The Comeback in Macy’s Stock Is Merely an Illusion

Retailers have been particularly hard-hit by the novel coronavirus pandemic. Lockdowns forced store closures, crippling sales. Meanwhile, operating expenses like costly leases continued. Macy’s (NYSE:M) was no exception to the bloodbath. Nothing in the department store’s long history prepared it for the situation it has faced. On Wednesday, Macy’s stock closed at $7.38, after posting a record 19.6% gain on the day.

The Comeback in Macy’s Stock Is Merely an Illusion

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If that sounds like the beginning of a turnaround for Macy’s, think again. The largest department store chain in the U.S. faces bigger problems than the coronavirus — although the damage inflicted by the pandemic is going to continue. It’s on my list of “7 Low-Rated Stocks to Sell Before They Drag You Down” for a reason.

Why Did Macy’s Stock Soar on Wednesday?

If you’ve been keeping an eye on the price of Macy’s stock this year, you probably did a double-take after seeing Wednesday’s close. After peaking at $18.10 on Jan. 8, Macy’s was sliding until it fell off a cliff starting in mid-February. By April, the stock was worth just $4.43, a near 76% drop in just three months. 

The damage the coronavirus lockdown inflicted on a retail chain that’s highly reliant on in-store sales was unimaginable. Macy’s stock never really recovered, bouncing around the $5 level for the past month. But on Tuesday, sentiment started to shift. Macy’s closed up sharply, then followed that up with Wednesday’s record performance.

So what gives?

On May 26, the company announced it’s offering $1.1. billion in senior notes. They are secured by some of its most iconic properties, including Downtown Brooklyn, Union Square and State Street Macy’s locations. The plan is to use this money, plus cash on hand, to pay off its existing $1.5 billion revolving credit facility. It will then enter into a new $3 billion credit facility secured by store inventory. The new credit line won’t mature until 2024.

According to Macy’s, these financial moves will give it the breathing room to fund operations through fiscal 2020 and fiscal 2021.

The market was clearly happy with this development.

In addition, Macy’s reopened 80 stores in time for the long Memorial Day weekend. It plans to have all 775 of its stores open across the country over the next six to eight weeks.

Why You Shouldn’t Get Too Excited

Addressing its short-term financial crunch doesn’t change the bigger problem facing Macy’s: the department store model is in trouble. 

Already this year, two of Macy’s largest competitors have entered into Chapter 11. Neiman Marcus (NYSE:MCS) was first, filing on May 7. J.C. Penney (OTCMKTS:JCPNQ) wasn’t far behind, filing on May 15.

The coronavirus lockdown was the final straw for these companies, but they had been in decline for years. And so has Macy’s.

The retail landscape has changed dramatically in the past two decades. The department store was already suffering from the rise of big box stores and discount chains. The situation got dramatically worse with online shopping. Why would anyone drive to a mall, park and trudge through a department store when they could find everything they wanted at Amazon (NASDAQ:AMZN)? With lower prices and free shipping as well.

Making a bad situation worse, the middle class has been shrinking. Department stores like Macy’s thrived for generations by targeting that demographic.

Back at the start of February — before anyone in America was worrying about Covid-19 — Macy’s was outlining a drastic attempt to save itself. This included a plan to close 125 stores, closing one of its headquarters and laying off approximately 2,000 corporate and support staff.

Bottom Line on Macy’s Stock

With Macy’s latest move, the coronavirus is not going to drive the department store chain into the ground. At least not in the next year or two. However, it has done significant damage, and still has the potential to cause trouble for years. A lengthy post-pandemic recession with consumers clamping down on spending will test many retailers.

However, even if the coronavirus pandemic doesn’t force Macy’s to join J.C. Penney and Neiman Marcus, that doesn’t change the fact that the company is in trouble. It’s a department store — the biggest department store chain in America — and its customers are increasingly losing interest.

Macy’s stock may have have just set a record, but don’t mistake that as a signal that all is well with this iconic American retailer.

Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.

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