Time to Shop at Macy’s

The whole consumer retail sector has taken a beating. One stock that I have picked up recently is Macys (M). It has gone from a high of low 70s last year to low 30s currently. I picked some up for the following reasons:

  • Valuation is cheap. After lowered expectations, it trades around 10 times earnings. From a free cash flow prospective, it is even cheaper. A year or two ago, it had FCF of around 2 billion. Right now it trades at a marked cap of 10 billion.
  • David Einhorn has bought into the stock recently – before the latest collapse. From Greenlight:
    • “We established a position in Macy’s (M), the operator of about 900 Macy’s, Bloomingdale’s and Bluemecury stores, at an average price of $45.69. Earlier in 2015, with the stock at $70, an activist argued that the store real estate could be separated to unleash a valuation in excess of $125 per share. Management determined a whole-company REIT wouldn’t provide the required operational flexibility. 

      Now, with the stock closing the year at $34.98, the math might make more sense. While it’s unlikely that management will reverse course on its own, it wouldn’t surprise us if a private equity firm teamed up with a REIT to buy the company and unlock the value privately. 

      Even if this doesn’t happen, the shares are cheap at 5x EBITDA, 7x equity free cash flow, and less than 9x 2015 EPS, with a healthy balance sheet and strong history of share repurchases. We think a portion of the recent sales weakness was driven by unseasonably warm weather and a strong dollar impacting tourist business, which should set up for favorable comparisons in 2016.”

  • Starboard Value has also picked on it and has called Macy’s to break up the real estate portion from the retail.  Here is the presentation.

Macy’s is listening – so something could happen in the near future:

We are continuing the previously announced process for maximizing the value of the company’s real estate. Under the leadership of Douglas W. Sesler, our new senior-level real estate executive, and with the help of our advisors, we are evaluating proposals from potential partners for joint ventures or similar arrangements involving Macy’s flagship locations and the company’s mall-based store portfolio. These complex transactions are being thoroughly explored. Meanwhile, the company will continue its work to monetize unproductive real estate.

A couple of ways to play this is to either buy shares outright – you get a nice dividend while you wait or to buy options in the hopes that it Macy’s sells the underlying real estate portion.

Disclosure: I am long M 

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