Macy's - About That Real Estate Catalyst

| About: Macy's Inc. (M)


Macy’s is one of the most iconic names in retail, no doubt about that.

However, the real estate spin-off thesis is well known and likely futile to execute.

Despite its 4% dividend yield and 10x P/E, it’s not worth the gamble.

Shares of Macy's (NYSE:M) have been taken to the woodshed over the year. Its stock is off more than 50% in the twelve months and down near its 52-week low. However, the slide comes for good reason, and despite having one of the great activist investors involved, may remain dead money for awhile.

Much of the conventional brick-and-mortar retail industry is really feeling the full pressure of's (NASDAQ:AMZN) quest to take over the retail industry. And it's not just Macy's, the likes of The Gap (NYSE:GPS), Target (NYSE:TGT), Nordstrom (NYSE:JWN) and the bankrupt Sports Authority have all felt the pressure. But what's different for Macy's is that it has an activist investor involved. Starboard Value voiced its concern for Macy's last year, and has been trying to get the company to spin off its real estate or form a joint-venture to unlock the hidden value tied up in the land.

Starboard, the same activist that broke up Darden Restaurants (NYSE:DRI), first got involved when shares were trading closer to $75 a share, noting that the true value of the company was upwards of $125 a share. From here, Macy's would be a four-bagger if we could get close to $125. That doesn't look to be happening anytime soon, especially with the current state of the retail industry.

As I noted last year, Macy's locking itself into long-term rental contracts, which is what would happen if it spins off its real estate, would be a foolish move as we head deeper into a brick-and-mortar retail slowdown.

Bigger issues than just real estate spin offs

And as I mentioned in mid-2015, Macy's has been an enticing hedge fund target for some time, since it owns over half its stores. Recall that Carl Icahn took aim at Macy's nearly a decade ago, back in 2007 when it was Federated Department Stores. Icahn lost his battle, but at the time, Icahn said that Macy's was the "perfect candidate for private equity … and there is a great undervaluing in the real estate."

But the prospect of this hidden value, which is Macy's real estate, is arguably no longer hidden. Activists have been pushing the company to unlock that value since 2015 and they've laid out the process and theoretical values for its major properties. However, the market just doesn't appear to care; rather, it knows that a spin-off will not fix Macy's core issues.

About those core issues

The shift from brick-and-mortar to mobile and digital ordering won't be solved via spinning off real estate. Again, a real estate spin-off locks Macy's into a rental payment. Where, if it sells the real estate it'll get some cash, but then have to make lease payments on the property it just sold. But there's the fact that Macy's just isn't relevant anymore. A recent Cowen & Co. report notes that Amazon will overtake Macy's as the number one clothing retailer in the United States by 2017.

Still, Macy's, with shares down so much so fast over the last year, is in a rush to please investors and activist investors. Of late, they've hired two real estate executives with backgrounds in REITs. This alludes itself to the fact that Macy's is more serious about monetizing real estate. Of note Bill Lenehan, former CEO of Four Corners Property Trust (NYSE:FCPT) - the REIT spin-off of Darden - joined Macy's board recently.

However, despite this progress, there's no clear answer to turning around the retail operations. There is a need to slim down its square footage to help meet the new retail and e-commerce trend. It's really going to depend on the strategy that Macy's pursues to unlock its real estate value - in part, selling off stores all together, or selling/leasing certain floors of its buildings could be viable. We need to see a more defined strategy on the real estate for Macy's, which it's been tight lipped about.

Bottom line

Since Starboard Value showed up, David Einhorn's Greenlight Capital has also gotten involved. Einhorn has had a tough time of late, being invested in the now bankrupt SunEdison and taking large losses on Micron Technology (NASDAQ:MU). However, he's still one of the greats, and Starboard Value is one of the top activist investors around.

Still, the issue remains that a real estate spin-off does little to fix Macy's retail business. The traffic to stores and malls is down. What does it take to regenerate in interest? Spinning off real estate will unlock some value in the near-term, but what's the fix for the longer-term and more aggressive encroachment of Amazon and other cut-throat retailers on its market share? It appears to be a race to the bottom from here, so don't let the 4%+ dividend yield at Macy's lure you into a false sense of security.

Now, Macy's 1Q quarterly results weren't all that bad, with sales for the quarter down 5.6%, but earnings per share beating expectations. However, full year management guidance for EPS was lowered by 15% (at the midpoint). Macy's doesn't think consumers will be spending more, blaming the current economic environment. There's just no end in sight for the time being.

And as much as I want to buy into the deeply undervalued retailer with a hefty dividend story, it's just not happening. Retailers, like many industries, are cyclical and I'm not sure we've seen the trough for this cycle. Then there's the fact that Macy's has its own issues, as some retailers are doing okay - case in point, the success of Wal-Mart (NYSE:WMT) and Home Depot (NYSE:HD) of late. Note, the last time we saw Macy's dividend yield above 4%, it was trading at less than 6 times earnings - it currently trades at 10 times.

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.