What Message Is Macy's Sending?

 | Nov 01, 2016 | 10:00 AM EDT
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There are reasons why major publicly traded companies announce certain things at certain times.

Take, for instance, Starbucks (SBUX) announcing all sorts of new growth initiatives over the last two weeks. The coffee king may toss up negative traffic growth in the U.S. when it reports earnings on Thursday due to the mild restaurant recession and tough year-ago comparisons. So why not try to get investors to think beyond a near-term quarterly hiccup and focus on the long term? (Starbucks is part of TheStreet's Action Alerts PLUS portfolio.) 

The same goes for Chipotle (CMG) , which unleashed a dizzying array of new actions last week in the face of a monster third-quarter earnings miss. Feeling pressure from activist investor Bill Ackman, Chipotle has suddenly begun to test two new desserts, will likely close its Asian-fare concept and is exploring (finally) a true mobile ordering system. Chipotle wants investors to forget about its near-term problems and instead focus on its longer-term potential.

My, how the threat of losing their jobs sends CEOs into swift action.

Struggling department store Macy's (M) may have just had its own moment where it sends important clues to investors. The company shared on Monday that it sold five stores to mall developer General Growth Properties (GGP) for $46 million. Macy's expects to realize a gain of $32 million on the sales in the third quarter.

Here is how I interpreted the news:

Yes, Macy's is in fact working on an array of real estate transactions (led by a recent hire of a veteran real estate exec) designed to enhance shareholder value. Macy's in effect has finally shown investors a little leg, a taste of the potential from monetizing a real estate base chock-full of attractive locations. The news signals more deals of this sort could be announced within the next three to six months, with cash proceeds being used to fund investments in existing stores or some form of enhanced dividend/buyback plan.

Macy's is open to striking a deal to sell all, or parts, of the real estate underlying its prized New York City Herald Square location. Personally, I wouldn't want to see Macy's do this simply to appease activist investor Starboard Value (owns about 0.77% of Macy's outstanding shares). But the willingness to part ways with legacy assets to raise cash shows Macy's is rethinking how it should be doing business in the future. This is quite important in the sense a longtime Macy's exec is about to take over as CEO at the start of 2017.

Yes, Macy's probably had a sluggish third quarter and will offer slightly negative guidance when it reports later this month. Just like Chipotle and Starbucks, Macy's likely wants investors to focus on the long-term potential in this case to monetize real estate and boost operating margins through store closures rather than one or two quarters of negative sales (even if it comes during the most important quarter in the holidays).

The actions Macy's detailed on Monday are bullish. They demonstrate a company finally willing to shake up the status quo for the benefit of shareholders. Most importantly, Macy's has created a backstop to a poor holiday shopping season if it were to materialize. After all, why sell Macy's shares -- even if the holiday season post-presidential election goes up in smoke -- if the company could raise millions upon millions of dollars from real estate sales? The answer is you're unlikely to sell Macy's. If anything, you stay long Macy's (or buy it), and continue to stay short Sears SHLD. Mall developers buying up Macy's sites could mean Sears will find trouble selling off its real estate in 2017 in a bid to raise badly needed cash.

As an Aside...

It may be worthwhile to start kicking the tires on Walmart (WMT) now that it's off the mid-August highs. The world's largest retailer is very likely to announce a solid third quarter later this month and give in-line fourth-quarter U.S. sales guidance (which in this backdrop in the U.S. would be a good thing). Walmart's stores just feel more crowded in the evening hours. Moreover, I liked that a Walmart exec told me last week that better-paid store associates are spending more in its stores. That, along with trade down by nervous consumers ahead of the election, likely means Walmart delivered again for another quarter.

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