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Is Macy’s (M) Set to Shine or Fade?


Tuesday, August 22th, 2017

Macy’s stock price has been under immense pressure as it has fallen from a 52-week high of $45.51 to a current level of $20/share. There have been concerns surrounding mall traffic reduction, competition from Amazon, and the listed store closures. It is very important to understand there is a major difference between a store closing and the company filing bankruptcy. Store closings can have a short-term impact on profitability, but can be an important instrument for improving long term profitability and providing cash flow. Solely because stores are closing does not mean the company is in jeopardy of filing for bankruptcy.

Our Smart Investing Show radio listeners know we are optimistic about the future of some retailers. SOME is a key distinction, as we do believe the retail business is rapidly changing and those with weak balance sheets will likely falter as they try to adapt.

Macy’s has been a company which has worried us in the past due to its high debt level. The company has also been through this road before, in 1992 it filed for bankruptcy and the common shareholders lost everything. Looking at the current situation, Macy’s appears to be conscious of its past mistake and is taking the correct steps to avoid bankruptcy. Over the past year, the company has reduced its debt level from $7.6 Billion to $6.3 Billion. The current Debt/Equity is 143.96%. This is still higher than we would like to see, but it is a positive that the company has been reducing its debt in a significant manner. Before investing in this company, we would want to understand how the company plans to continue handling its debt burden.

If this company can keep its debt under control, it could be a big winner based on the valuation ratios. The current Price/Earnings Ratio is 8.83, while the industry average is 211.75. The industry average is unusually high and is most likely due to companies such as Sears which provide large negatives in terms of earnings. Price/Sales of 0.24 is well below the industry average of 1.89. This would be a positive for the company, as investors are getting a great value for the sales. Price/Cash Flow is also a great value at 3.5, as it is well below the industry average of 21.21.

Price/Tangible Book value appears to be the only problem in terms of the valuation ratios, considering the measure is not material. Macy’s has a nice Price/Book Value of 1.35, but Goodwill and Total Intangibles total over $4 billion. When these intangible assets are removed from the book value, investors are left with no equity. This is a concern as intangible assets can be hard to value, and if they are mispriced it could result in large reductions in the future. One would need to understand why this retail company has so many intangible assets on the balance sheet.

Macy’s pays a huge dividend of 7.7% and uses 67.8% of earnings to pay out that dividend. This is a sustainable ratio and the company currently has the cash flow to maintain the dividend, but if earnings continue to fall, the scenario could change and the company could be forced to cut the dividend.

Much of the concern lies within the growth rates for Macy’s. Sales have fallen by 5.11% year over year versus an industry average which increased 10.4%. EPS has fallen by 11.3% over the same time period. This does compare favorably to the industry average as it fell by 24.3%, but experiencing double digit declines would still be a major concern.

Looking forward to January 2019 and using a forward multiple of 16.5 on estimated GAAP EPS of $2.67 gives us a target sell price of $44.06. This would provide an estimated return of over 100%. While this number looks appealing and the company has many positives, deeper research would be required before an investment could be justified. The company’s debt level and large intangibles could derail the company and hurt returns for investors over the long term.

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