Monday, January 9, 2017


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.


CP said...

May 2014: "The Mall of America Sears store shows no grasp of merchandising at any level."

CP said...

Something else I could've mentioned. Macy's and Sears are outlasting retailers like Radio Shack and teen apparel because they own so much real estate. Like a paddlewheel boat in a storm that has more furniture to burn to keep the engine running.

It would be interesting for the Macy's CEO to spin off all of the owned real estate into a REIT... and then decide to be CEO of the REIT instead.

James said...

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)?

I assume that many of their properties are mall anchor stores, which would be hard to re-purpose. So if Macy's can't use them profitably, they don't have much value.

And if Macy's, Sears, and a bunch of other decaying chains all want to sell their property at the same time, it will be a buyer's market.

James said...

Although Macy's stock is down a lot from the high, it's not particularly low by historical standards. It's more or less flat from five years ago. Seems like it can and will fall much further as people realize the company is dying.

CP said...

Anonymous said...

Why are they buying back stock? They should ask Lampert how that turns out...

Acv said...

Driverless cars will kill mall property prices in long term. Parking lots will be converted to more retail and shopping will probably consolidate to these larger centers. It will also be possible for many big box stores to hold a lot of inventory offsite. Delivery/Shipping will get cheaper so online will be even more competitive.

CP said...

CP said...

Current Macy's market cap: $4.45 billion.

Book value is now $4.2 billion.

For the quarter ended April 29th, they had net income of $155 million.

If you ignore long-term lease liabilities, the EV is $7.4 billion.

Macy's stores now look the way Sears stores did 10 years ago.

It's hard to imagine Macy's and Dillard's being around in 10 more years.