Learning From the Macy's Mistake

As my readers would know, I have been bullish on Macy’s for quite some time. Although the stock did rise following my initial recommendation, it is now down almost 20% in the reference time period. Macy’s terrible earnings report along with the weakness in the entire brick and mortar retail segment led to the stock crashing over 20% since the earnings report. In this article, I will highlight the reasons why my Macy’s thesis did not play out.

Weak retail environment

It is obvious that online retailers are eating brick and mortar retailers’ lunch, and at a very fast speed too.
Apart from Macy’s, retailers like Kohl’s and J.C. Penney also saw huge drop in store traffic and same-store sales. Despite the fact that April retail sales came in way ahead of the consensus, brick and mortar retailers witnessed the biggest year over year drop in sales since the Great Recession.

The primary reason why my Macy’s theory didn’t play out was the weak retail sales environment. Although I did not recommend Macy’s because of its retail potential but its real estate potential. Despite the overall weak retail sales environment, I was bullish on Macy’s primarily because of its real estate assets.

I was confident that Starboard will be able to find a way to monetize Macy’s real estate assets, which in turn will benefit the company. Monetizing its real estate assets could have helped Macy’s improve its online business, thereby preventing online retailers from snatching market share from it.

In short, my reason to be bullish on Macy’s was speculative. In the past, I have suggested investors to not buy stocks on speculation, like acquisition rumors. However, in Macy’s case, I was confident that the company’s board will be more proactive in unlocking the value of its real estate assets as it was the only way curb falling sales and effectively compete against online retailers like Amazon.

However, as of now, Macy’s board has not shown great interest in monetizing its assets. While I am not saying that Macy’s will not monetize those assets in the future, betting on the company’s turnaround because of it is risky.

Right now, Macy’s is still a speculative buy at best. The company will struggle amid the weak sales environment, but the potential of its real estate assets is very tempting. Thus, even if investors decide to buy Macy’s right now, they should only allocate a very small portion of their portfolio to the stock.
Published on May 19, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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