Macy's real estate could protect it from raiders

Posted at 12:12 PM, Jan 05, 2016
and last updated 2016-01-05 12:12:03-05

CINCINNATI - A Wall Street analyst has lowered his fourth-quarter earnings expectation for Macy’s Inc., the latest in a string of developments that could make the Cincinnati-based department store chain a takeover target in 2016.

Cowen and Co. analyst Oliver Chen reduced his Q4 earnings estimate on Macy’s to $2.42 per share, down from $2.52. He also lowered his 12-month price target on Macy’s stock to $39, down from $42.

“Our store checks in the mall, discussions with industry experts, and monitoring of promos showed Macy's has the most inventory and deepest markdowns in the department store channel,” Chen wrote in a Jan. 4 report. Chen said Macy’s suffers from “a lack of traffic-driving items” and shifting consumer preference toward online purchase and off-price, or discount, brands.

Macy’s declined to comment for this story. It will report fourth-quarter earnings on Feb. 23.

The critique is the latest in a series of reports in which analysts and investors have questioned whether Macy’s can turn around a three-quarter sales slump that has squeezed profitability and caused its stock price to fall 45 percent in 2015.

The lower Macy’s stock price goes, the more attractive it becomes as a takeover target, partly because of its real estate, which is said to be worth up to $21 billion – nearly twice as much as the $11.3 billion current value of all Macy’s stock.

Macy’s shares closed Monday at $35.79, up 2.3 percent from its Dec. 31 closing price. Shares jumped another 2 percent in mid-morning trades. But only 8 of the 24 analysts who follow the company have a buy rating on the stock, down from 11 three months ago.

“The consumer is interested in experiences and gadgets more than apparel,” said Jeff Krumpelman, senior portfolio manager at Riverpoint Capital Management Downtown. “That’s not going to benefit Macy’s.”

Goldman Sachs analyst Stephen Grambling predicts Macy’s will fall short on earnings expectations this year and sees “limited upside from strategic initiatives” announced by the company in 2015. Grambling in December reduced his rating on Macy’s from “buy” to “neutral” and reduced his 12-month price target on the stock to $42, down from $66 in December.

“Secular competitive pressures from e-commerce encroachment, fast fashion and even off-price, while not necessarily new, have been pressuring fundamentals,” Grambling wrote in a Dec. 3 report. Grambling lists leveraged buyout opportunities as one factor supporting a higher stock price for Macy's. While he thinks a deal is possible at about $43 per share, he offers "no view on the likelihood of any transaction occurring."

Recent media speculation lists Hudson’s Bay Corp. and Ross Stores Inc. as potential suitors.

Toronto-based Hudson’s Bay has proven adept at spinning off retail assets to finance the purchase of well-known department stores, including Saks and Lord & Taylor. Ross Stores is a discount retailer that “could become the exclusive off-price retailer for unsold Macy's merchandise” if it acquired Macy’s, wrote Brian Sozzi, a former research analyst who writes for the online investor newsletter,

Well-known retail consultant Howard Davidowitz said private equity investors are more likely to make a play.

“They have gigantic amounts of money,” said the chairman of Davidowitz & Associates Inc., a national retail consulting and investment-banking firm based in New York. “If they do get taken over, the price will be monstrous.”

Davidowitz said Macy’s shareholders will expect a hefty premium for the company’s real estate assets. In his view, that makes a takeover unlikely.

“Let’s not forget the history of Macy’s,” he said. “They already went bankrupt on a leveraged buyout. I’m not saying they couldn’t get the money or do the deal. But at the end of the day, if the price is too big, the deal won’t happen.”

In the meantime, Macy’s will cut costs, close unprofitable stores and invest in new ideas to stimulate revenue growth. Ideas identified so far include the 2015 purchase of Bluemercury, an online cosmetics retailer that Macy’s is expanding to malls and Macy’s stores.

It’s also developing a new discount store called Backstage, testing a new approach to jewelry sales in California and expanding its use of licensing deals to secure unique merchandise in eyewear, sports apparel and athletic shoes.

“You’ve got a great management team at Macy’s,” Krumpelman said. “They’re doing the right things to accelerate sales growth.”