Let’s be clear about this one…M is one of the biggest long-term losers out there in #oldretail. The margin structure today of 6% is completely unsustainable, and over a TAIL duration the only EBIT left is likely to be credit income and proceeds from asset sales while the base business deleverages and melts over a bloated fixed cost structure. There’s no way out, and this is as close to a perma-short as you can find in retail.
But tactically, the call is a lot less toothy – or better said, is more balanced. First off, the name is off 27% since we added it to our Best Ideas list in October as we flagged the biggest losers as it relates to our “Apocalypse Now” call. The XRT is -8%. The name just imploded last week, and took down estimates for next year such that the Street is already looking for nearly a 20% EBIT decline. On those numbers, the stock is trading at 7.3x earnings, just under 5x EBITDA, and is churning out a 6.3% dividend yield.
Now…I could very easily argue that those EBIT numbers are fake due to the inclusion of asset sales – with the real consensus clocking in closer to $3.10. Hence – it’s a total value trap for anyone that would actually sniff long side. But in another month we get actual 4Q results – which shouldn’t be a miss given the latest guide down. Given sales deceleration, e-comm pressure and cost inflation, we could see a clean EPS number closer to $2.50 for the year. But let’s face it, when Macy’s gives guidance next month it won’t guide to $2.50. It’ll probably offer up a more squirrely $3.25-$3.50 number including one-off benefits (that I will subsequently exclude). That matters with the stock at $24.48 today.
Even on a bear case $2.50 number – the stock is trading at 10x today. 8x is closer to a real trough earnings multiple on the next miss – hence about $4.50 per share in downside from here. But I simply don’t want to be left holding the bag on a consensus short like Macy’s when it guides something north of $3 for next year. Remember what happened to BBBY? Stock spiked by 20% by simply noting that earnings would be flat for the year when the consensus was looking for 18% EBIT decline. It does not mean that BBBY will actually put up flat EBIT – but it didn’t matter on that day, nor will it for Macy’s.
So all in, looking at the risk/reward today on this name I get to $4-5 upside and $4-5 downside. A simple 1 to 1 downside/upside is not enough for me to look a PM dead in the eye and call this a Best Short Idea. I prefer to stick with names where I can bank on bigger and more definable out-of-consensus earnings downside that have multiple risk to boot – like KSS and TGT. We’ll likely have another shot to get loud on this one again in 2019. Stay tuned.