With Sales Sliding, Macy's Inc Explores New Frontiers

By Motley Fool Staff Markets Fool.com

In the past two years, the growth of e-commerce and off-price retailers has decimated mall traffic, hurting department stores. As a result,Macy's(NYSE: M) has reported a steady string of revenue and earnings declines.

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In this episode ofIndustry Focus: Consumer Goods, the team looks at the company's fourth quarter results and its plans for the future. One key aspect of Macy's ongoing strategy involves its valuable real estate and the cash it can generate to pay down debt and invest in new growth initiatives.

A full transcript follows the video.

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This podcast was recorded on Feb. 28, 2017.

Vincent Shen: Let's start with Macy's, then. How did they look for their Q4?

Adam Levine-Weinberg:Last quarter, Macy's had a comp store sales decline of about 2.1%. That led to a modest decline in their EPS (earnings per share) from $2.09 a year earlier to $2.02 last quarter. That's a pretty good result on the face of it. However, in both quarters, both Q4 2015 and again in Q4 2016, Macy's had some big one-time asset-sale gains from selling off real estate that was quite valuable. Each quarter, that was over $100 million in gains. That added $0.20 to $0.30 to their earnings.

So, they were certainly profitable, but not as profitable as it might seem, just from looking at their results. The cash proceeds, actually, last quarter, from the asset sales at Macy's, were worth $500 million. That's actually becoming an increasingly important part of Macy's financial story. We'll talk a little bit more about that later. Looking at the full year, adjusted EPS at Macy's were at $3.11. That was down from $4.40 just two years ago. That really shows you what's been going on with these department stores in the last two years. Looking forward, Macy's expects pretty similar trends going into 2017 with comp sales down another 2% to 3%.Adjusted EPS likely to decline a little bit, again, on a year-over-year basis.

Shen:I want to go back to the asset sales that you mentioned.You have written about this a few times, the idea that Macy's very valuable real estate, they have been trying to find different ways of monetizing it. It seems like that's really coming to the forefront now. How hasthe company been taking advantage of this cash windfall that it's seen from some of these asset sales? Do they want to return more capital to shareholders, are they investing more in their stores and technology, trying to catch up on the e-commerce side where a lot of these companies are getting the only growth that they're seeing?

Levine-Weinberg:That's a great question. It's a little bit of everything. For 2017, Macy's decided that it's not going to be buying back any shares. The main use of cash is going to be debt reduction. If you look back a few months, in late 2016, Macy's had about $7.7 billion of debt on its books, which is quite a lot for a company of its size. It does have revenue of over $25 billion, but that's been sinking, and it has pretty low profit margins, so they really should not be carrying that much debt. The debt isalready down to under $7 billion. Macy's used a lot of its free cash flow last quarter.

For our listeners, during the fourth quarter, that's when retailers generate the bulk of their cash flow. So, Macy's generated a lot of cash flow last quarter, used it to pay down almost $1 billion of debt. And it's going to continue doing that in 2017. That said, it's also trying to make some strategic investments both in stores and online. It's been spending about $900 million a year on capex, which is a pretty substantial sum. Some of that is going to be for technology, particularly mobile apps is really where the market is going, and it's not good enough anymore to just have a good e-commerce website, you need to have a good app. Macy's is also going to refurbish some stores. But a lot of the investment is actually going to be on the store side in terms of bringing new departments into stores with new items that aren't in the stores right now, including these off-price what they call Macy's Backstage departments. That'sbasically like aT.J. Maxxinside of a Macy's store. They'retrying to tap into this demand for this treasure hunt experience of cheaper items. It's not a full collection, it's just whatever the manufacturers have that's cheap that they're looking to get rid of.

Shen:So, basically trying to tap into the core segment, but also people who are looking for those discounts and deals, too.

Levine-Weinberg:Exactly!

Adam Levine-Weinberg owns shares of Macy's. Vincent Shen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.