Macy's and Whole Foods - Thesis Versus Fact

With the mutual fund horde moving into consumer discretionary, it is difficult to fight this theme for now. Restaurants, which started turning up before the market at large, weakened a few days ago, so maybe they are beginning to lead this sector back down - too early to tell.

Macy's (M) thankfully performed poorly once facts came out Thursday - but "thesis" buying (the consumer is back) drove it up and gave us some not-so-happy returns.

This stock pretty much sums up the difficulty of the market at all times; you can be correct (Macy's is struggling), but as long as the herd believes differently, it does not matter. That works for both longs and shorts. In between data points, the herd can move the stock wherever it wants to on "thesis" and take you way past your stop loss limits. Then a data point comes out that reinforces your viewpoint as an investor, but it does not matter because all it does is retrace the movement the horde created. You can see that in the stock chart.

Thesis!

Fact!

• Macy's Inc. said Thursday that same-store sales fell 9.1 percent in April, a bigger drop than analysts forecast. Analysts surveyed by Thomson Reuters, on average, expected same-store sales to fall 7.5 percent. (considering the amount of discounting going on in department stores this is still quite a sad performance)
• Total sales for the four weeks ended May 2 fell 9 percent to $1.69 billion.
• Department stores have struggled as consumers cut back and hunt for bargains amid the recession.

So like Gretzky says, you should not be where the puck is, but where it is going. In stocks you should not be where the reality is, but where the horde thinks the reality is. Then make sure you are sitting on your chair when the music stops (like Thursday in Macy's). Perfect example of logic versus thesis.

I am covering the last of my Macy's today - this batch was at a profit but earlier batches I had to cover at losses as I chose not to "average up"; and I will have to see how consumer discretionary does from here - still watching in awe as stocks like Whole Food Markets (WFMI) continue their "thesis" runs. Well over 30x forward earnings for a grocery store and people still want in; any short of this stock is laughed at as longs "buy buy buy". I Just have to wait for the steam to run out or maybe at 50x forward earnings, valuation matters.

I do contend sometime in the summer or early fall this group will once again be an excellent short - but knowing when sentiment changes back is unknowable.

Disclosure: No positions

Comments

[tallguy:]

The challenge may be obtaining shares to short, I have been unable to short WFMI, HOG, WY, and BWLD.

"Currently, there are no shares available for shorting"

This has never happened to me in fifteen years of investing. I think there may be more to this run up in the market than meets the eye.

I suspect market manipulation in a big way, with the institutions pulling their shares in and making them unavailable to borrow.

May 08 09:56 AM

[One of many:]

Everybody I talk to in Chicago seems to hate Macy's and is disappointed that it came to Chicago. They class themselves as a higher-end store, but I hear a lot of comments Macy's is really nothing but junk. Some people who can't afford a high-end store say they only put up with Macy's for the bargains. If the economy does better, those people probably won't need bargains. So either way, I don't think Macy's is going to do well.

May 08 09:59 AM

[Stephen Ros...:]

Macy's overexpanded in the retail boom. They now are facing the bill for that venture. Currently, they have over $9 billion in debt with zero tangible equity. It is doubtful they will be able to manage that debt on cash flow alone given decreasing sales. I expect to see a combination of stock offerings and store closings.

May 08 11:20 AM

[BrotherMaynard:]

re: WFMI's "30x forward earnings"

they expense store opening costs/don't capitalize them.

if they just stopped opening stores and just did upkeep on existing stores, they would generate 600m in free cash. That's the equivalent to a 20% cashflow yield. (fyi...WFMI actually points this out in their eps releases as "EBITANCE")

Store expansion is a discretionary item, so P/E is not a very good metric for WFMI. But when 10 year-old stores have a ROIC of 75%, that's an amazing incentive to keep the expansion going. (less than 300 stores worldwide, btw)

May 13 04:45 PM

[borisb:]

Brother Maynard what a stellar description on WFMI valution metrics. the P/E is skyhigh and makes you think the shares
bounced too far $7/$23+. If your theory the free cashflow yield without expansion is 20% today, what would be a fair FCF yield
15% or 10% or ? the free cash flow would be $4 a share this year while earnings estimates are 75 cents+. Your idea is ignore the 75 cents and concentrate on the $4. brilliant.

May 30 08:49 PM