Macy’s Inc (NYSE:M), like every other department store in this country, is suffering from the ongoing downsizing of brick-and-mortar retail. Down 34% year-to-date, M stock has little hope of making up those losses by the end of the year.
The company announces its second-quarter earnings before the markets open Thursday, August 10. Both revenues and earnings are expected to be lower than in Q2 2016 with analysts estimating earnings-per-share of $0.46 and $5.5 billion in revenue.
Short-term, there appear to be few if any catalysts to drive Macy’s stock. Long-term, however, there are three levers Macy’s has at its disposal that can push its stock higher in the coming quarters.
Macy’s: Three Things to Look For
Macy’s is taking some of its unused parking-lot space and repurposing the real estate so that it’s a revenue generator rather than an empty space.
The company’s partnership with Brookfield Asset Management Inc (NYSE:BAM) will see at least 50 of its 841 stores undergo a parking-lot makeover. Possible additions could include restaurants, office space, hotels, condos and more.
Brookfield already is a big player in retail real estate owning 35% of GGP Inc (NYSE:GGP), America’s second-largest mall owner. Also, it’s one of the world’s biggest owners of infrastructure assets. It understands big projects.
“Regional shopping centers are horizontal assets with large parking footprints which can allow for great creativity in the redevelopment process,” Brookfield CEO Bruce Flatt told Forbes in May. “We are finding significant opportunities with continued urbanization to add multi family residential rentals, condominiums, hotels and office uses to these large pieces of real estate.”
Although Flatt was specifically talking about GGP malls, the same principle applies to M’s real estate. Redevelopment of these lands not only provides an excellent return on investment, but it also improves the malls that get these makeovers, which in turn strengthens the Macy’s store at this location.
M might be suffering from revenue shortfalls, but its real estate still holds plenty of value. Patient investors will be rewarded from the repurposing of its real estate.
In early June, M announced that Yasir Anwar had been promoted to executive vice president and chief technology officer. In his role as CTO, Anwar is responsible for making Macy’s online experience a good one for its customers.
“Maximizing our technology capabilities and continuing the strong growth of our digital and mobile platforms is a high priority for Macy’s …” CEO Jeff Gennette said at the time.
M’s first-quarter saw its e-commerce sales increase by double digits. Although no dollar amounts were given, M sits 6th on Internet Retailer’s 2017 list of the top 500 online retailers in the U.S. and Canada. In fiscal 2017, the company’s online sales were estimated to be $6.9 billion or 27% of its overall revenue.
While margins might continue to suffer in the short-term as a result of Macy’s move to a truly omnichannel experience, long-term, a smaller brick-and-mortar footprint will mean better returns on its real estate and its retail operations.
A 6.4% Yield
The big question for most investors is whether the $1.52 annual dividend is sustainable. Currently, analysts expect 2018 earnings per share of $3.29 and $2.74 in 2019, a payout ratio of 46% and 55% respectively.
Furthermore, CFRA Investment Research expects Macy’s to generate at least $1.1 billion in free cash flow annually over the next two years leaving it plenty to pay out the dividend.
Unless Macy’s business deteriorates significantly in the second quarter, the yield is sustainable for the remainder of fiscal 2018.
Bottom Line on M Stock
The cash return on Macy’s is currently 11%, which suggests M stock is cheap from a cash flow perspective.
Personally, I see M stock as a great income play for investors who can handle above-average volatility. If you get nervous driving in the rain, Macy’s isn’t for you.
While this Macy’s earnings report won’t be pretty, it will likely tell us a bit more about the company’s future. Try to read between the lines.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.