On its 2Q conference call, Macy’s played-down potential impact from the recent string of bankruptcies in the department store space. I think the company was right to play it down, because quite frankly it does not have the infrastructure/ clue (few retailers do) to know why a customer is or is not shopping in its stores. What is certain is that the store overlap is quite meaningful.
My Jr Analyst Zac has turned into quite the cartographer of late. His analysis below shows that about 20% of Macy’s stores overlap with either a Mervyn’s, Boscov’s, or Goody’s within a 3-5 mile radius. The initial hit is/was likely to have been negative given the aggressive promotional activity, but as with most bankruptcies, the business siphons away in subsequent quarters to competitors. In this economy, it is not unrealistic to assume that the business is lost forever. But my sense is that Macy’s sees a bump. My math suggests something in the 0.5-1% comp range is not out of question. Not huge, but enough to cling on to for a zero growth retailer that is in a secular decline.
When I stack that up against cycling extremely weak gross margins last year, and the fact that Macy’s SG&A ratio is trending down despite zero sales growth (i.e., this is bad behavior as the company is cutting into muscle), this puppy might actually shape up to show a decent cash flow trajectory in the coming quarters.
It’s tough for me to make any kind of positive fundamental call given that I believe margins will be 2-3 points lower at this company in another 3 years. Also, from a tactical standpoint, how can I ignore Keith’s comment that ‘if it fails to close above 21.24, short it with impunity.’ Today’s close was 2 cents shy… (Yes, his timing models have proven to be accurate to the penny).