M Stock: Macy’s, Inc.’s Desperate Plan Could Send Shares Skyrocketing

Macys StockThis Is Bullish for M Stock

Retailer Macy’s, Inc. (NYSE:M) announced that it would cut more than 4,500 jobs and close some 40 stores to save $400 million per year in order to support M stock after poor sales following its 2015 year-end.

Macy’s stock has responded favorably to the restructuring plan, as the group has suffered consecutive months of losses. Moreover, Macy’s also said it would consider partnerships to manage its considerable property portfolio, including its flagship store on 34th Street in Manhattan, one of New York City’s most popular attractions.

Macy’s cuts are bold; it has even put its flagship stores in San Francisco, Chicago, and Minneapolis on the block.

The chain, which also owns Bloomingdale’s stores, will also reduce the latter’s staff numbers. About 3,000 employees will be affected, but 50% of them will be redeployed to other functions. Macy’s has also issued a special redundancy plan, offering early retirement or similar mechanisms to about fifty seniors, while 450 jobs will be eliminated in support functions and 110 following the consolidation of call centers. (Source: “Macy’s to cut over 4,000 jobs after poor holiday sales,” CNN, January 7, 2016.)

Macy’s expects to start closing its stores—a little more than five percent of its network—in the U.S. in the early spring.

On Wall Street, Macy’s stock closed some two percent higher on Thursday, closing at $36.90 as the market absorbed the news. Macy’s stock opened the New Year’s trading at a 52-week low of $34.87, though it remains higher than its five-year low of $22.82, which it touched in January 2011.

Macy’s Stock Prone to Shocks

Macy’s stock, given its retail business, is prone to shocks in the period after the Christmas holidays, affected by good or bad sales. In 2015, Macy’s had poor sales; they fell 5.2% from November to December, which is the opposite of what should have happened during the year’s most important period for revenue in the retail space. This has forced the company to lower its financial goals. Macy’s now expects annual earnings per share of $3.85 to $3.90, compared to earlier estimates of $4.20 to $4.30.

Part of the problem suffered by Macy’s, as well as many other retailers, is the strong dollar, which influenced tourists to be tighter with their wallets.

El Niño, and the particularly mild weather it brought in late 2015, played a significant role, too, in weak sales. El Niño has had many consumers delaying or avoiding purchases of boots, sweaters, jackets, and winter apparel in general. The fact that the falls and winters of 2014 and 2015 were especially cold may also have led to higher-than-normal inventories of winter apparel this year in expectation of similar sales patterns. (Source: “Retail Could Get Crushed by Changing Consumer Habits,” The Street, November 9, 2015.)

Macy’s stock has lost more than 29% since the start of 2015. The company’s real estate investment trust (REIT) unit would have facilitated the sale of Macy’s real estate assets. Indeed, Starboard Value, an activist investment fund, has urged Macy’s to sell its real estate assets, which it believes would fetch some $21.0 billion. Macy’s guidance has not given investors good news either.

Macy’s Has Endured Similar Conditions Before and M Stock Survived

El Niño weather patterns happen with some regularity. Perhaps, the main obstacle to growth is more the higher U.S. dollar in crucial holiday periods like Christmas, when New York is host to many tourists.

General market conditions suggest that the high U.S. dollar, with respect to all currencies—from the Canadian dollar to the euro, yuan, and even the British pound, which is coming under increasing pressure from rumors of a referendum on Britain’s permanence in the EU (a potential “Brexit”)—will be the single factor that may affect sales the most.

Finally, the company can clear out some negative sentiment from Macy’s stock if it addresses the problem of its REIT, which represents a class of assets that money managers appreciate. Failure to address its REIT caused Macy’s stock to fall even before the disappointing sales and high dollar joined the bearish party.

Now, Macy’s has clearly caved in to activist investors’ pressures and the real estate investment bank Eastdil will work with Credit Suisse and Goldman Sachs to form “partnerships or joint ventures” to put the aforementioned mall-based properties and flagship stores in Chicago, Minneapolis, San Francisco, and Manhattan—the latter of which Starboard said could fetch $4.0 billion alone—on the selling block. (Source: “Macy’s cave may not go deep enough,” Crain’s, January 7, 2016.)

Given that Macy’s stock gained more than two percent on the day that other blue chips and major stocks lost value by as many percentage points or more, M stock appears to have taken the right track for recovery, even if it is a little late on pulling the trigger.