Wow, what in the world is going on at Macy's (M)?
Actually, I know the answer to that right off the bat -- old age has crept into a retailer that for years has said it was youthful because of a best-in-class online experience (relative to peers) and new shops from vendors in its stores.
When a company announces its second straight year of material restructuring (what Macy's unwrapped on Wednesday evening came almost a year to the day after another restructuring plan) there is a problem. When a department store that in many cases has been the bedrock of the community for over 30 years is set to close by the spring, there is a big issue. And when the CEO of the company consistently goes on live TV to proclaim the business is doing great, but then has a year of missed numbers, something is very wrong.
Macy's store base continues to shrink pretty dramatically. Districts are being consolidated. Workers being laid off in each store (even high-end Bloomies) to match current sales trends. This is a company in crisis, I think. Other than Sears (SHLD) and Gap (GPS) I have not seen this type of upheaval in retail operations in the past few years. And sadly, more restructuring will likely be announced in January 2017, perhaps by a new CEO that takes over before the holiday season (succession plan; Terry Lundgren has done great things for Macy's and will unlikely be fired). Macy's should be a 500-store chain (as I have been saying will eventually happen) not the 730 one that will exist by the end of 2016.
Not only do stores have to be fewer in number, but those left open will have to be repurposed to drive the traffic Macy's needs to compensate for elevated fixed costs and digital investments. That means, yes, as far-fetched as it sounds, Macy's should consider reaching out to grocery stores to take over parts of its store space. Perhaps even upstart fast casual restaurants at the higher-income locations. Maybe rent some space out to Wal-Mart (WMT), allowing the world's largest retailer a place to deliver packages for same-day pickup.
Many retailers are likely to be forced to abandon the "we are enemies" mindset that has always dominated the retail sector and instead, team up to better absorb costs and fend off Amazon (AMZN) and other digital threats.
Having said that, one likely missed out on betting against Macy's into Wednesday's restructuring. However, I think there are other ways to play the aftermath of one epic warning from the iconic bricks-and-mortar retailer.
V.F. Corp (VFC): I suspect this best in class operator (and Trifecta Stocks holding) will make a big acquisition in 2016. But the stock has dropped off noticeably since the summer due to warm weather hurting sales of winter apparel. Macy's confirmed on Wednesday that was a major issue during the holidays. For me, the news confirmed what I have been seeing in the stores since December: bloated levels of winter apparel and elevated discounts.
If you have bet against V.F. Corp. in recent months, stay the course on that winning hand. If not, you might want to make that wager ahead of the company's earnings release in February -- its quarter and outlook could be soft.
Further, I am growing concerned that vendors are losing floor space with all the Macy's store closures.
J.C. Penney (JCP): The news from Macy's suggests that J.C. Penney may have continued to win back market share. While J.C. Penney was likely also hurt by the warm weather, its focus on compelling prices and better in-stock levels should lead to better-looking sales relative to Macy's. That may intrigue Wall Street. I continue to like J.C. Penney.
Coach (COH): As I wrote recently, I have no idea why shares of Coach have been doing well of late. First, the company's result in China have been slowing right into the teeth of that country's slowdown. I expect holiday-quarter results from Coach China to be slower still than in recent quarters.
Second, the Macy's news suggests Wall Street's optimism on the impact of Coach's upgraded shops (which feature attendants and fancier fixtures) is completely misguided -- in all likelihood, Coach had a very weak holiday season at Macy's, a key customer.
I remain negative on Coach shares, also believing sales at its full-price retail stores stunk during the holidays.
Feel free to play Michael Kors (KORS) to the downside as well. Kors is in the same boat at Coach with regards to Macy's and to a lesser extent, its retail stores.
Fossil (FOSL): It was the holiday season of wearables. By most accounts, Fitbit (FIT) had a strong holiday season. The Apple Watch discounts at Best Buy (BBY) and others likely led to a good number of units being moved. Considering these factors, and the dreary Macy's news, it's likely Fossil puts up an ugly quarter in coming weeks.