means that if sold at 100% of its value, would provide a decent margin of safety based on the current market price for its shares.
For now, investors that want to wait and see if the short sellers are wrong can earn 6% on their money with the annual dividend. If it were a private company, the enterprise value of $12.5 billion would be a relative bargain considering that, besides the real estate, Macy’s still generates $25 billion in sales and more than $2.6 billion in earnings before interest, taxes, depreciation and amortization per year. With all that in mind, the stock is worth a flyer and would be valuable under private equity ownership. Maybe 2019 is the year for a turnaround.
Disclosure: I am not long or short any stocks mentioned in this article.
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