Let’s face it, this is a blow-out earnings week for virtually all of retail – especially junk-tail. Macy’s (the king of junk-tail) print this morning was impressive relative to expectations – but expectations were out to lunch. The company put up top line that was $811mm (14%) below 1Q19 levels, but manage to eek out EBIT that was $67mm better, or 42% above 1Q19. That’s entirely due to the SG&A that the company cut out of its infrastructure – which is both excessive and unsustainable. We don’t blame management – we’d cut that level of SG&A too. But the reality is that if you want to model any kind of business recovery at this company, the labor costs need to come back. So does that capex (which went from $1.2bn in ’19 to $466mm last year). The company also took up guidance for the year to a level that we actually think is beatable due to the rebound that we’re likely to see in dressy apparel in 2H, and what will likely be the best holiday season Macy’s is likely to see in years due to pent-up demand from a wash of a 2020 holiday season. That gets us to a 5.6% EBIT margin on about $23.5bn in revs (about $1bn above guidance). That get us to $2.46 in earnings, which might not make the stock look egregiously expensive at the current $19 price. But you gotta really dig into the model and ask what’s in store for FY22 and beyond…it ain’t pretty.
We’re actually looking for Macy’s to comp in FY22 – nothing heroic – only 3%. But still, that’s a victory for a company like Macy’s. But there’s a permanent shift to e-comm that will dilute Gross Margins next year – on top of 2021 numbers that include incredibly lean inventories and an unusually high level of full price selling. That benefit goes away next year, at the same time labor costs come back to more normalized levels. The end-result is EPS of about $0.80 per share – down 70% yy. Continued share loss to online competitors and B&M peers that actually deserve to exist, GM weakness and SG&A deleverage gets us to a loss of $0.72 per share over a TAIL duration. How’s that $19 stock price looking now?
And let’s not forget that this company has debt – a lot of it – with $3bn in maturities due over 4-years. Yeah we know that it owns real estate – 328 out of 789 stores. We’ll continue to see token real estate sales to fund working capital and keep the balance sheet on life support. But the reality is that the owned stores are among the best stores in the fleet. They’re the LAST ones you want to see closed or be paying a market rent for. Then there’s the issue around physical stores fueling e-commerce sales in each respective region. If the company goes on a store-closing spree, then we have to heavily discount the e-comm business it claims to be building.
If you believe our numbers, then you’re looking at a junk name like Macy’s trading at 23-24x next year’s earnings, and 12x TAIL EBITDA. Makes no sense. We’re down to just 13% of the float short…way too low for a company that’s going the way of JC Penney. Ultimately, this company is worth about 2-3x EBITDA. No joke. This is a dying retailer in every way shape and form, and the best management team on the planet can’t resuscitate it. Given the debt level, anything below 5x EBITDA gets us to ZERO equity value. Simply put…the debt and the real estate wash each other out, while the business rapidly evaporates.
Timing is tricky, as this company is still in the 4th or 5th inning of an upward revision cycle, and we think that 2H performance will validate the upside. But in the end, this name is a bagel. Adding this one back short side, and it’s got Best Idea written all over it later this year.
