M - Macy's

[ccplz]

Wall Street currently hates Macy's so much that it's now pricing in below zero growth into perpetuity.

 

http://www.moneychimp.com/articles/valuation/dcf.htm

 

Plug in $4.50 for E.P.S. for Macy's and zero growth with an 11% discount rate and you get an intrinsic value higher than today's price.

 

What's amazing is that investors have become so negative that they're now digging their own graves. The opportunity to outwit Wall Street is being handed to Macy's on a silver platter.  All Macy's needs to do with it's double digit earnings yield is repurchase 10% of it's shares annually. They can create 10% E.P.S. growth and raise the dividend 10% annually, and they don't need to actually grow at all.

 

Over the past five years, Macy's has repurchased over $6 billion of shares. Today's market cap is $12 billion. In my life, nearly every time you find a company who's stock that is pricing in zero growth, but the company is buying back stock so rapidly that they can repurchase every single share in less than ten years, it's a huge buying opportunity.

 

Macy's actually has not grown that much. Since 2007, they have grown revenues from 26 billion to 28 billion annually in 2014. Adjusted for inflation, that is negative growth. Add a bit top line pressure from online sales to the mix and it does not take much to see Macy's shrinking, even in nominal numbers.

 

Shrinking sales does not mean sinking net income. Also 11% is a rather conservative estimate for M's cost of capital.

[rkbabang]

Wall Street currently hates Macy's so much that it's now pricing in below zero growth into perpetuity.

 

http://www.moneychimp.com/articles/valuation/dcf.htm

 

Plug in $4.50 for E.P.S. for Macy's and zero growth with an 11% discount rate and you get an intrinsic value higher than today's price.

 

What's amazing is that investors have become so negative that they're now digging their own graves. The opportunity to outwit Wall Street is being handed to Macy's on a silver platter.  All Macy's needs to do with it's double digit earnings yield is repurchase 10% of it's shares annually. They can create 10% E.P.S. growth and raise the dividend 10% annually, and they don't need to actually grow at all.

 

Over the past five years, Macy's has repurchased over $6 billion of shares. Today's market cap is $12 billion. In my life, nearly every time you find a company who's stock that is pricing in zero growth, but the company is buying back stock so rapidly that they can repurchase every single share in less than ten years, it's a huge buying opportunity.

 

It may look cheap now, but not cheap enough for me yet.  I am keeping it on my watch list though, because I think Mr. Market is going to give us a huge buying opportunity after the holiday quarter's earnings are released.  Amazon is going to own this holiday shopping season like never before and I have a feeling that retail stocks will drop to a level of ridiculousness that Macy's (and maybe Walmart and some others) will be a no brainer of a buy.  If I'm wrong, I'm going to pass on this one though.

 

[Spekulatius]

Wall Street currently hates Macy's so much that it's now pricing in below zero growth into perpetuity.

 

http://www.moneychimp.com/articles/valuation/dcf.htm

 

Plug in $4.50 for E.P.S. for Macy's and zero growth with an 11% discount rate and you get an intrinsic value higher than today's price.

 

What's amazing is that investors have become so negative that they're now digging their own graves. The opportunity to outwit Wall Street is being handed to Macy's on a silver platter.  All Macy's needs to do with it's double digit earnings yield is repurchase 10% of it's shares annually. They can create 10% E.P.S. growth and raise the dividend 10% annually, and they don't need to actually grow at all.

 

Over the past five years, Macy's has repurchased over $6 billion of shares. Today's market cap is $12 billion. In my life, nearly every time you find a company who's stock that is pricing in zero growth, but the company is buying back stock so rapidly that they can repurchase every single share in less than ten years, it's a huge buying opportunity.

 

Macy's actually has not grown that much. Since 2007, they have grown revenues from 26 billion to 28 billion annually in 2014. Adjusted for inflation, that is negative growth. Add a bit top line pressure from online sales to the mix and it does not take much to see Macy's shrinking, even in nominal numbers.

 

Shrinking sales does not mean sinking net income. Also 11% is a rather conservative estimate for M's cost of capital.

 

If they move more of their business online, I am fairly certain that their margins will take a huge hit. The Macy story since the recession is one of margin expansion, there was very little organic growth. Now that the revenues start to shrink, there is a significant risk that margins take a huge hit, which will take earnings and cash flow down as well, and there goes the share buyback...

 

I have a sticker on my forehead that retail turnarounds are tough.

[ccplz]

You are right, retail turnarounds are tough, almost impossible

 

Macy's is not struggling and fortunately for longs do not need a turnaround.

[Picasso]

Yeah I wouldn't call M a turnaround yet. Maybe in a couple years it might be.

 

Anyone have a long term chart of SSS and the equity performance?

[ccplz]

http://fortune.com/2015/11/06/amazon-retailers-ecommerce/

 

Digital sales are 17% of total sales for Macy's.

[Guest Grey512]

This worked out poorly

Stock price is down. Starboard made little/no progress.

I sat on a decent paper loss and now sold to deploy capital elsewhere. This was not a massively expensive mistake, but it was a mistake, still. So let's deconstruct.

 

Lessons learned:

1. 'Financial engineering'-led activist theses are faulty. There's only so much value that can be created through conversions to REITs, etc etc.  When activists come and say that you have to move some assets around, change the signposts on some things and - voila - the stock price will double, then beware.

 

2. 10x earnings is not enough for a secularly challenged business, all else equal. Maybe it's the environment, maybe' its me being hasty, maybe it's the Jeff Smith magic, but I ended up lowering my standards and buying this anyway at 10x earnings. I probably subconsciously knew that 10x P/E is not cheap enough here but I ignored that.

 

3. The drop from $50 to $40 made me think 'there could be a bargain here'; it's a case of the 'reversion-to-the-mean fallacy'.

 

Overall - I get the feeling that activism in general is about to hit a significant speed-bump. 2010-2014 was probably a bubble for activism.

[ccplz]

Are you actually an idiot? Did you even have a thesis in the first place or were you just blindly following Starboard into the trade?

[rkbabang]

Are you actually an idiot?

 

If only we all had the intelligence, wit, and wisdom of ccplz, none of us would ever make an investment which turns out badly.  In the presence of greatness we are all but idiots.

 

[intothebreach]

As the OP Grey512 started this thread (and actually pointed to Starboard's thesis) which has now been viewed over 3,000 times and received over 30 replies.

 

And now because he's candid enough to admit a mistake and share his lessons learned instead of staying mum on the topic, he ends up being called an idiot. Remember: you get the behaviors you reward and promote. I don't know about you, but I'd rather encourage more ideas and more sharing of lessons learned.

[Guest Grey512]

Am I an idiot? Maybe. 20-40% of the time the market certainly makes me feel like an idiot.

 

intothebreach, rkbabang - thanks folks. I've thought of more post-mortem lessons here:

 

4. Outright longs vs hedging. Had I understood the sector better, I might have been better off short-selling a correlated name in the retail space (on a premise analogous to 'Apple doing well is bad for Blackberry'). Instead, I just bought M and did not hedge it with anything.

 

5. Have a clear gameplan. Looking back, at the time I bought M, I think it wasn't entirely clear in my mind whether I planned this to be a short-term hold, a medium-term hold or a long-term mainstay in my portfolio. After I bought this around $40, if this had immediately gone to $50 in a month, I would have sold. Instead, if it gradually headed back towards $50 over a period of a year or so, I am not sure what I would have done.

 

So all in all - a speculative move with a flimsy thesis, gone bad. I think I've made some of these mistakes before, but they 'looked' or 'felt' different, if you know what I mean. Re-learning some of the same lessons again.

[rkbabang]

Am I an idiot? Maybe. 20-40% of the time the market certainly makes me feel like an idiot.

 

intothebreach, rkbabang - thanks folks. I've thought of more post-mortem lessons here:

 

4. Outright longs vs hedging. Had I understood the sector better, I might have been better off short-selling a correlated name in the retail space (on a premise analogous to 'Apple doing well is bad for Blackberry'). Instead, I just bought M and did not hedge it with anything.

 

5. Have a clear gameplan. Looking back, at the time I bought M, I think it wasn't entirely clear in my mind whether I planned this to be a short-term hold, a medium-term hold or a long-term mainstay in my portfolio. After I bought this around $40, if this had immediately gone to $50 in a month, I would have sold. Instead, if it gradually headed back towards $50 over a period of a year or so, I am not sure what I would have done.

 

So all in all - a speculative move with a flimsy thesis, gone bad. I think I've made some of these mistakes before, but they 'looked' or 'felt' different, if you know what I mean. Re-learning some of the same lessons again.

 

Thanks for your candor. #5 is one I struggle with.  I sometimes buy a little of something because it looks cheap without a clear plan.  My most recent version of this was buying WFM.  I bought a tiny bit when it was around $29 a few months ago.  Now I have this really small position (even if it does well it won't make a material difference in my portfolio), the price is a little higher, and there are better values out there so I probably won't buy any more.  I'll probably end up selling it for a short-term gain meaning after commissions and taxes I will make very little, if anything.  A failure to plan is a plan to fail.

 

 

[krazeenyc]

Am I an idiot? Maybe. 20-40% of the time the market certainly makes me feel like an idiot.

 

intothebreach, rkbabang - thanks folks. I've thought of more post-mortem lessons here:

 

4. Outright longs vs hedging. Had I understood the sector better, I might have been better off short-selling a correlated name in the retail space (on a premise analogous to 'Apple doing well is bad for Blackberry'). Instead, I just bought M and did not hedge it with anything.

 

5. Have a clear gameplan. Looking back, at the time I bought M, I think it wasn't entirely clear in my mind whether I planned this to be a short-term hold, a medium-term hold or a long-term mainstay in my portfolio. After I bought this around $40, if this had immediately gone to $50 in a month, I would have sold. Instead, if it gradually headed back towards $50 over a period of a year or so, I am not sure what I would have done.

 

 

So all in all - a speculative move with a flimsy thesis, gone bad. I think I've made some of these mistakes before, but they 'looked' or 'felt' different, if you know what I mean. Re-learning some of the same lessons again.

 

I agree with of your statements about financial engineering, piggybacking, and Macys at least possibly being secularly challenged. But basically nothing has changed about Macy's business from when you first posted til now. Other than the very short term performance that was impacted by the ridiculously warm NE weather -- it was 70 degrees in NYC around Christmas -- warmer than in LA.  I'm actually surprised they did as well as they did. The only thing that has changed is the stock price and the mood of the market. Obviously i can understand you deciding that you really don't know enough about Macys to take a position and bail -- that's generally not a bad idea to bail on an investment you're not comfortable in. 

 

I'm actually fairly pessimistic about any transformative real estate transactions and not sure what impact if any Starboard will have. That being said I think Macys is quite cheap and I actually initiated a small position (<1%) at basically the closing price today (a couple days ago).  My thesis is simple at this price -- they have a fairly good business (IMO), are fairly cheap <10x PE, and have a lot of valuable real estate protecting you on the downside.

[BG2008]

I think that you do the deep dive and scrubbing of Macy's asset, you'll find that there are a lot of "real estate" that can be "unlocked" without detriment to the retail operation.  For example, selling off the top floors of downtown Brooklyn and Seattle made all the sense in the world.  Once you get to the 5th or 6th floor of a department store, it no longer makes sense to use it as retail.  What good is retail real estate if you need to go up 9 flights of escalators.  Fortunately, in places like NYC, SF, and Chicago, these space are very valuable as office conversions.  I believe that those assets are worth $5-7bn.  But monetizing the top floor will likely yield about $1 billion in cash proceeds.  Frankly, I prefer them to retain ownership and keep the JV interest in the office conversion.  The value in those 3-4 trophy assets is in the millions of foot traffic, not necessarily in Macy's operation.  However, Macy's is generating a good chunk of cashflow from operating those assets.  What I'm trying to say is that whether Macy's works or not in the long run, Herald Square, Union Square in SF, and Chicago will always have "alternative use" value that isn't gonna go away due to Macy's not functioning as a retailer.  An entire block in NYC is worth something!!! 

 

Aside from this, Macy's also have mall space in some of the top malls in the US.  Roosevelt Field Mall, Aventura etc.  Generally, I believe that there's a bifurcation of Malls.  B and Cs overtime will die.  As can potentially grow overtime or simply have much longer staying power.  They are fun to walk through and shop in.  Even Blue Nile, a pure retailer, recently took some mall space in Roosevelt Field Mall.  Simon is aggressively courting online retailer to showroom their products.  You'll be surprised to know what Macy's owns.

 

I tend to agree with Krazeenyc that Macy's is one of the better department store retailers out there. 

 

   

[peridotcapital]

This worked out poorly

Stock price is down. Starboard made little/no progress.

I sat on a decent paper loss and now sold to deploy capital elsewhere. This was not a massively expensive mistake, but it was a mistake, still. So let's deconstruct.

 

Lessons learned:

1. 'Financial engineering'-led activist theses are faulty. There's only so much value that can be created through conversions to REITs, etc etc.  When activists come and say that you have to move some assets around, change the signposts on some things and - voila - the stock price will double, then beware.

 

2. 10x earnings is not enough for a secularly challenged business, all else equal. Maybe it's the environment, maybe' its me being hasty, maybe it's the Jeff Smith magic, but I ended up lowering my standards and buying this anyway at 10x earnings. I probably subconsciously knew that 10x P/E is not cheap enough here but I ignored that.

 

3. The drop from $50 to $40 made me think 'there could be a bargain here'; it's a case of the 'reversion-to-the-mean fallacy'.

 

Overall - I get the feeling that activism in general is about to hit a significant speed-bump. 2010-2014 was probably a bubble for activism.

 

The risk in bailing so soon is that you might make an even bigger mistake by selling in the mid 30's. We get a warm winter causing retail comps to go from low single digit positives to low/mid single digit negatives and the market concludes all bricks and mortar is dead, sells down every stock tremendously, and crowns Amazon the default winner. Typical short term thinking.

 

If you take a longer term view I think you'll find that Macy's has above-average management, above average real estate, and a stock price in the 30's that is very cheap on a free cash flow basis. Let's assume for a second that they continue to use free cash flow to buyback shares and pay a nice dividend. Some real estate monetizations will also give some extra kick. Where could FCF per share be in 3-5 years, even if you assume flat comps? Should Macy's trade at 10-12x that number? Add in the dividend accumulation and I think we could look back at say, wow, Macy's was $35?

 

FD: long

[FCharlie]

 

 

 

The risk in bailing so soon is that you might make an even bigger mistake by selling in the mid 30's. We get a warm winter causing retail comps to go from low single digit positives to low/mid single digit negatives and the market concludes all bricks and mortar is dead, sells down every stock tremendously, and crowns Amazon the default winner. Typical short term thinking.

 

If you take a longer term view I think you'll find that Macy's has above-average management, above average real estate, and a stock price in the 30's that is very cheap on a free cash flow basis. Let's assume for a second that they continue to use free cash flow to buyback shares and pay a nice dividend. Some real estate monetizations will also give some extra kick. Where could FCF per share be in 3-5 years, even if you assume flat comps? Should Macy's trade at 10-12x that number? Add in the dividend accumulation and I think we could look back at say, wow, Macy's was $35?

 

FD: long

 

I agree 1,000%.

 

I think the past few months have just been a bad time to own retail. You can blame it on the weather, or Amazon, or whatever... but the long term earnings power of Macy's is not impaired. Excluding weather, Macy's says the same store sales decline for this current quarter would have been 1%. That's not terrible. Will every summer be abnormally cool and every winter be abnormally warm going forward? I think not, and I'm looking forward to some better results in the future. In the meantime, whether they create a REIT or not, the real estate is still there and it's very valuable. I like that Macy's isn't selling it's real estate or simply spinning off a REIT. I think more value can be created with partnerships and joint ventures. Who knows, perhaps Macy's can allow a developer to build a couple billion dollars worth of offices/condos above the NYC stores. I'd prefer that than to just have a lump sum cash infusion for selling the real estate.

 

Remember, if the real estate was worth $125 per share this summer, imagine what it will be in a few years once Macy's has repurchased another $5 billion worth of stock. I'm not predicting this, but in all reality, if the market continues to treat this stock like a pile of crap, the real estate "per share" could be $500 or more one day. 

[fareastwarriors]

Activist Investor Starboard Urges Macy’s to Strike Real-Estate Deals

 

http://www.wsj.com/articles/activist-investor-starboard-urges-macys-to-strike-real-estate-deals-letter-1452485020

[Guest Grey512]

What I struggled with is the contradiction between these two general statements/ideas:

"Macy's is the best and most well-run player in its sector"

"Macy's real estate is under valued"

 

Is Macy's really well-run? Isn't it the job of the management to take the assets that the company has (e.g. real estate) and then generate an appropriate cash return from those assets? If we assume for a second that Macy's management are smart and doing their job well, maybe the real estate is really most valuable in Macy's hands and its current configuration. In the end, any asset is worth the stream of cash flows that it can generate over its lifetime. We all can see the stream of cash flows that Macy's assets are generating. Can someone else really take some of those RE assets, remodel them, re-lease them and generate more cash flows than Macy's? Is it really a slam-dunk?

 

I've avoided Sears and the whole Sears saga so far, but am looking through it now. The Sears bulls appear to have been focused on real estate. I am not a real estate expert, but what I keep going back to is the fundamental truth that any asset is intrinsically worth the (discounted) stream of cash flows that it will generate.

 

Looking at the whole thing another way, realization of value at Macy's here depends on liquidity in a general sense because I don't buy that Macy's management can magically flip some operational switches to lift the EBITDA margin - retail is a tough, tough business. Therefore, according to activists (and some on this board), some of Macy's illiquid assets need to be monetized in the public or private markets. But my sense is that liquidity is decreasing; there's less and less appetite for illiquidity or illiquid assets - one can only look at what's happening in the SWF space, which will cascade down. So I think another reason why I sold Macy's is because I don't think that it's an equity that will do well in a global market regime which I think we're in for the next few years, which is a regime of low liquidity, low appetite for illiquidity, and an accelerated shift to e-commerce.

[DTEJD1997]

 

 

 

The risk in bailing so soon is that you might make an even bigger mistake by selling in the mid 30's. We get a warm winter causing retail comps to go from low single digit positives to low/mid single digit negatives and the market concludes all bricks and mortar is dead, sells down every stock tremendously, and crowns Amazon the default winner. Typical short term thinking.

 

If you take a longer term view I think you'll find that Macy's has above-average management, above average real estate, and a stock price in the 30's that is very cheap on a free cash flow basis. Let's assume for a second that they continue to use free cash flow to buyback shares and pay a nice dividend. Some real estate monetizations will also give some extra kick. Where could FCF per share be in 3-5 years, even if you assume flat comps? Should Macy's trade at 10-12x that number? Add in the dividend accumulation and I think we could look back at say, wow, Macy's was $35?

 

FD: long

 

I agree 1,000%.

 

I think the past few months have just been a bad time to own retail. You can blame it on the weather, or Amazon, or whatever... but the long term earnings power of Macy's is not impaired. Excluding weather, Macy's says the same store sales decline for this current quarter would have been 1%. That's not terrible. Will every summer be abnormally cool and every winter be abnormally warm going forward? I think not, and I'm looking forward to some better results in the future. In the meantime, whether they create a REIT or not, the real estate is still there and it's very valuable. I like that Macy's isn't selling it's real estate or simply spinning off a REIT. I think more value can be created with partnerships and joint ventures. Who knows, perhaps Macy's can allow a developer to build a couple billion dollars worth of offices/condos above the NYC stores. I'd prefer that than to just have a lump sum cash infusion for selling the real estate.

 

Remember, if the real estate was worth $125 per share this summer, imagine what it will be in a few years once Macy's has repurchased another $5 billion worth of stock. I'm not predicting this, but in all reality, if the market continues to treat this stock like a pile of crap, the real estate "per share" could be $500 or more one day.

 

Macy's has real estate worth $125/share?  whut whut?  In a few years that could be $500/share?

 

In my local market, Macy's has some good property, but it also has worthless stuff.  I live less than a mile away from a Macy's that has 5 floors.  Two of the five floors are currently open for business.

 

Obviously, the NYC property is worth a bundle!  I have seen estimates that it might be worth $1 billion.  Might it be worth more in the future?  Under what circumstances could it be worth $2 billion? 

 

How much longer will real estate go up in NYC?

 

I have no doubt that M has valuable real estate that could be monetized.  I am somewhat skeptical that it is worth hundreds of dollars per share.

[krazeenyc]

 

 

 

The risk in bailing so soon is that you might make an even bigger mistake by selling in the mid 30's. We get a warm winter causing retail comps to go from low single digit positives to low/mid single digit negatives and the market concludes all bricks and mortar is dead, sells down every stock tremendously, and crowns Amazon the default winner. Typical short term thinking.

 

If you take a longer term view I think you'll find that Macy's has above-average management, above average real estate, and a stock price in the 30's that is very cheap on a free cash flow basis. Let's assume for a second that they continue to use free cash flow to buyback shares and pay a nice dividend. Some real estate monetizations will also give some extra kick. Where could FCF per share be in 3-5 years, even if you assume flat comps? Should Macy's trade at 10-12x that number? Add in the dividend accumulation and I think we could look back at say, wow, Macy's was $35?

 

FD: long

 

I agree 1,000%.

 

I think the past few months have just been a bad time to own retail. You can blame it on the weather, or Amazon, or whatever... but the long term earnings power of Macy's is not impaired. Excluding weather, Macy's says the same store sales decline for this current quarter would have been 1%. That's not terrible. Will every summer be abnormally cool and every winter be abnormally warm going forward? I think not, and I'm looking forward to some better results in the future. In the meantime, whether they create a REIT or not, the real estate is still there and it's very valuable. I like that Macy's isn't selling it's real estate or simply spinning off a REIT. I think more value can be created with partnerships and joint ventures. Who knows, perhaps Macy's can allow a developer to build a couple billion dollars worth of offices/condos above the NYC stores. I'd prefer that than to just have a lump sum cash infusion for selling the real estate.

 

Remember, if the real estate was worth $125 per share this summer, imagine what it will be in a few years once Macy's has repurchased another $5 billion worth of stock. I'm not predicting this, but in all reality, if the market continues to treat this stock like a pile of crap, the real estate "per share" could be $500 or more one day.

 

Macy's has real estate worth $125/share?  whut whut?  In a few years that could be $500/share?

 

In my local market, Macy's has some good property, but it also has worthless stuff.  I live less than a mile away from a Macy's that has 5 floors.  Two of the five floors are currently open for business.

 

Obviously, the NYC property is worth a bundle!  I have seen estimates that it might be worth $1 billion.  Might it be worth more in the future?  Under what circumstances could it be worth $2 billion? 

 

How much longer will real estate go up in NYC?

 

I have no doubt that M has valuable real estate that could be monetized.  I am somewhat skeptical that it is worth hundreds of dollars per share.

 

Most estimates I've seen on the Herald Square real estate value peg it around $3B. Starboard, in my opinion is a bit optimistic at $4B. They put $400MM in capex on that store alone from 2011-2014.

 

I'm not as bullish on the total value of their real estate and I'm also wary of their willingness to do a deal involving Herald Square.

[BG2008]

 

 

 

The risk in bailing so soon is that you might make an even bigger mistake by selling in the mid 30's. We get a warm winter causing retail comps to go from low single digit positives to low/mid single digit negatives and the market concludes all bricks and mortar is dead, sells down every stock tremendously, and crowns Amazon the default winner. Typical short term thinking.

 

If you take a longer term view I think you'll find that Macy's has above-average management, above average real estate, and a stock price in the 30's that is very cheap on a free cash flow basis. Let's assume for a second that they continue to use free cash flow to buyback shares and pay a nice dividend. Some real estate monetizations will also give some extra kick. Where could FCF per share be in 3-5 years, even if you assume flat comps? Should Macy's trade at 10-12x that number? Add in the dividend accumulation and I think we could look back at say, wow, Macy's was $35?

 

FD: long

 

I agree 1,000%.

 

I think the past few months have just been a bad time to own retail. You can blame it on the weather, or Amazon, or whatever... but the long term earnings power of Macy's is not impaired. Excluding weather, Macy's says the same store sales decline for this current quarter would have been 1%. That's not terrible. Will every summer be abnormally cool and every winter be abnormally warm going forward? I think not, and I'm looking forward to some better results in the future. In the meantime, whether they create a REIT or not, the real estate is still there and it's very valuable. I like that Macy's isn't selling it's real estate or simply spinning off a REIT. I think more value can be created with partnerships and joint ventures. Who knows, perhaps Macy's can allow a developer to build a couple billion dollars worth of offices/condos above the NYC stores. I'd prefer that than to just have a lump sum cash infusion for selling the real estate.

 

Remember, if the real estate was worth $125 per share this summer, imagine what it will be in a few years once Macy's has repurchased another $5 billion worth of stock. I'm not predicting this, but in all reality, if the market continues to treat this stock like a pile of crap, the real estate "per share" could be $500 or more one day.

 

Macy's has real estate worth $125/share?  whut whut?  In a few years that could be $500/share?

 

In my local market, Macy's has some good property, but it also has worthless stuff.  I live less than a mile away from a Macy's that has 5 floors.  Two of the five floors are currently open for business.

 

Obviously, the NYC property is worth a bundle!  I have seen estimates that it might be worth $1 billion.  Might it be worth more in the future?  Under what circumstances could it be worth $2 billion? 

 

How much longer will real estate go up in NYC?

 

I have no doubt that M has valuable real estate that could be monetized.  I am somewhat skeptical that it is worth hundreds of dollars per share.

 

Could you share the name of that location and city and state?  Thank you.  Some of the "easiest to monetize" locations are multi-story where the upper floors are vacant or underutilized.  If the neighborhood is valuable, then you can sell off the top floors.  If the neighborhood isn't, then it's likely not worth much. 

[BG2008]

 

 

 

The risk in bailing so soon is that you might make an even bigger mistake by selling in the mid 30's. We get a warm winter causing retail comps to go from low single digit positives to low/mid single digit negatives and the market concludes all bricks and mortar is dead, sells down every stock tremendously, and crowns Amazon the default winner. Typical short term thinking.

 

If you take a longer term view I think you'll find that Macy's has above-average management, above average real estate, and a stock price in the 30's that is very cheap on a free cash flow basis. Let's assume for a second that they continue to use free cash flow to buyback shares and pay a nice dividend. Some real estate monetizations will also give some extra kick. Where could FCF per share be in 3-5 years, even if you assume flat comps? Should Macy's trade at 10-12x that number? Add in the dividend accumulation and I think we could look back at say, wow, Macy's was $35?

 

FD: long

 

I agree 1,000%.

 

I think the past few months have just been a bad time to own retail. You can blame it on the weather, or Amazon, or whatever... but the long term earnings power of Macy's is not impaired. Excluding weather, Macy's says the same store sales decline for this current quarter would have been 1%. That's not terrible. Will every summer be abnormally cool and every winter be abnormally warm going forward? I think not, and I'm looking forward to some better results in the future. In the meantime, whether they create a REIT or not, the real estate is still there and it's very valuable. I like that Macy's isn't selling it's real estate or simply spinning off a REIT. I think more value can be created with partnerships and joint ventures. Who knows, perhaps Macy's can allow a developer to build a couple billion dollars worth of offices/condos above the NYC stores. I'd prefer that than to just have a lump sum cash infusion for selling the real estate.

 

Remember, if the real estate was worth $125 per share this summer, imagine what it will be in a few years once Macy's has repurchased another $5 billion worth of stock. I'm not predicting this, but in all reality, if the market continues to treat this stock like a pile of crap, the real estate "per share" could be $500 or more one day.

 

Macy's has real estate worth $125/share?  whut whut?  In a few years that could be $500/share?

 

In my local market, Macy's has some good property, but it also has worthless stuff.  I live less than a mile away from a Macy's that has 5 floors.  Two of the five floors are currently open for business.

 

Obviously, the NYC property is worth a bundle!  I have seen estimates that it might be worth $1 billion.  Might it be worth more in the future?  Under what circumstances could it be worth $2 billion? 

 

How much longer will real estate go up in NYC?

 

I have no doubt that M has valuable real estate that could be monetized.  I am somewhat skeptical that it is worth hundreds of dollars per share.

 

$1 billion is a ridiculous valuation for Herald Square.  The rule of thumb for Manhattan Real Estate years ago used to be $1,000 per square foot for residential.  Just plain vanilla residential, not your ultra high end with 360 views etc.  Office space was always worth less.  Post recession, that number is probably closer to $1,500 for residential.  Office is probably hovering around high hundreds, low $1,000 per square foot depending on location, built etc.  What's really valuable is street level retail space.  Asking rent in the Herald Square area is $891 per square foot.  Of course, there is only so much prime street level retail frontage.  At 2.2 million square foot spread over 9 stories, I would say that only 30% of the first floor qualifies for that $891 per square foot.  The rest deserves a flat $700 per square foot price to be converted into office/residential space.  Based on my math, you have 2.1mm sqft @ $700 which equates to $1.47bn plus the 73.33k sqft that nets you $891 per square foot.  The retail is worth at least $653mm at 10x rent based on my figure.  Come to think of it, this figure seems low.  Given Macy's Herald's square frontage on 6th Ave and on the entire 34th St.  7th Ave and 35th street frontage is not worth much.  I can get to a $2.12 billion valuation fairly easily.  This is likely a low end number for me to start out with.  If you get more detailed, then you can figure out its true value. 

 

https://www.rebny.com/content/rebny/en/newsroom/press-releases/2014/REBNY_Retail_Report_Rents_Rise_Shopping_Corridors.html

 

The great thing about Macy's real estate is that so much of its value is in the amount of foot traffic at its location.  If Macy's cease to work as a retailer one day, the millions of visitors that come to Herald Square is still worth billions of dollars.  There are always alternative use for its location other than Macy's (at least for the prime locations) 

[DTEJD1997]

 

 

 

The risk in bailing so soon is that you might make an even bigger mistake by selling in the mid 30's. We get a warm winter causing retail comps to go from low single digit positives to low/mid single digit negatives and the market concludes all bricks and mortar is dead, sells down every stock tremendously, and crowns Amazon the default winner. Typical short term thinking.

 

If you take a longer term view I think you'll find that Macy's has above-average management, above average real estate, and a stock price in the 30's that is very cheap on a free cash flow basis. Let's assume for a second that they continue to use free cash flow to buyback shares and pay a nice dividend. Some real estate monetizations will also give some extra kick. Where could FCF per share be in 3-5 years, even if you assume flat comps? Should Macy's trade at 10-12x that number? Add in the dividend accumulation and I think we could look back at say, wow, Macy's was $35?

 

FD: long

 

I agree 1,000%.

 

I think the past few months have just been a bad time to own retail. You can blame it on the weather, or Amazon, or whatever... but the long term earnings power of Macy's is not impaired. Excluding weather, Macy's says the same store sales decline for this current quarter would have been 1%. That's not terrible. Will every summer be abnormally cool and every winter be abnormally warm going forward? I think not, and I'm looking forward to some better results in the future. In the meantime, whether they create a REIT or not, the real estate is still there and it's very valuable. I like that Macy's isn't selling it's real estate or simply spinning off a REIT. I think more value can be created with partnerships and joint ventures. Who knows, perhaps Macy's can allow a developer to build a couple billion dollars worth of offices/condos above the NYC stores. I'd prefer that than to just have a lump sum cash infusion for selling the real estate.

 

Remember, if the real estate was worth $125 per share this summer, imagine what it will be in a few years once Macy's has repurchased another $5 billion worth of stock. I'm not predicting this, but in all reality, if the market continues to treat this stock like a pile of crap, the real estate "per share" could be $500 or more one day.

 

Macy's has real estate worth $125/share?  whut whut?  In a few years that could be $500/share?

 

In my local market, Macy's has some good property, but it also has worthless stuff.  I live less than a mile away from a Macy's that has 5 floors.  Two of the five floors are currently open for business.

 

Obviously, the NYC property is worth a bundle!  I have seen estimates that it might be worth $1 billion.  Might it be worth more in the future?  Under what circumstances could it be worth $2 billion? 

 

How much longer will real estate go up in NYC?

 

I have no doubt that M has valuable real estate that could be monetized.  I am somewhat skeptical that it is worth hundreds of dollars per share.

 

Could you share the name of that location and city and state?  Thank you.  Some of the "easiest to monetize" locations are multi-story where the upper floors are vacant or underutilized.  If the neighborhood is valuable, then you can sell off the top floors.  If the neighborhood isn't, then it's likely not worth much.

 

There are (were) at least two locations locally that aren't worth nothing for Macy's.  The locations would be Harper Woods & Southfield.  The Eastland mall (HarperWoods) has had some problems lately with people being shot & killed.  Please see:

 

http://detroit.cbslocal.com/2016/01/01/3-teens-charged-with-murder-of-17-year-old-outside-eastland-mall/

 

The mall has also had some problems with it's owners paying the mortgage note.  Please see:

 

http://michronicleonline.com/2015/07/21/eastland-center-mall-in-financial-woes/

 

The words that come to mind when describing the design of the Macy's store are "Fuhrer Bunker".  The store literally has NO WINDOWS and looks like a WWII pill box.  It is not inviting or conducive to shooting.

 

There is not going to be any rehabilitation of the real estate there...other than perhaps a wrecking ball & bulldozer.

 

There is a glut of real estate in MI, especially near the city of Detroit.  The city of Harper Woods is going to be in some real trouble as they spent many many millions of dollars rebuilding & upgrading their high school years ago.  Eastland Mall is their largest property taxpayer.  I doubt that the property taxes are being paid on it now.

 

So this is an example of an "F" Macy's location...

[rkbabang]

 

The words that come to mind when describing the design of the Macy's store are "Fuhrer Bunker".  The store literally has NO WINDOWS and looks like a WWII pill box.  It is not inviting or conducive to shooting.

 

 

It appears to be conducive to shooting.

 

[DTEJD1997]

 

The words that come to mind when describing the design of the Macy's store are "Fuhrer Bunker".  The store literally has NO WINDOWS and looks like a WWII pill box.  It is not inviting or conducive to shooting.

 

 

It appears to be conducive to shooting.

 

Sorry about that...conducive to "SHOPPING" is what I meant to write....