Will the novel coronavirus destroy Macy’s (NYSE:M)? That seems to the consensus. M stock has plummeted more than 70% since February.
But the retailer’s troubles go beyond short-term losses from store shutdowns. As our own Matt McCall recently wrote, the decline of brick-and-mortar retail is a megatrend that won’t regress. With the pandemic slated to speed up their long-term decline, it seems the writing’s on the wall for Macy’s.
Sure, the company’s large real estate holdings could save the day, but this alone may not be enough to stop the inevitable. It’s not just big-box stores like Wal-Mart (NYSE:WMT) eating their lunch anymore. The growing dominance of Amazon (NASDAQ:AMZN) and other eCommerce giants comes at their expense.
So, what’s the play with M stock? Compared to “old school” rivals like JC Penney (NYSE:JCP), the company looks like a blue-chip. But that’s not saying much. The damage from the pandemic, coupled with being on the wrong side of retail disruption, means shares could fall further from today’s already depressed prices.
On the other hand, shares have a shot at rebounding. Mortgaging its property holdings, the company may be able to ride things out. Just surviving the maelstrom could send shares to much higher prices than where it trades today. Macy’s could go either way from here.
How M Stock Could Bounce Back
As mentioned above, valuable real estate holdings may provide the key to Macy’s survival. Many of these properties are in the affluent New York, Los Angeles, and Washington, DC metro areas. As this Seeking Alpha contributor recently discussed, these properties in total could be worth more than $10 billion.
Yet, keep this in perspective. Prior estimates estimated their value as high as $21 billion. Also, it’s debatable how much these properties would fetch in a sale. Especially now, with coronavirus meaning bad times for commercial real estate.
Nevertheless, this factor does provide a pathway to recover from recent lows. Mortgaging its real estate, the company may have enough cash to as stores stay closed. Once they re-open, cash flow may not return to normal, but it could be enough to cover their obligations.
As retail recovers, shares bounce back. Maybe not to prior highs (above $20 per share). But, certainty at levels much higher than its April 22 closing price of $4.82 per share.
However, this scenario is no slam dunk. Taking a more negative view, it’s easy to see why Macy’s could go the way of other retail dinosaurs.
Why Macy’s Could Wind up the Next Sears
It not really fair to compare Macy’s to its dying rivals, JC Penney’s and Sears (OTCMKTS:SHLDQ). Macy’s locations have a more cosmopolitan feel, offering higher-end goods and a much more appealing ambiance. The latter two look the part of retail dinosaur, without outdated store layouts and lower-quality merchandise.
Yet, this is exactly the retailer’s issue: they’re stuck in the middle. Too expensive for the average American family. Too downmarket for affluent households. Add in the low prices and convenience of online, and there’s little that gives them an edge.
The coronavirus shutdown just takes Macy’s off this prior “dead-end” trajectory and throws it on the same path JC Penney’s and Sears wound up taking. Back in March, analysts at Cowen said the company had liquidity to last just five months.
The recent mortgaging of property, along with employee furloughs, may provide more wiggle room. But the company is going to come out of this outbreak with more debt and weaker sales demand. If they are unable to monetize their real estate, and cash flow fails to bounce back, expect shares to keep tumbling towards zero.
My Take on M Stock? Sit This One Out
Today’s crisis provides many opportunities to buy quality stocks on the cheap. Macy’s isn’t one of those screaming buys. While shares sell at a sharp discount to the company’s underlying real estate, it isn’t as if they can unload the properties today and suddenly have $10 billion at their disposal.
In a stronger economy, buyers were clamoring for such properties. But now? Not so much. Add in current and future challenges from coronavirus, and M stock could fall to even lower prices. Bottom line: it’s best to sit this one out.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis for web-based publications since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
