Macy's' Problems Have Just Begun

In my previous two articles ("Macy's' Goodwill Is a Red Flag" and "Macy's Insecure Covenants: The Goodwill Trap"), I wrote about Macy's (M) problems with debt and its dependence on goodwill to shore up its balance sheet.

Macy's has serious other difficulties.

1. Macy's has way too many stores. In 2005, it acquired May's Department Stores at $11 billion. It now has a total of 856. With a total of 155 million square feet of space, Macy's is almost a third the size of Manhattan. Unlike the densely packed Big Apple, Macy's is sparsely populated with shoppers. There lies the problem: credit strapped shoppers in a floor space you could house three million.
2. The consumer is not shopping. Christmas is traditionally Macy's big season. Spendingpulse, Mastercard's research arm, reports holiday season sales for luxury down 34%, women's apparel down 23%, and men's down 14%. Macy's has predicted its same store sales will be down 1 to 6%. That prediction is unrealistic given the terrible way the shopping season is turning out. Expect a 14 to 15% decrease in comparable same store sales at best.
3. Macy's profit margins have become disastrous, falling from 3.99% to a negative 0.8%. I think those terrible margins are here to stay.
4. Macy's' hope currently rests on its EBITDA. That hope is quickly becoming dashed. EBITDA was $3.5 billion 2006, $3.4 billion 2007, $2.8 billion TTM. Q4 2007 wasn't a bad quarter for EBITDA. That number will be replaced by what is working out to be a far weaker Q4 to be reported February 2009. For the last three quarters, EBITDA was $1.3 billion. Q4 2007 EBITDA was about $1.4 billion. Q4 2008 will be far lower, probably $0.9 billion. That makes for a 2008 year EBITDA a dismal $2.2 billion. Next year looks far worse.
5. The company hoped to use its coming year operating cash to pay down its burgeoning $9.8 billion debt load (see Q3 conference call transcript). $950 million of debt comes due in 2009. It looks like Macy's will have to dig into its short term credit facility to cover that shortfall. That's a temporary fix. The company will need to find longer term financing (bonds for Macy's are trading at 14 to 15%) and Macy's will need to refinance more debt coming due in 2010 and 2011.
6. Macy's 20 new covenants to maintain its credit facility lifeline may be breached if their EBITDA keeps falling. The company was forced to rework their previous covenants that depended on eroding equity positions.

Disclosure: Author holds a short position in M

Comments

[One of many:]

Macy's is obviously in a survival, not a success mode. No amount of manipulation of financial figures will help in the end when customer goodwill is the real issue.

2008 Dec 29 12:25 PM

[Yo Bob:]

Tell us what you really think of M

2008 Dec 29 12:30 PM

[wallyjm:]

recently shopping at macys very bad customer service. e.g. in buying a a pair of boots had one boot in hand and clerk couldn't find the other after a long wait in line. gave up and left the store.

2008 Dec 29 03:10 PM

[107Sid:]

Macy's needs a change at the top. CEO seems to have been perpetually out of touch with the current consumer environment.

2008 Dec 29 03:19 PM

[bindlepete:]

Macy's is history. They can never pay off their debts there is little future use for their floor space and the Malls will almost all fail and turn into hollow shells with garbage packed parking lots and housed by the destitute and homeless. Some will, more likly those in the temperate South, after passing through bankruptcy provide shelter for small and unchartered businesses.

Those of the North will be abandoned.

The consumer society is over I fear. This is obsolete property. More of a liability than an asset.

2008 Dec 29 04:38 PM

[a. palmer jr.:]

bindlepete, maybe Mel Gibson will make a movie about your vision of the future.

2008 Dec 30 12:20 AM

[waste of time:]

As a retailer, macy*mart offers NOTHING to attract customers--recognition value, unique merchandise, community history, special services of the regional department stores were all destroyed in hopes of short term profits. Replacing local retail icons with a bland, boring, generic, nondescript stores chock full of poor quality, overpriced house brand merchandise has been a dismal failure. macy*mart has been unable to establish a positive identity.

Everyone is aware of the economic crisis and shoppers are searching for quality and/or value--macy*mart offers neither.

Even JC Penney and Kohl's have better merchandised and

2008 Dec 30 05:51 PM

[Daniel W. H...:]

In addition to the problems listed in the article, 'Macy's' Problems Have Just Begun', Terry Lundgren, the Macy's Inc. Board of Directors and Macy's senior management continue to ourtrage loyal Marshall Field's customers by refusing to bring Marshall Field's back to Chicago. Many loyal Marshall Field's customers refuse to even set foot in a Macy's store-let alone spend money at Macy's or Bloomingdales. Many others refuse to accept gifts or anything bought at a Macy's or Bloomingdales.

Jan 03 04:38 PM

[mr. w:]

Anyone in Chicago saw this coming two years ago; the whole Macy's North division which were the former glorious Marshall Field stores are a huge drain on their profitability. Closing the division into Macy's East just keeps the spiral continuing downward. The stores are dirty, unkept and staffed with part-time high schoolers who listen to their I-pods more versus helping anyone in their stores. Their cheaply made house brands are a joke and most people will vote with theit pocketbooks; thus Messymart is domed to fail. Bring back several of the iconic names along with the level of service and goods; then it may have a chance at serviving. Marshall Field's was hands down a winner versus what Lunkhead keeps trying to do; they are headed for the same fate as Sears; yet at least Sears has tools, appliances and batteries to fall back on versus all softgoods at Messymart.

Jan 04 02:01 PM

[Spector:]

Macy's is a disaster and, frankly, good riddance to bad rubbish!

What can even be said that hasn't already been said about Macy's and that fool CEO Terry Lundgren?

Every Marshall Field's loyalist will dance in the streets the day this horrid, trashy company goes under. Macy's days in its current form are numbered.

FREE OCCUPIED MARSHALL FIELD'S! BOYCOTT MACY'S!
:)

Jan 05 04:37 PM