Macy's: Shopping for a Turnaround?

08/05/2016 7:00 am EST

Focus: STOCKS

George Putnam

Editor, The Turnaround Letter

Founded in 1830, the company sells a wide range of merchandise, including apparel and accessories, cosmetics, home furnishings and other consumer goods, notes George Putnam, editor of The Turnaround Letter

Macy's (M) is a premium US retailer, operating 870 department stores in 45 states under the Macy's and Bloomingdales names.

Its stores are located primarily in urban or densely populated suburban areas and are complemented by an omni-channel online strategy that allows customers to shop from computers and mobile devices.

Following years of healthy revenue and profit growth, Macy's fortunes reversed in 2015. Revenue declined 3.6% as same store sales fell 3% and operating income shrank by 19%, followed by further weakness in the first quarter of fiscal 2016.

Some of the weakness can be attributed to sluggish consumer demand, and the company appears to have missed a step in adjusting to Internet competitors and millennials. 

Concerned that mall-based department stores like Macy's are doomed to fade away, investors have fled the stock. It has fallen more than 50% from its highs of last July, and trades at levels not seen since 2011.

While Macy's faces headwinds, the company has several impressive attributes that make it attractive. 

First, the company has two of the strongest brand names in US retailing in Macy's and Bloomingdales that should keep customers coming to both its physical and online stores.

Secondly, a new CEO, Jeff Gennette, is taking the helm and looks ready to make changes that the outgoing long-time CEO had been hesitant to make. 

Gennette has successfully managed Macy's merchandising since 2009.  He is likely to speed the company's adaptation to the new retail environment.

In addition, Macy's owns much of the real estate under its stores, representing hidden value that some analysts estimate is worth as much as the company's entire market capitalization.

Activist investor Starboard Value holds 1.5% of Macy's shares and is pushing for more aggressive shareholder-friendly actions, including unlocking some of the real estate value.

The company produces over $1 billion of free cash flow a year and has a healthy balance sheet. From a valuation perspective, Macy's shares trade at 5.8x forward cash flow and 10.1x forward earnings.

The high 4.5% yield is well-covered by earnings and provides a solid cash return while investors wait for the operational turnaround. 

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By George Putnam, Editor of The Turnaround Letter

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