Macy's (M) has everything. But maybe we don't want everything, or at least everything it is selling. Yep, Macy's old tag line about having all sorts of merchandise used to be a big plus, but with this extremely disappointing quarter announced this morning I see a microcosm of pretty much all I don't like about traditional bricks and mortar retail, even as I think that the stock's dirt cheap and trying to stabilize.
First, I do applaud Terry Lundgren the CEO of Macy's, who just came out on Squawk Box this morning and said he was disappointed in how the company's quarter turned out. Macy's missed the estimates -- missed them big -- and for so many different reasons that I felt, holy cow, are they off their game. He so much as admitted to that.
But then when I went down the list of what went wrong I found myself thinking, you know what, there's some real structural problems here. Macy's, indeed, has too much of everything, whether it be apparel, accessories or real estate. And it has too few bargains, like the kind you find in the off-priced outlets that frugal shoppers now long for post the Great Recession. Alas, Backstage, their off-priced pilot store hasn't even opened yet. It's a few weeks away.
Now, not all the newsflow out of the retailer is negative. Macy's was able to monetize some of the excess real estate it has, namely $270 million worth of empty space in Brooklyn, N.Y. However, the company threw cold water on a recapitalization plan by activist Starboard at CNBC's Delivering Alpha conference that suggested the retailer monetize its huge properties, like its monster store in New York City's Herald Square, saying it's in too cyclical a business to warrant that kind of financial engineering. The stock roared from $67 to $73 when Starboard's Jeffrey Smith outlined that bold plan at the conference, so the stock was headed lower no matter what the earnings, given the enthusiasm so many traders had about the activist's monetization plan. Somehow, with today's decline, I don't think we have heard the last of it.
But a lot of what the company said just reminds me of how hard it is right now to be in bricks and mortar retail. For example, Lundgren talked about how the super- freaking strong dollar has hurt tourism, including the tourists who seek out the destination stores Macy's has, like the gigantic Herald Square store that can account for about one-fifth of the chain's business. There's nothing Lundgren can do about that. It's out of his hands.
At the same time, Macy's is expanding in Puerto Rico, perhaps the worst part of this nation to expand in, economically. I mean it's defaulting on its bonds and Macy's is opening a second store there? What's wrong with this picture? And it's moving online into China at a time when even Alibaba is stumbling because the Chinese consumer's no longer spending like mad.
While the company didn't sell enough fancy apparel and watches (could that be the Apple (AAPL) damage factor, the one that Fossil (FOSL) alluded to when it said watches were soft because of the Apple Watch?) Lundgren said furniture was solid.
Even there, though, I question the strength. My daughter's moving into her own apartment and I remember when that rite de passage automatically meant a trip to Macy's for furniture. Nope, she just went to a bunch of Wayfair (W) sites for everything. She's not alone -- the online furnishings company reported a quarter today that Macy's would kill for and its stock's up eleven points.
In the end that's the real issue: the Web. Macy's is always talking about its omnichannel. Yet the company once again mentioned that it's having a steeper-than-expected learning curve, although not as bad as the previous quarter. Still how can there still be a learning curve after all of these years of trying to make it work? Then again every retailer's on a steep learning curve when it goes up against Amazon (AMZN).
In the end, I know Macy's will see its way through these travails. Still, though, the challenges of the modern day full-price retailer are so stiff that you have to wonder if there aren't so many other places worth investing in, even if a lowered-expectations Macy's stock is now good for a renewed activism-driven trade.