Macy's (M) lackluster second-quarter earnings and big real estate deal will be news for at least the rest of the month.
The reason: The department store retailer dropped a host of clues on the state of retail and the economy. Here is what I saw.
Institutional money: I expect teen apparel retailers such as Abercrombie & Fitch (ANF), Aeropostale (ARO) and American Eagle Outfitters (AEO) to have rough back-to-school seasons. You might want to add Gap (GPS) into the mix. In turn, the sluggish performances are likely to weigh further on their stock prices, and raise chatter on potential leveraged buyouts.
However, the $270 million real estate transaction pulled off by Macy's (likely ahead of a few others) suggests institutional money wants retailers with hard assets right now, which makes sense as property values are rising nationwide. That means far less interest in retail brands, or companies that simply lease locations. Institutional money knows the world of retail is changing rapidly, and brands that are open today may not be five years from now. So, they want hard assets that could be repurposed for other uses, such as offices.
A little wrinkle lost in the Macy's news was that Tishman bought the air rights to the building, along with five floors. Given this transaction, I think you need to meet the inevitable takeover scuttlebutt in teen apparel with skepticism. Mark my word that it will surface before the holiday season.
How to invest in retail: I would be looking at property managers such as Simon Property Group (SPG). The amount of money Tishman shelled out for five floors, air rights and a parking garage in Brooklyn was astronomical. It suggests the portfolios of the property developers such as Simon Property may be undervalued in the public market.
I ultimately expect more deals like this to surface within the next year. Primark is opening in former space owned by Sears (SHLD) shortly. Starbucks (SBUX) likely will benefit from this deal activity -- its stores will pop up in new mixed-use areas, and they all will be able to offer same-day delivery services from the Starbucks app.
Somewhat related, I also would be diving into Toll Brothers (TOL). The company continues to make a nice push into urban settings. It's likely sitting on land it bought at attractive prices for development in big cities.
The state of the U.S. economy: Is it a little weird to see months of 200,000-plus, non-farm payroll growth and Macy's warning sizably on sales? You bet. There is more going on here than the influence of online shopping on Amazon. What is being reinforced is that the recovery is not creating high-quality jobs that pay strong wages. Indeed, I looked at Macy's warning that people are not shopping many areas of its stores (such as watches and housewares) and thought the Fed would be nuts to raise rates in September (as I have said is likely). There is no inflation in this economy; if there was a healthy dose of it, Macy's would have put up a much better quarter and not warned.
I suspect J.C. Penney (JCP) will have had a stronger quarter than Macy's yet again (Penney announces on Friday). If it did, it certainly will be telling -- consumers are trading down to cheap J.C Penney from rather affordable Macy's.
The only good way to invest in retail at the moment is through a brand that is consistently killing it because (1) it is an innovation beast, and (2) its products skew to upper-income households. For me, that is V.F. Corp. (VFC), which is fresh off another impressive quarter.