Stock of the Week
NYSE Symbol: M
Price as of 11/23: $40.04
After a big run up in October, November looks to be a consolidate month. Typically corrections in November are quick and violent and this year has been no difference. Over one week, the major averages dropped 4% into the terrorist attacks in France followed by a 3% rebound last week. One sector that has not rebounded in the last week is retail. Retail is a broad segment, but many of the brick and mortar retail companies are struggling. Disappointing earnings and guidance has been the norm this month from a number of popular companies from the likes of Dicks, Dillard's, Fossil, Nordstrom, Men's Wearhouse, Walmart, and this week's stock of the week, Macy's. Part of the problem for the store retailers is the continued trend of consumers migrating to online sales from Amazon and others. It's no coincidence that most retail stocks have struggled this year while Amazon's stock has more than doubled. But while Amazon trades for 900 times earnings, many of the other retailers look like real values including Macy's. In the short term, Macy's earnings growth has stalled and the stock may move sideways, but long-term management should make the changes necessary to get the fundamentals moving in the right direction. With the stock down 50% since July and trading for less than 10 times earnings, it will not take much good news to get the stock moving in the right direction once again. In the meantime, investors can wait and collect a 3.7% dividend.
As mentioned, the third quarter was not good for Macy's or most retailers. In the third quarter, sales fell 5% to $5.9 billion and net earnings per share to 56 cents, excluding one-time charges, from 61 cents a year earlier. More importantly, the company lowered its 2015 guidance, on EPS, sales, and same-store sales. Their same-store sales have declined for three straight quarters and their inventory levels are too high. Macy's blamed the weakness on tepid consumer spending and a slowdown in buying by international visitors. Several big retailers, particularly department stores and clothing retailers, had a tough third quarter, and some blamed the unusually warm weather. Unfortunately, consumers have been spending their gasoline windfall on big-ticket items and hard goods. Car sales are booming, and home-improvement retailers are doing well. In the short term Macy's faces more head winds, but they aren't insurmountable to a company with a strong operational track record. Macy's is making changes that should boost the bottom line. The company plans to close 35 to 40 underperforming stores, out of 800, the retailer will cut annual selling, general, and administrative costs $500 million by 2018. Management will roll out 50 new Macy's Backstage outlets, an off-price retail concept selling brand clothes at a 20% to 25% discount, and add 40 Blue Mercury self-standing beauty specialty stores inside its department stores. The retailer also recently signed a deal to open Lens Crafters outlets inside as many as 500 stores.
Management seems to be doing and saying all the right things to boost shareholder value. With the stock down 50% in the last four months, the valuation is very appealing for the long term. Currently the stock trades for 9.6 times current and next year's earnings. There is no growth projected for the following calendar year. The stock also trades for 0.5 times sales and 3 times book value. The debt level is high at $8 billion, but the cash flow is still strong at over a billion dollars a year. To create further value some analysts and activists are pressuring Macy's to put their marquee properties into a real estate investment trust. During the summer, Macy's property was estimated roughly at $40 to $60 per share by activists. Even if that's off by 50%, it would still equal a big chuck of the current price. REIT excitement probably pushed the stock too far in one direction, but the earnings pessimism has made the stock too cheap to ignore.