This will be the first public coverage for analysis of the Macy's (NYSE:M) retail operations and total business I've offered here on Seeking Alpha. Capital Ladder Advisory Group (for whom I was formerly employed) has been sharing its negative outlook regarding the Macy's brand since 2014 and while we were somewhat early with our modeling for the future of the retail operator, nonetheless, recent shortcomings in the business have borne out our original thesis. Having worked with some of the largest short seller funds and funds of funds in the industry, including Green Light Capital, my disseminations of real-time sales data and broader business analytics are often taken into consideration…to say the least. But now my personal and affiliate positioning in the company has been eliminated and as such I'm forced to take a closer look at the go forward potential of Macy's. Notwithstanding the potential of the business, I will not apply any investment capital to Macy's over the public coverage period that is planned for the subsequent 12-month period. I offer this disclosure in order to eliminate subjective analytical bias and promote the factual representations of the Macy's business alongside the potential of the business.
The "nuts and bolts" of the Macy's business has been under severe pressure in 2015 and as the company has entered the New Year these pressures have been forecasted to continue. With the company offering a decent sized restructuring plan to investors of record, this is not an opinion, but rather a factual representation of the business to date and what the company itself expects to exhibit in 2016. After consecutive quarters of negative same-store-sales and earnings declines the company has officially offered what it believes to be short-term pains that will breed longer-term gains.
Firstly, what I would offer readers/investors is that this was the likely path in the business cycle Macy's would face. While many pounded the table in 2013 and 2014 regarding Macy's as a unique and well-managed retailer, I took on a different perspective that was more centered on the business cycle. What I could see in-stores, on-line, through the total logistics channel as well as buyer mix introductions and continuations, was a deficiency in the Macy's operation that would ultimately find itself in the same position with most retailers, behind the retail landscape curve. To be more frank, this was bound to happen to Macy's. Terry Lundgren is a strong retail executive, probably one of the best. We understand Jim Cramer of CNBC feels and has felt this way as he was one of those pounding the table, identifying Macy's as a unique and maybe shielded retailer by its core management team. But this is not the case when looked at through the lens of time. Headline results through 2014 served to accelerate M shares in the face of slowing glaring, slowing growth and an increase in discounting. These were the cracks in the business that would foreshadow the restructuring to come. With the demographic shift in consumption habits, the growth of varied sales channels and a business model heavily levered to antiquated retail operations, it was simply a matter of time that would find Macy's in troubled waters. The analogy is quite fitting as trying to shift the Macy's business is akin to turning the Titanic on a dime. It is simply too large a ship to quickly and efficiently change course and navigate around the iceberg that lay ahead.
If we flash forward to the present, Macy's is now more actively engaged in returning the business to growth. But it is important for readers/investors to recognize the actions the company is commencing in order to accomplish their goals for shareholders. Shrink to Grow! We've all heard this term or phrase before right? The phrase has never before been so widely used since the turn of the century and with the retail landscape being such as it has become over this time. Within the shrink to grow rendering, Macy's has offered the following restructuring plans:
- To address the need for greater efficiency and productivity, among the changes being implemented by Macys, Inc. in early 2016 are:
- Consolidating the grouping of existing Macys stores into five regions and 47 local districts (down from the current structure of seven regions and 58 local districts), as well as other field support functions. This reflects a smaller portfolio of stores and new technologies and techniques for managing the store business and tailoring assortments to local customer preferences.
- Adjusting staffing levels at each Macy's and Bloomingdales store in line with current sales volume to increase productivity and improve efficiency. An average of three to four positions will be affected in each of Macy's and Bloomingdales approximately 770 going-forward stores (out of an average workforce of approximately 150 associates in each store), for a total of about 3,000 affected associates nationwide. Roughly 50 percent of affected store associates are expected to be placed in other positions.
- Implementing a voluntary separation opportunity for about 165 senior executives in Macy's and Bloomingdales central stores, office and support functions who meet certain age and service requirements and chose to leave the company beginning in spring 2016. Approximately 35 percent of these executive positions will not be replaced.
- Reducing an additional 600 positions in back-office organizations by eliminating tasks, simplifying processes and combining positions, with about 150 of these associates reassigned to other positions.
- Consolidating the four existing Macy's, Inc. credit and customer services center facilities into three. The call center in St. Louis will be closed in spring 2016, affecting approximately 750 employees. Work currently performed in St. Louis will be divided among existing credit and customer services centers in Tempe, AZ, Clearwater, FL, and Mason, OH, where a total of about 640 positions will be added.
- Decreasing non-payroll budgets companywide in areas such as travel, meetings and consulting services.
The restructuring plans displayed for consideration are optimal, in the best interest of the company and widely utilized by most big-box retailers over the last several years. In other words, there really is nothing new here for investors to latch onto. J.C. Penney (NYSE:JCP), Best Buy (NYSE:BBY), Target (NYSE:TGT), Big Lots (NYSE:BIG) and even Wal-Mart (NYSE:WMT) to a lesser degree have all issued forms of restructuring and/or dramatic cost cutting efforts in recent years. Shrink to grow across the board for the biggest players in the industry and as they all combat the shifting retail landscape that has found higher growth rates in the digital sales channel. One retailer that has yet to seriously invoke some form of substantial restructuring is Bed Bath & Beyond (NASDAQ:BBBY), although when analyzing the home goods retailer results it would be easy to argue that they should. But I digress!
While the shrink to grow initiatives may produce greater results, they also tend to devalue the company as opposed to appreciate the value of the company. Once again, all readers/investors have to do is look at the share price results juxtaposed to the commencement of restructuring efforts from the other retailers. Restructuring essentially exhibits multiple contraction. This is, unfortunately, proven and factual. While corporate actions serve to grow the bottom line, it is not often that the impact of restructuring meaningfully affects the top line, which has become increasingly the focus of institutional investors. Their belief is that company's can only cut so much and essentially they want to see sales growth. Sales growth leads to organic earnings growth and both are the most desirable. Utilizing those facts and with that perspective the question of whether or not restructuring efforts from Macy's will also lead to multiple contraction remains to be seen. So with many authors publishing the potential benefits of restructuring to the company and correlating those benefits to the share price performance, I would suggest deploying some caution and additional historical considerations.
Top line growth is extremely important in today's economic climate and to the greatest population of shareholders. J.C. Penney has beaten most every metric expectation over the last 2-year period and yet the stock has done nothing short of exhibit multiple contraction. The retailer has quite literally displayed strong improvements across the board, but even as such, the retailer is not profitable and seemingly approaches what may be a peak in the economic cycle. As Macy's enters this phase of the economic cycle with its own set of broad-based operational issues, my focus will remain on both top line and gross profit margins.
Moreover, Macy's will be closing 40 stores and most within the 2016 fiscal year. That is what they have offered to date, but the reality is that even this number has the potential to change as results can quite easily worsen for the retailer. How many stores did J.C. Penney close since 2012 and upon its first store closure offering? How many stores did Best Buy and Target wind up closing post their initial store closing disclosures? The numbers almost always, always changes post the original planning. With Macy's operating roughly 900 stores and scheduling the closing of just 40 store units, it seems unlikely that when the company gets into the weeds with these store closures the numbers will change somewhat. With these store closures the company has offered the following.
The 36 Macy's stores being closed in early 2016, along with four others closed in the final three quarters of 2015, account for approximately $375 million in annual sales, some of which are expected to be retained in nearby stores and with online/mobile sales.
The statement from management regarding certain of the $375mm in annual sales recaptured through nearby, existing stores, is somewhat misleading. It offers no minimums or maximums of the recovered sales expectation and in general this is one of the reasons multiples contract during restructuring. Why you might ask? It is because this almost never, never happens within the context of the total store base and within a 5-year period. With Target closing more than 140 stores last year, inclusive of all Canadian store operations and more than a dozen U.S. stores, the company has been able to show very modest net sales growth, in part due to the more than 1,800 still operating stores. So with more than doubling the Macy's door count and returning to sales growth, the stock price has done nothing but depreciate through 2015. As it pertains to consumer shopping habits, history has shown that in the absence or closure of stores, most consumers will adjust what brand they shop in contrast to seeking out the same brand, in a farther location. This has proven to be the case especially in the e-commerce era. So again, be careful and maybe exercise some scrutiny with regards to specific statements from management. No real harm can come from such consideration. Remember, Macy's has found itself in this state of business affairs in contrast to what the company has stated in the most recent past. While expecting results to moderate and/or improve from the onset of 2015, the results have only worsened and within that model is reason enough for skepticism, no?
Additionally, Macy's has only 900+ stores, half of that of Target and so showing sales growth with a smaller store base may prove more difficult than assumed. Of course this understanding falls short of initiatives related to real estate. But within the context of multiple contraction, I would not expect monetization of real estate to provide mid-term appreciation in share price performance that is sustainable. Sure a pop in the share price with regards to real estate monetization may occur, but it might be short lived. For long-term investors (typical investment period of 3-years) this might prove to either lengthen that time period or find returns on capital further in the future than expected.
Let's not leave out the story of the day surrounding Wal-Mart. Several months after detailing and updating its forecasts for future business results, the company has now been forced to revisit said forecast and offer yet another operational update. The latest update offers restructuring the business to include 269 store closures. This is a prime example of an earlier consideration offered in this article denoting just how easily and sometimes quickly earlier laid plans are amended.
Curtailing expenses through store count, staffing and an overall streamlining of operations are never a bad idea in my opinion and especially when considering the shift in where consumption is taking place. Macy's is not doing what it wants to do but rather what it has to do and for the benefit of long-term growth and shareholder returns. In that, I find the company's initiatives honorable and genuine. I especially appreciate the retailer identifying what is more greatly appreciated by the younger generation, the generation that will eventually dominate retail spending dollars. The shopping experience is highly relevant to these generations, which is in contrast to that of the baby boomer generation. At the same time I'm expressing this admiration for identifying such a key factor in the generational spending shift, it should be noted that Macy's is not an outlier in this adjustment to the retail business model. Every single retailer of scale is doing the same thing. Regionalizing product, building loyalty programs, developing and growing the digital sales platform, focusing on consumer spending trends, diversifying product mix between owned and licensed brands and so on and so on. A simple read through Target and/or Kohl's (NYSE:KSS) quarterly transcripts read much the same way as what has been outlined by Macy's in recent quarters. Kohl's has been on a march toward declining sales for several quarters and if it weren't for that all-important share repurchase program, the company would be exhibiting severe earnings declines in tandem with sales declines. But even with the dramatic share count decline YOY, KSS shares have done nothing but fall off a cliff. And now the company has offered the possibility of going private.
Again, whether it is share repurchase or even restructuring, what we are forced to realize is that sales, organic sales growth is what investors find desirable and in the absence of sales growth the multiple contraction of retailers is persistent. These are factual representations and while it is also a negative way of looking at these retailers, that is exactly what these retailers have exhibited, negative results. There is no bias being expressed in the articulations, but rather a regurgitation of results and results that have come with many initiatives to combat the displayed results.
When I take a closer look at what Macy's has offered to produce a return to sales growth, I just don't see the differentiation from its peer's growth initiatives. Blue Mercury, I get it; it has worked to some degree for J.C. Penney with Sephora and the center core business of Macy's has continued to show growth, albeit slowing growth. What I would more closely follow or analyze is the magnitude of the business segment and how much it can actually offset the greater portions of the Macy's business. And again, Kohl's has been doing very much the same thing with adding beauty products and counters to their stores, with dedicated personal service since 2014.
BackStage I like; I do very much like this initiative. If we look at the retail landscape we come to understand two segments of the industry have and continue to work well. Those segments are the digital sales channel and the off-price sales channel or retail segment. Smaller stores with off-price assortment appeal to the younger generation of shoppers. It's a treasure hunt for these shoppers and this in itself is somewhat of an experience at the same time. So for this sales growth initiative by Macy's, this I like and hope the company accelerates the number of BackStage openings in the near future. Shifting business operations to sales channels that have exhibited nothing but growth over the last decade is needed, but let's not confuse this with what the company has already offered itself to be. The company suggests it is a successful omni-channel retailer. With digital sales growing at roughly 25% while brick and mortar sales falls continuously does not define the retail as successful in omni-channel sales. All must grow. Macy's is, however, a successful digital sales retailer to date. And for that matter who isn't…to date? As one can probably tell, I don't take the words of management at face value; I run them "through the ringer" to distinguish between "executive speak" and factual representation of the business.
Last, but certainly not least, accessing the Chinese consumer through a joint venture is something I can also recognize as having strong potential in the future for Macy's. While the Chinese economy is something of a "black box", the sheer population demographics exude an undeniable potential for sales in the region. This will take some time to develop and as such I wouldn't factor in near-term benefits, but again, I can appreciate this initiative.
The question of the day is whether or not to devote capital to shares of M and I'm of the opinion that there are better opportunities out there for near-term profitability. But certainly many investors find the share price cheap and have longer-term considerations. If I were to recommend acquiring shares of M, I would do so 5-7 percent cheaper than where the share price enters the trading day and in moderation should the share price continue to decline.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.