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 (NYSE:M) problems with debt and its dependence on goodwill to shore up its balance sheet.
Macy's has serious other difficulties.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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