Macy's: Is The Real Estate Thesis Overplayed?

About: Macy's Inc. (M), Includes: BPR, HHC
by: Activist Stocks

The department store space is abysmal right now.

Every single U.S. department store stock is down over the last month.

It’s now or never to unlock shareholder value.

There's been a number of activist investors that get involved with retailers and the like, arguing that the company owns a lot of real estate - tangential to their core business - and that land should be monetized or put to good use. For Macy's (NYSE:M), that activist is Starboard Value.

You're be hard pressed to find a cheaper retailer, at 9 times forward earnings, with a higher yield, at 5%. Last summer I talked about the real estate catalyst at Macy's, noting it would be tough to see come to fruition. Now, Macy's is down a cool 33% in just a couple months. The Santa rally could've been a head fake. Shares are back now near 52-week lows, and down close to 60% since hitting all-time highs in 2015.

It's now or never for Macy's and potential investors. Admittedly, we're getting another chance to potentially buy Macy's for a very cheap price. Since we last visited Macy's, it's been selling off stores and announcing plans to close more. This is a bit positive, as the mall model is broken, as least for anywhere but "A" locations near the upper- and upper-middle class areas.

The issue with Macy's is that sales aren't great, so among the few bright spots about Macy's is its real estate. However, that does create a margin of safety. Without the real estate, where would Macy's be trading? Macy's was a leader back in the day when it was a quality merchandiser and when online shopping was less prevalent.

There is a silver lining for Macy's if it can simply reshift its portfolio- close down the stores that are struggling and focus on a portfolio of stores that only caters to higher-end markets, where people still visit malls. That inherently comes with monetizing some of its real estate. It's finding buyers as well, including General Growth Properties (GGP) and Howard Hughes (NYSE:HHC).

But Macy's can't simply navigate the declining retail market with a spinoff of real estate - that is, it would not fix the issues. It would only be a coverup. Macy's is losing relevancy. David Einhorn of Greenlight Capital showed up at Macy's citing the real estate catalyst, only to blow out of the stock a few quarters later, at a near 30% loss. Meanwhile, activist investor Starboard Value is still holding out. The fund pegs Macy's real estate value at roughly $20 billion. The enterprise value is $16 billion. So, basically, with the retail operations and credit card business, you're getting Macy's for 'free.' Another way to think about it: Starboard says that separating out the retail and real estate could add $10 billion in value to Macy's - roughly $30 a share - an easy double of the stock price. Time is of the essence for that, however, as Macy's retail operations continue to lose value. But does it have a 'negative' worth? I'm not sure of the long-term for Macy's business, but there is some upside if Macy's can right its real estate portfolio rather quickly. The bull thesis is that Macy's can spin off or monetize its real estate

With all this, monetizing real estate is a slow catalyst and one that doesn't always work out. I still realize that Macy's core business is deeply struggling. Yet, if the company shows signs of actually moving on its real estate, it could be worth a proverbial 'cigar puff' here. Notably, it is getting aggressive on store shutdowns, yet, there's still too much overhang. The company is closing stores but these are stores that are already underperforming. Its most valuable stores are the ones that are actually profitable, so there's little reason to close or sell them. Until Macy's can figure out a strategy for these stores, it's still a questionable investment.

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.