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Macy's: There Goes The Dividend

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About: Macy's, Inc. (M)
by: Shock Exchange
Summary

M suspended its dividend. This should help cash flow going forward.

M must pare debt to appease the rating agencies.

M is off about 75% Y/Y. Until the company can arrest the slide in revenue and earnings, the stock remains a sell.

Source: Fortune

Source: Fortune

It has been a tough environment for traditional retailers like Macy's (M). Last week, the company suspended its quarterly dividend:

Macy's (M) suspends its regular quarterly dividend and draws down $1.5B under its credit facility as a proactive measure to provide the retailer with financial flexibility amid the continued spread and impact of Covid-19.

The company's previously announced dividend payment occurring on April 1, 2020, isn't affected by the suspension.

Additionally, Macy's is reviewing all non-essential operating expenses for opportunities to lower spending and is reducing its capital expenditures in 2020.

Withdraws 2020 sales and earnings guidance issued on Feb. 5 and confirmed on Feb. 25.

This was a smart move, in my opinion. The coronavirus has led to social distancing. This has caused traffic for retailers with physical locations to plummet. Most retail sales are now occurring online. Prior to the negative effects of the coronavirus, shoppers had shifted their preferences from mall-based retailers to online retailers and off-price retailers like TJ Maxx (TJX) and Burlington (BURL).

Meanwhile, Macy's appears to be running in quicksand. During its most recent quarter, the revenue of $8.3 billion fell 1% Y/Y. Comparable sales for owned plus licensed fell 0.5%. Backstage, the company's off-price business showed promise; however, it needs to add more scale so it can have a meaningful impact on financial results. Gross margin of 36.8% fell 60 basis points versus the year-earlier period. EBITDA margin of 12.3% was down 50 basis points. The company must continue to invest in its digital platform to keep pace with Target (NYSE:TGT) and Walmart (WMT). This could continue to weigh on margins. On a dollar basis, EBITDA was $1.1 billion, down 5% Y/Y.

Amid the retail wars, maintaining liquidity could become paramount. At the end of its most recent quarter, Macy's had cash of $685 million. Management's task now is to maintain it.

Macy

For its fiscal year, the company generated free cash flow ("FCF") of $451 million, down from over $800 million in the year-earlier period. The company paid dividends of $466 million, which exceeded FCF. Macy's had to suspend the dividend if it wanted its liquidity to increase. Going forward, the company must rein in capital expenditures to further enhance FCF and grow liquidity.

Credit Metrics Are Deteriorating

Last month, S&P downgraded the company's debt to junk status and looked askance on its turnaround plans. Macy's debt load of $4.2 billion is currently 1.9x last 12 months ("LTM") EBITDA. In the November 2019 quarter, its debt/EBITDA was 1.6x. The company's credit metrics have deteriorated slightly since the S&P downgrade. S&P views the company's competitive position as unfavorable. The coronavirus did not help matters. Macy's is, currently, culling underperforming stores and reducing its corporate staff.

Management must improve cash flow and cut debt as soon as possible. The window of opportunity to rightsize the company could be closing. The last thing the company needs is another ratings downgrade that could amplify borrowing costs and limit its capital-raising ability.

Conclusion

Suspending the dividend was the right thing to do. Until Macy's can arrest the slide in revenue and earnings, the stock remains a sell.

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.