Macy’s Inc (NYSE:M) is on another of its “could be worse” jags.
It might be the beginning of the end, and a profitable takeout. Or it might be just another quarter that wasn’t as bad as it could have been for the stock market’s biggest drama queen.
Macy’s said it had net income of $472 million, $1.54 per share fully diluted, on sales of $8.515 billion for the quarter ending in January. For the full year, Macy’s tallied total net income of $619 million, $1.99 per share, and sales of $25.778 billion.
The initial reaction of investors was to buy the shares, which were up 2.3% in pre-market trading and are currently up 1.2%. But it’s a little hard to see why, considering that sales were down about $350 million from last Christmas, with net income down about 13%, compared with a year earlier.
An Earnings Beat in Name Only
The phrase being trotted out was “earnings beat,” but it was a beat off expectations of disaster, and the drop in the quarter’s sales was actually bigger than expected.
Like every other brick-and-mortar retailer, Macy’s has been getting hit for years by online convenience at Amazon.com, Inc. (NASDAQ:AMZN), lower prices at Wal-Mart Stores Inc (NYSE:WMT), and the convenience of bulk at Costco Warehouse Corporation (NASDAQ:COST). People don’t go to stores to shop, they go there to buy … or they let their fingers do the walking and talking.
Macy’s has already announced in January it will soon be even smaller, closing 68 stores and laying off 10,000 workers. For the year so far, M stock is already off about 10%. So what is driving the optimism?
A Greater Fool
A look at the bullish articles on Macy’s show that a lot of optimism is based on a belief that some greater fool is about to take over the company and try to make it work.
M stock popped in the beginning of the month after rumors swirled that Hudson’s Bay Company, which operates Macy’s rival Saks Inc (NYSE:SKS) might make a run at its bigger rival. In doing so, Hudson’s may use its real estate as leverage against its small market cap, and perhaps sell a lot of Macy’s own real estate, including its flagship at 34th Street and Broadway, to raise the rest of the cash.
Hudson’s is not the only potential buyer said to be circling Macy’s. Uniqlo, a Japanese company, is said to be interested. But any buyer would have to face a small mountain of debt, $6.5 billion worth, on assets of $21 billion. If no buyer is found Macy’s could circle the drain for years before falling in, as The Limited decided to do last month.
It’s Macy’s real estate that has most of its value, other analysts say. The Herald Square store alone could be worth half the company’s current market cap. A commitment to selling real estate could send the stock rising to $45 per share very quickly.
It still smells to me that investors aren’t buying an operating company, but land.
Bottom Line on M Stock
Even smart investors seem unclear what to do. Pacer Advisors is selling while Menta Capital is buying.
The buyers right now look like arbitrageurs, looking for a deal that might spin off the real estate into a Real Estate Investment Trust (REIT), or sell the operating units to Hudson’s or someone else. The sellers look like longer-term investors who correctly see a flailing company, whose CEO Terry Lundgren is about to retire, in a fading market niche. These days, the title of “mall anchor” sounds more like something that holds you to the bottom of the ocean than something that grows and makes money.
My guess is that if a deal isn’t done in the next month or two that the sharks are going to scatter and the stock is going to settle to its logical value, which is lower. Maybe a lot lower.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
