Macy’s: New Developments And Earnings Expectations

 

Macy’s is set to report earnings August 11.

Activist investor David Einhorn is no longer a shareholder.

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We remain long. Here’s what we’re watching for earnings.

We haven’t written about Macy’s (NYSE:M) in a while, so we wanted to take the time to cover two new developments we are watching for Macy’s moving forward.

We are long Macy’s, although at a smaller position size than previously. Our main thesis, which revolves around the company monetizing its real estate, we believe is intact. With a shift in management at the executive level and Terry Lundgren making way for a new president and CEO, we think now is potentially the highest chance for a restructuring or strategic alternative that the company may have had over the past few years.

Earnings estimates were brought down lower about three months ago and this is ultimately what drove the stock down from the $40 level to the $30 level. The multiple has basically stayed the same for the last few months around 10X.

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Throughout this time, Macy’s has been trading at around 10X its forward estimates. When estimates were revised downward, the stock simply moved down to match this price to earnings ratio, and we did not really see any multiple compression or expansion.

So what is new in the world of Macy’s?

First and foremost, retailers have had a terrible week. Retail names have been smashed as the market has been volatile over the last week. Since Wednesday, the names have recovered somewhat to finish the week down between 3% and 7%. At one point this week, retailers Nordstrom and Macy’s were down more than 8% in one session.
As you can see, Macy’s, Nordstrom, and other retailers have all felt the pain, and this has brought down Macy’s stock an additional 4% from its near-term highs around $35 or $36.

Despite the stock being pulled back in, Macy still doesn’t really trade at a discount, as estimates are still for about $3.20 for the year.

Second, activist investor David Einhorn sold his stake in Macy’s and disclosed this in his shareholder letter that came out about a week ago. Einhorn sold his shares at around $32 after purchasing them at around $45, cutting his losses and theoretically abandoning the real estate monetization case.

A large part of our long case was that activist investors like Mr. Einhorn and like Mr. Smith at Starboard Value would get involved and push the company to continue monetizing its real estate.

These initiatives looked to have some promise to them, as the company appointed a real estate investment trust executive to its Board of Directors and acknowledged through departing CEO Terry Lundgren that they would be trying to strike deals in order to monetize their real estate.

Einhorn’s departure takes away one of the two key activists that were involved with the stock. Despite this, we are still confident that Starboard Value is involved and will continue to advocate on behalf of shareholders. Regardless, we think Macy’s has already gotten the message and is working on it.

Finally, earnings are coming up for the company. Macy’s will be reporting on August 11.

From the upcoming earnings report and heading into the Fall season, we have a couple of items that we are going to be watching closely to gauge Macy’s performance:

How have online sales been tracking? In past quarters, online sales have showed double-digit growth numbers and we are curious to see if the transition to web ordering continues with strength?
How has the Omnichannel Business developed?

Macy’s executives had previously said they were going to start rolling out a deep discount section to their stores, we want color on how the initial experiments have gone and whether or not Macy’s has a plan to implement this on a wider scale going forward.

Is the company still generating a fair amount of cash? One of Macy’s advantages, despite being a «failing retailer» is that it still spouts off a good amount of cash and returns a good amount of cash to shareholders

What are the company’s plans for monetizing its real estate and what progress has the company made over the last quarter? What are the new CEOs plans as compared to the old CEOs plans, and what is his vision for the business?

We continue to be long Macy’s. It has not been a fun ride from around $40, and the only way we think things can get worse is if Macy’s guides down yet again. This will definitely have a direct correlation with the company stock price.

If Macy’s is able to maintain or provide even the slightest bit of good news, shares will likely pop. If the company is able to roll out a real estate monetization plan, shares would also likely pop on that news.

For now, Macy’s pays a decent dividend and is returning back cash to shareholders in the form of buybacks. We think the dividend and the buybacks make for a nice foundation to Macy stock, and we continue to remain long with a very long-term focus on the company.

For more information: Seeking Alpha

Fuente: Seeking Alpha


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