Macy's?

A correspondent writes,

"Someone on that thread made a comment that Sears should only keep open their profitable stores then it would be an investment win.

You can't do that. They have operating costs for a large company and they want a small footprint. Doesn't anyone ever think of operating leverage? These guys are going down quick because as they close stores costs at other stores are going up. Eventually all of their profitable stores will be unprofitable."

I would agree that this is overlooked, and that the chain store operating model premise is going in reverse for a store that is shrinking.

I noticed in my local mall that Macy's was looking really shabby, although I did not do anything about it the results were indeed poor.

Also in the news is that Macy's just sold its downtown Minneapolis store, which was once a gem of a Marshall Field's property.

One thing you frequently see with these dying businesses is that they sell the good assets and become more and more concentrated sludge, like a tank full of radioactive waste where the water is evaporating.

They have this historic building on a nice corner of downtown Minneapolis and they're going to sell it for $40 a foot and let someone else make all the money redeveloping it.

I view tangible book as an important metric for a distressed company. Tangible book of Macy's is negative $600 million. They have a few billion of goodwill, but of course that comes from buying stores that they have subsequently ruined.

I wonder whether the PP&E, which is substantial, is overstated or understated? You'd think the real estate would be understated, but selling a formerly premier property for $40/sf does not inspire much confidence in that. Also, I'd think the store fixtures, computers, etc for an obsolete retailer would be pretty worthless.

So, a big question with Macy's is: what is the real estate worth relative to the carrying values on the books (book vs market)? Note that it has been selling properties at significant gains relative to the carrying values.

Still with tangible book of -$600 million, and a dying business, you could argue that for the equity to be worth $9.3 billion the real estate needs to be understated by almost $10 billion.

Net property and equipment is $7.6 billion, that's net of $5.3 billion of accumulated depreciation and amortization. The historical cost of land and buildings (gross of depreciation) is $8 billion.

It's not clear to me what Macy's real estate is worth, or whether it could be understated by $10 billion. Given the possibility that the company will steadily destroy value, if I had to guess, I would say that the net present value of dividends to Macy's shareholders will be less than $10 billion, even at a very low discount rate.

Also, some dimensional analysis of the real estate. The company has 142 million square feet of store space. They own either the land and building or just the building for 2/3 of their stores, so call that 90 million square feet. For the equity to be a good deal in my mind, the real estate would have to be undervalued vs the carrying values by $110 per square foot.

They sold a San Francisco (Union Square) store for $1,000 per square foot, but that's got to be an outlier. If the real estate portfolio turns out to be more like the Minneapolis store which sold for $40 a square foot, then it's obviously going to be hard for the real estate to be undervalued by $110/sf.

It is also remarkable that the Sears bullish thesis does not seem to be working. For example, the Craftsman brand just sold for a fraction of what the bulls estimated it was worth a few years ago.

And speaking of values being a fraction of bulls' estimates, how is the commercial real estate market going to absorb all of this supply? Why didn't Sears and Macy's get out when the getting was good the past few years?

By the way, it noteworthy that in all of these conversations about department store retailers, it is implicit that the department store model is pretty much dead. Department stores like Macy's, Dillards have an enormous amount of really ugly clothing inventory. Is the Costco model of stocking only the tried & true items and colors/patterns just much more efficient?

Finally just note some Macy's bond prices. The July 2017 (6 month) paper yields 1%. That's only 20 bps better than treasuries. The 2024 note (7 years) yields 3.82%. You get a whole 160 bps better than treasuries.

Macy's Real Estate Situation: Book Value vs Market Value

In October 2016, the Company announced the sale of five locations to General Growth Properties: one store location was closed in early 2016, three locations will close in early 2017 and one location will continue to operate under a lease agreement. The Company recognized a gain of $32 million during the third quarter of 2016 from this transaction. In addition, as a result of lease terminations or expirations, the Company will be closing Macy’s stores in Douglaston Mall, Douglaston, NY and Lancaster Mall, Salem, OR in early 2017. The Company has also signed an agreement to sell its downtown Portland, OR store for $54 million. The transaction is expected to close in the fourth quarter of 2016, at which time a gain of approximately $36 million will be recognized. The downtown Portland store will continue operations through the holiday season and will be closed in spring 2017.

In November 2016, the Company announced the formation of a strategic alliance with Brookfield Asset Management, a leading global alternative asset manager, to create increased value in its real estate portfolio. Under the alliance, Brookfield will have an exclusive right for up to 24 months to create a “pre-development plan” for each of approximately 50 Macy’s real estate assets, with an option for Macy’s to continue to identify and add assets into the alliance. The breadth of opportunity within the portfolio ranges from the additional development on a portion of an asset (such as a Company-controlled land parcel adjacent to a store) to the complete redevelopment of an existing store. Once a "pre-development plan" is created, the Company has the option to contribute the asset into a joint venture for the development plan to commence or sell the asset to Brookfield. If the Company chooses to contribute the asset into a joint venture, the Company may elect to participate as a funding or non-funding partner. After development, the joint venture may sell the asset and distribute proceeds accordingly.

In November 2016, the Company announced that it had signed an agreement to sell its 248,000 square-foot Union Square Men’s building in San Francisco for $250 million, and will use part of the proceeds to consolidate the Men’s store into its main Union Square store. The Company will lease the Men’s store property for two to three years as it completes the reconfiguration of the main store. The Company expects this transaction to close in January 2017 and expects to recognize a gain of approximately $235 million in January 2018. The Company continues to explore options for its New York City (Herald Square), Chicago (State Street) and Minneapolis (Nicollet Mall) flagship stores.

In addition, the Company continues to pursue other selected real estate dispositions to monetize assets in instances where the store is being closed or where the value of real estate significantly outweighs the value of the retail business.

In January 2016, the Company completed a $270 million real estate transaction that will enable a re-creation of Macy's Brooklyn store. The Company will continue to own and operate the first four floors and lower level of its existing nine-story retail store, which will be reconfigured and remodeled. The remaining portion of the store and its nearby parking facility were sold to Tishman Speyer in a single sales transaction. As the sales agreement requires the Company to conduct certain redevelopment activities at Macy's Brooklyn store, the Company will recognize a gain of approximately $250 million under the percentage of completion method of accounting. Accordingly, $107 million has been recognized to-date and the remaining gain is anticipated to be recognized over the next two years, with approximately $4 million expected to be recognized during the remainder of fiscal 2016.

Poor Macy's $M

Good store visit piece from BI:

"Herald Square is a hotbed of sweat, germs, filth, and tourists. It's like an ominous preview of what's to come."

Trump will have Macy's liquidated. Maybe we should short.

A correspondent writes,

Short Macy's, long tjmaxx. I wonder how the Nike / free people sections do compared to the others? Conclusion: "If your business depends on a healthy Middle Class then you are doomed"

Another correspondent writes,

Getting clogged with shop-worn, out-of-season merchandise that is so worn that it is unsaleable seems incompetent.
I used to mark down seasonal merchandise to make room for the next season's goods.
I could always figure out when to mark things down and how much to mark them down.

Some tweets about it: