Macy's Has Two Roads to Redemption

 | Nov 27, 2017 | 11:20 AM EST
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Is Macy's (M) out of trouble? Has the Death Star moved on to greener pastures, like the drug stores? Is there a sense that we got too negative about the mall and retail, given that The Gap, Inc (GPS) , Abercrombie & Fitch Co (ANF) , Foot Locker (FL) , GameStop Corp (GME) and The Children's Place Inc (PLCE) all reported sharply better-than-expected results?

I think that's the setup going into Cyber Monday. Remember, there are two stages to redemption for Macy's. The first stage is a recognition that the dividend seems too outsized versus the earnings, (not the cash flow, but the earnings), and must be augmented by real estate sales. The second stage? Enough debt paid down and enough of the weaker stores closed that the cash flow will be voluminous and the company gets out of a jam.

The strong Inc (AMZN) reaction Friday, with the stock sprinting to new highs, makes the trade daunting, as does the rest of the group: Lots of people calling for a stronger JC Penney (JCP) because they like that last quarter-doubted by me-Kohl's in many ways as does the still-lagging TJX (TJX) .

There's a sense in the industry that Jeff Gennette, the new CEO of Macy's, may have gotten his arms around the styles needed and has cleaned up the stores for Christmas better than in years. Not only that, but he has started a loyalty program, something Macy's badly needs. I wish, as Marc Benioff told me, that no company would have a loyalty program -- because that implies disloyalty among some customers, and I would like a much more personal, one-on-one relationship to triumph. I find that of the chains I am familiar with, only Panera Bread Co (PNRA) and Sephora have really pulled this off -- and even Starbucks' (SBUX) loyalty program has stopped showing strong growth.

Jeff Gennette, Macy's CEO.

It's possible, I think, that Gennette can bring some shoppers back from Amazon. I notice that VF Corp (VHC) and PVH (PVH) are both hitting new highs, which is astonishing with the big discount retailers and department stores all fighting for the business of these two behemoths. Maybe that's Macy's -- which is perhaps the biggest stage for those two suppliers -- doing better than expected.

Anyway, I know that the numbers are supposed to be down, which is another reason why the stock has been avoided. But here, too, the news could be good: Retailers that were supposed to miss badly like Foot Locker, missed by less and had gigantic short squeezes. Macy's stock is more liquid, so that might not occur. It is more likely to occur with Kohl's (KSS) . That said, if you take the dividend off the table as a worry, you might get buyers anyway.

We've been waiting for strong employment to kick in, which would raise all boats -- presumably some Macy's shoppers and would-be shoppers trading up, could be spending more. It can't be all Dollar Tree Inc  (DLTR) and Dollar General Corp  (DG) , either, although both of those had a remarkable lift from their quarters -- again, a function of a guide-up.

In the end it's a guide-up that's needed, and more debt paydown so we don't repeat the 1992 era where a heavily indebted Macy's filed for bankruptcy. We've had a spurt of them this year -- including Wet Seal, Inc (WTS) , Payless Shoe Source (PSS) , RadioShack and The Limited (of L Brands, Inc  (LB) ) -- but all of them were hanging on for dear life.

It may be too much to ask of a single executive to turn around a company and a stock that traded at $72 two years ago on the value of its real estate -- then calculated at about $21 billion for this $6 billion company. But we know this: Had the assets been sold and leased back to Macy's, there's a good chance that the debt would have wiped them out. After being reviled for not taking enough action to sell real estate, prudence prevailed.

Now it is time for Macy's to play offense, and while its omnichannel strategy will always be hobbled by mall stores where it is too difficult for many to buy on line and pick up because of the racetrack and the parking -- do pull up at curve -- the merchandising and the stores themselves remain more attractive than most, with always-reasonable valuations. In other words, it's worth a shot to go with this one.

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