Macy’s Inc (M) Store Closings Might Not Stop the Bleeding

Macy's - Macy’s Inc (M) Store Closings Might Not Stop the Bleeding

Source: Mike Mozart via Flickr

Macy’s Inc (NYSE:M) stock might be soaring this morning, but it didn’t actually do all that well last quarter, in the grand scheme of things. Revenue as well as earnings were down on a year-over-year basis in Q2, as were same-store sales. Struggling Macy’s further announced it would be closing 100 stores in the foreseeable future, most of which will be shuttered by early 2017.

Macy's Store Closings May Not Actually Stop the Bleeding

The response? M stock is up 14% early Thursday, as investors saw the glass as half-full rather than half-empty on the heels of a new, compelling plan to improve shareholder value.

Macy’s store closings will only involve units that aren’t performing well enough, and presumably never will. From that perspective, it’s a smart decision. In many regards, though, it begs the question:

Can Macy’s be sure the remaining 628 stores won’t eventually suffer the same fate?

Macy’s Earnings Better Than Expected, But …

The good news is, Macy’s earned 54 cents per share last quarter, on sales of $5.87 billion. That’s better than the profit of 45 cents per share of Macy’s stock and revenue of $5.74 billion analysts were looking for.

The bad news is, profits were down from 64 cents per share in the same quarter a year earlier, when the top line rolled in at $6.1 billion. Same-store sales were down 2% counting licensed departments within stores, and fell 2.6% when just looking at square footage operated by the retailer itself. Retail Metrics, however, had predicted a 4.4% dip in same-store sales.

CEO Terry Lundgren commented on the numbers:

“A number of factors worked in our favor in the second quarter, including a normalized weather pattern, which contributed to a sales lift in our apparel business in particular. We also saw a smaller decrease in tourist spending during prime summer travel months, supported by strengthened promotional events designed to increase customer traffic and conversion.”

The optimistic spin was infectious, setting up a bullish response to the other news Macy’s delivered on Friday.

Macy’s Store Closings Part of Massive Overhaul

In conjunction with (though separately from) its second-quarter report, Macy’s shared a detailed turnaround plan with the market.

The retailer has been back-pedaling since 2014, when earnings as well as revenue began to weaken. The reasons for the deteriorating results were largely presumed to be greater online competition, and a growing disinterest in buying goods. Buying experiences is a growing priority now, as consumers develop “stuff” fatigue. A strong U.S. dollar has also crimped Macy’s all-important foreign-tourism business.

Regardless of the reasons, though, Macy’s has to stop the bleeding.

Part of the rebound plan includes shedding approximately 100 stores. Macy’s President (and soon-to-be CEO) Jeff Gennette explained:

“Nearly all of the stores to be closed are cash flow positive today, but their volume and profitability in most cases have been declining steadily in recent years. We recognize that these locations do not yield an adequate return on investment and often do not represent a customer shopping experience that reflects our aspirations for the Macy’s brand. We decided to close a larger number of stores proactively so we can invest in a winning customer experience in our most productive and highest-potential locations, as well as invest in growth sooner and more aggressively in digital and mobile.”

The stores collectively drive about $1 billion in annual business. Although their absence will reduce EBITDA, Macy’s believes it will offset that with savings related to store closings.

The plan nods back to a possibility proposed by hedge fund Starboard Value in the middle of last year, suggesting M could unlock value the value of its real estate by spinning it off into a REIT, then leasing those spaces from that REIT. That plan would immediately put money in the bank but create a perpetual financial obligation. Such a plan would also wipe away Macy’s choice so simply close stores, as it has now chosen to do.

Bottom Line for Macy’s Stock

The market cheered Macy’s plan, which not only includes store closings, but an improved in-store and online shopping experience. The company didn’t rule out other types of real estate reconfiguration and joint ventures in the future either. They all sound good.

A closer look at the plan, however, doesn’t answer the question of how the plan will stop the slow implosion — it’s more of a to-do list then an plausibly effective overhaul.

It could work. Shedding the least attractive 100 stores may well allow the organization to focus on the 678 or so units that matter the most to Macy’s top and bottom lines. There’s no real assurance it will gain traction, though. Every other retailer out there is also (always) aiming to improve the in-store and online shopping experience. There’s no real guarantee Macy’s will make progress on those fronts — progress it should have made long ago. The new plan is mostly a hope.

Indeed, perhaps the headwind it’s facing isn’t a service or operational problem at all. If it’s a social/cultural one — as appears to be the case — the turnaround plan won’t make a dent.

M stock may not be a risk worth taking.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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