By Parke Shall
There are a few companies that we follow relatively closely and Macy's (NYSE:M) is one of them. Macy's has been a core long position in our portfolio for the last few months as the price has become attractive relative to the company's earnings and we believe there is a firm foundation in the company's cash flow stream, dividend yield, and buybacks authorized that will hold up the stock price until the retail business stops deteriorating or the company is able to monetize its real estate.
On Thursday of last week, it was announced that CEO Terry Lundgren was stepping down in Q1 2017 and that he would be succeeded by Jeff Gennette, current president and former chief merchandising officer of the company. The market didn't really know what to think of this news when it was released; the stock was volatile in early morning trading. When the stock finally began to trade on Thursday, it ran up about 4%. It gave most of those gains back on Friday after the Brexit fiasco.
The company didn't really offer too much of an explanation for Lundgren leaving in its press release on Thursday. You can read the full press release and see that the most indication it gives as to the future direction of the company is,
"This is the time for us to be laser-focused on what is most important to our customers, and how we can best deliver the shopping experience that will secure our position as the premier omnichannel retailer of the future," Gennette said. "We have successfully navigated our way through changing customer trends in the past and there is no doubt that Macy's, Inc. will need to be a significantly different retailer in the future in the way we operate and approach the marketplace. But we also must continue to tackle our immediate priorities with vigor and discipline. Terry and I have an outstanding relationship and we will continue to collaborate closely through this CEO transition process."
We wanted to try and speculate as to why Mr. Lundgren is actually leaving. He has been on with Macy's since 2003 and has done a great job transforming the company, building online sales, and assembling good management depth. There is a legitimate theory that he is simply retiring after a job well done and is ready to hand over the reins.
There is also a theory that he is leaving prior to things going far south for the company. Most executives leave when they feel as though they have done everything they can, which is why short-sellers like Jim Chanos like to target companies like Tesla where there has been a recent executive exodus. It can sometimes be indicative of a turning point for a company where business operations are going to deteriorate.
We are not sure that is the case with Macy's, due to the company already recently lowering its earnings estimates for the upcoming year and due to Mr. Lundgren not wanting to cede his role until the first quarter of next year. We think that if Mr. Lundgren was leaving due to poor performance, he would have left abruptly, rather than transitioning a new CEO in and staying on as a consultant to the board of directors after that. We realize this is probably just for show and that most executives do the same thing, but we have to believe that if Armageddon were to be upon Macy's, Mr. Lundgren would be leaving in a much quicker fashion.
One theory that fits our confirmation bias is that Mr. Lundgren is leaving due to the structure of the company changing significantly. It wasn't but two quarters ago that Mr. Lundgren came out and said he had offers "on his desk" to get real estate projects done for the company's assets that would unlock value for shareholders. In the time since then, the company has hired an investment bank that specializes in real estate and has also appointed a REIT expert to its own board of directors.
The obvious potential explanation is that Mr. Lundgren could be getting ready to usher in a large change at Macy's, where the younger Mr. Gennette may be perfectly poised to head up the "new" company and whatever new projects or initiatives it may be taking on to increase shareholder value.
There is also the potential that Mr. Lundgren's exit could be part of a upcoming deal. It may have been in the terms and conditions of a company trying to work with Macy's in a strategic fashion that Mr. Lundgren step down. This idea was tossed around on Thursday, but we believe the company would have had to disclose this reasoning as it would have been a material omission if left out and if true.
We are going to have to state the caveat that a lot of executives wind up leaving because operational performance has slowed down. Macy's has easy comps for the next couple of quarters, and we can speculate that since Mr. Lundgren is not in a rush to leave, that these quarters operationally may be decent. This, of course, is all speculation simply based on timing and the way that his transition was announced to the public. We do not have all of the answers that we are looking for that would give us more clarity, but we can try to analyze the little data that we have.
Again, we have the following possibilities about Lundgren's exit (we would love to hear your comments):
- He is simply retiring
- He is leaving ahead of an ugly 2017
- He is leaving as a part of a strategic move with a potential partner
- He is leaving as the company will restructure soon and enter a new era
We reached out to Macy's investor relations on Friday to try and get further answers to these questions. If we do get a chance to speak with them, we will write about it and inform our readers as to what we find out. For now, we are basically indifferent and a little hopeful from Mr. Lundgren's moving out of his role. We hope this marks a new period of structural change for the company, and we hope that this transition is in attempt to start a new era of unlocking shareholder value for the company.
We continue to see a firm backstop in the company's stock with its hundreds of millions of dollars of free cash flow in addition to the $10-$15 billion in real estate assets that the company can easily spin off into a REIT that it leases from. We will continue the search for more answers about Mr. Lundgren, and we will keep our readers up-to-date with what we find out when we find out.
Disclosure: I am/we are long M.
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.