Macy’s (NYSE:M) was already struggling before the novel coronavirus. And it’s safe to say the retailer will continue to struggle. Macy’s stock may have bounced back a bit from its March selloff lows. But, it’s hard to see shares rallying even higher from here.
First, it was big-box stores that captured a great deal of its legacy market share. But now, with the rise of e-commerce, the department store giant faces another major competitive threat. Add in high debt, lease liabilities and a bloated cost structure. Put it all together, and it looks like tough times will continue.
The recent outlook looks bad, but a post-lockdown rebound could help the company’s performance in the short term. Yet, as a long-term opportunity, look elsewhere.
Granted, the situation may not be as dire as seen with J.C. Penney (OTCMKTS:JCPNQ). However, it’s tough to see shares retracing past highs (above $20 per share) anytime soon. It’ll be a surprise if shares could bounce back to the double-digits realm (shares trade for around $6.60 today).
With this in mind, there are better ways to play a post-pandemic retail recovery.
Why There’s No Magic With Macy’s Stock
It’s not fair to judge Macy’s stock on its first-quarter results. With Q1 falling in the midst of the pandemic, it’s no surprise the company saw sales plummet to $3.03 billion from $5.5 billion in the year-ago quarter. Earnings plummeted from 44 cents per share in Q1 2019, to an adjusted loss of $2.03.
These massive top and bottom-line declines were in line with analyst expectations. But, the latest bit of bad news isn’t the recent results. It’s the near-term guidance.
Retail overall may be recovering, as seen with the 18% boost in retail sales in the month of May. However, with this company, don’t expect similar results.
Last week, the company released its current outlook. For the second half of 2020, it expects brick-and-mortar sales to be 35% below prior year results. The company’s e-commerce growth somewhat softens the blow. But, overall sales from July to December are set to fall between 20% and 25% from 2019 levels.
So, when will Macy’s return to normal? That is to say, when will it retrace prior sales levels? The company expects that won’t happen until late 2021 or early 2022.
Simply put, forget about the weak long-term prospects (more below) for this legacy retailer. Even a short-term rebound is out of the question.
With high fixed costs and overhead, a big sales drop doesn’t bode well for earnings in the upcoming quarters. And with the company’s troubles continuing to accelerate, it remains possible a “game over” scenario could play out in the years to come.
Things Look Even Bleaker Long Term
If you bought Macy’s stock at the height of the pandemic, you probably had a winning trade. Even after the aforementioned bad news, shares are up more than 56% from their lows. Yet, there’s likely no more upside left on the table.
Why? If you thought the short-term prospects for Macy’s look bad, consider the long-term prospects. In short, the company’s business model is not sustainable. Firstly, its stores are too big. Its largely mall-based locations were built for another era, before big-box stores and e-commerce started to dominate retail.
Secondly, its cost structure doesn’t work in today’s retail landscape. It needs much higher levels of sales to cover its existing overhead. Without it, expect losses to continue. Thirdly, the company is saddled with an excess of long-term obligations.
Outstanding long-term debt totals $5 billion. Long-term lease liabilities add up to another $3 billion in obligations. For comparison, Macy’s stock only has a market capitalization of $2.1 billion.
Granted, you can point to its large real estate portfolio, and claim the company has sufficient “margin of safety.” Yet, this illiquid portfolio of mall anchors and downtown properties may be less of a lifeline than you think. Especially with the pandemic depressing commercial real estate demand.
Remember, J.C. Penney and Sears (OTCMKTS:SHLDQ), both owned significant amounts of retail real estate. But that wasn’t enough to keep either one out of Chapter 11.
The Bottom Line: Avoid Macy’s Stock
Sure, not all brick-and-mortar retail is struggling. Names like Best Buy (NYSE:BBY) will continue to thrive no matter what lies ahead. But for retail dinosaurs like Macy’s? It’s a bleaker picture. That’s true both in the short term, and the long term.
With sales not expected to bounce back until more than a year from now, expect losses to continue. And, saddled with a bloated cost structure and large long-term liabilities, the company may not recover.
That’s not to say Macy’s is the next J. C. Penney. But, Macy’s stock is by no means a great long-term investment. Look elsewhere for opportunity, and avoid M shares completely.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.