The retail sector has faced a tough time since the economy reopened after Covid shutdowns, which led to consumers turning attention towards experiences and travel. Macy's (NYSE:M) still reported solid results in 2023, and along with a potential buyout bid, the stock should trade much higher. My investment thesis remains Bullish on the stock, even after the large bounce off the 2023 lows.
Activist Bid
A few weeks back, Macy's agreed to add two directors from Arkhouse Management. Richard Clark and Richard Markee were added to its board effective immediately to end a proxy battle.
The department store is now providing Arkhouse and Brigade Capital Management with confidential information to support the $24 bid. Honestly, in my opinion, the addition of two board members for an activist making a proposed buyout doesn't really add up considering the Board of Directors is supposed to support all shareholders, not the activists.
Arkhouse and Brigade increased the offer to buy Macy's to $24, or $6.6 billion. The new bid is up $3 from the original offer of $21 back in December.
The stock currently trades at only $19 with a market cap just above $5.1 billion. Macy's has long been estimated to have real estate valued above the new buyout offer.
The big question is why Macy's would even entertain an offer of only $24. Prior to 2023, the stock traded above $20 for most of the prior 18 months and prior to Covid, Macy's regularly traded at even higher levels. The department store has no reason to suddenly just dump the business after a tough 2023 due to activists offering to buy the company.
CoStar analyst Brandon Svec just valued the Macy's real estate at ~$10.5 billion based on the CoStar Market Pricing series. The company placed several values on the real estate with this method, valuing the real estate for the 286 owned stores at $146 per square foot.
In essence, the real estate value alone is worth double the current stock price and some $15 above the latest big from the activist groups. Macy's has no reason to entertain the current bid unless the firms plan to further up the bid from $24.
Bold Moves
Macy's ended 2023 with a strong Q4 EPS of $2.45, pushing the yearly EPS to $3.50. One should probably stop with any bid for only $24 with this level of profits.
The department store plans to shift the business further into luxury stores with growth in Bloomingdale's and Bluemercury stores while closing another 150 underperforming Macy's locations. The biggest negative to the investment story is that these store closures can feed on themselves as the company just loses customers forever, when the ideal solution is to revitalize these locations and boost customers.
The store closures amount to only 10% of sales and underperformed the go-forward locations by ~950 bps for 4-wall adjusted EBITDA rate. The big issue is that the stock market keys on overall growth rates, and cutting sales via store closures only heightens fears of the legacy department store business being in decline.
The Bluemercury beauty concept plans to add at least 30 new stores through 2026 while remodeling a similar amount of existing stores. The brand already has 129 locations, pushing the total close to 160 by the end of FY26.
The new small format Macy's stores and Bluemercury stores will help offset, if not boost, overall sales lost from closing 150 Macy's locations. Management really needs to focus on expanding the brand versus just replacing old stores with new concepts.
Regardless, the company guided to sales growth plus free cash flow reaching the pre-Covid levels. The stock currently trades at only 7x the forward EPS targets, which are below what Macy's earned in the prior FY by a large amount.
Back in FY19, the department store generated $1.7 billion in operating cash flow. Macy's produced ~$1.3 billion in operating cash flow last year, suggesting the guidance is for more upside through next FY, not exactly in line with the EPS targets.
Macy's only guided to FY24 EPS of $2.45 to $2.85, but the retailer provided equally weak estimates when guiding down after macro issues last year. The company only guided to $2.70 to $3.20 and ended up hitting $3.50 for FY23.
Takeaway
The key investor takeaway is that Macy's is too cheap below $19 for the company to be entertaining a buyout bid. The department store retailer has both the earnings power and real estate assets to warrant a far higher bid. The stock is cheap here, but investors have got to be careful because the stock could fall in the short term on the BoD passing on this buyout.
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