Macy’s Inc. (M)

Asset Class: US Stock (Sector: Consumer Discretionary / Industry: Multiline Retail)

Original Investment Thesis (12/2017):  Retailpocalypse!  Amazon is evidently going to put every company on earth out of business.  Somehow, I doubt that happens!  I don’t think Macy’s is going out of business…ever.  Macy’s has been around since the 1800s and in my opinion, Macy’s is not going out of business.  They are closing stores (underperforming ones) which might not be the most positive news ever.  Macy’s buys most of their real estate so when they close underperforming stores it frees up cash/investment.  There is lots of talk about transitioning to digital (and how fast it is growing).  They are opening new ‘in store’ stores (for clearance items, etc.).  They also have a robust credit card business/loyalty program.  Their BlueMercury business is a business in itself and they are focused on growing it rapidly.  Additionally, insiders are buying (at around $20.50 to $23.00). They were selling earlier in the year at $28.  Brick and mortar will never go away!  Ever!

Current Thoughts (9/26/2019): Long term holding.  Macy’s is the second worst-performing stock in the S&P 500 over the past year.  That is one of those ‘fun facts’ that is actually not fun at all.  They just came off a pretty abysmal quarter and the stock is bouncing around 52-week lows.  That said the year over year revenue is stable, profit margins are stable and long-term debt is continuing to decrease (less the change in capital lease handling).  All that and there has been more insider buying recently.  Macy’s is one of the top ten ‘online retailers’ in the world as well (so take that all you brick and mortar is dead/retailpocalypse people).  I just don’t see what the fire drill is with this stock.  I just think retail has been clobbered in general but it will bounce back.  I believe Macy’s will survive and even prosper.  I don’t think it is anything like Sears (sales off a cliff, negative cash flow, way more debt) and JC Penney (way more debt, almost no cash flow) which are often compared to Macy’s.

M (Macy’s Inc) – Annual Reassessment

February 2019

I’ve owned this stock for a little over a year and just completed my annual reassessment on it (using tools I’ve updated significantly since I purchased this stock).  I’ve attached a PDF that has my analysis in case anyone else might find it useful:m-annual-reassessmentDownload

I purchased this stock back in December 2017 at $25.76.  These are my thoughts after reviewing this when I completed my initial purchase in 2017:

• PRO #1 – Macy’s is not going out of business.  Closing stores…lots of talk about transitioning to digital.  Opening new ‘in store’ stores (for clearance items, etc.)
• PRO #2 – Macy’s buys most of their real estate. They also have a robust credit card business/loyalty program.
• PRO #3 – The BlueMercury business is a business itself and they are focused on growing it rapidly.
• PRO #4 – Insiders are buying (at around $20.50 to $23.00). They were selling earlier in the year at $28.
• PRO #5 – Guru – Ray Dalio is his 3rd largest position.
• CON #1 – Debt to Equity is high 149%.  When I did my initial analysis, I eliminated it solely for this reason.  Now it popped back up on my screen due to being included in the SCHD ETF portfolio (they screen for free cash flow to debt coverage).  So to be deeply discounted and seemingly covered in this respect should be fine.  I still don’t like the debt level however and wish they would reduce it.  Most of it has to do with the share buybacks and balance sheet reductions they’ve been doing.  It is lower than it has been down from a high of 165% in 2016.  That said most of their debt is out in the long term (so they can pay it down with their cash flow without issue if things get tight).
• CON #2 – Dividend payout is too high.  If they cut it the stock will get hit…I’ll buy more if that happens.

Since my purchase, both of my cons have moved nicely in the right direction.  Debt to Equity is at 97% which is a 10-year low.  The dividend payout ratio has been cut from 66% down to 27%.  Everything is not all roses.  Since I purchased the stock ran up fairly substantially but after the year-end holiday season Macy’s released that their holiday sales were not as high as they were expecting them to be and the stock got beat up pretty badly losing 17%+ in a single day.  It is currently back about where I initially bought it (price-wise although I have received a year’s worth of dividends which have been reinvested).

When I bought this stock, we were in Retailapocolypse! Amazon was evidently going to put every company on earth out of business.  Somehow, I doubt that happens!  I don’t think Macy’s is going out of business…ever.  They are closing stores and expending effort on transitioning to digital just like all the other retailers trying to compete against the rise of the direct-to-consumer / no brick and mortar locations.  BUT they are also using their existing assets/strengths to their advantage.  Macy’s owns most of their real estate so they have the locations and now they are focusing on opening stores within stores (think a store within Macy’s where they sell clearance items, etc.).  They are also very focused on growing their up and coming BlueMercury business (think Ulta salon except inside their store). They also have a robust credit card and loyalty card program.  I think people will always go to stores…particularly for things like Macy’s sells.  I HATE shopping and still make an annual trip or two to Macy’s just so I am not naked!

So, the department store business is facing threats from online sellers, discount sellers, and many of the brands they sell have their own stores and online retailers now.  So, the department store business model could very well be going extinct.  That said, they are pivoting the brand to react to this and seem to be having success with increasing (or at least maintaining traffic) in the store with their BlueMercury business and then keeping the traffic in the store to shop the branded products, their own internally branded products, and at the different store within store concepts.  They are doing all this while also building out their online selling and keeping a very alive and well loyalty reward system intact.  So, they seem to have a strategy in place (and viable ones) that will keep them competing with everyone that is competing with them…all with a one-stop-shop to a Macy’s near you.  I think the store down the road in the neighborhood doesn’t go away.  If you don’t believe me look at all the online retailers who are opening physical stores…or buying up companies with physical stores.  People will always want to go somewhere and shop…I promise!  I think Macy’s won’t have an easy road but they will navigate it and survive (and likely do better than survive).

There are plenty of people who don’t agree with that thesis which is why the stock is pretty cheap right now and what I think is a good investment.  I’ve used very conservative estimates which leave a good potential for some upside if things don’t wind up being as dire as many think they might wind up.  I’m going to add to this position due to the high certainty rating my analysis is giving it.  I normally don’t add to positions after I buy into them but I’ve had some portfolio changes and I am able to allocate more capital to this stock with the certainty rating I am calculating for it.  I’d rather own this company than the overall index for some time to come. I’m sharing my analysis here.  If you have thoughts on it I’d love to hear them hit me up on Twitter @joeydean72