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Stock massively down today, and I started nibbling. I originally got interested in M after Starboard Value engaged with the company during the summer. Some details of Starboard's thesis (which sees value north of $100/sh) is here: http://video.cnbc.com/gallery/?video=3000401003

 

Current price is around 10x earnings; the multiple is more modest depending on your outlook for 2016. Reasonably shareholder-friendly management, with significant buy-backs and a shrinking share count.

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OT?

 

I've said somewhere else that "buy online and pick up at the store" seems to be dumbest thing ever to me. It's a marriage of two bad parts: you buy online, so you cannot physically touch/see/try on; and you have to pick up at the store, so you have to go to the store wasting time, energy, gas, etc. I want the complete opposite: "buy at home (online) but with physical tryout as if I was at the store and get it shipped to me". This would marry the best parts: physical tryout and no time wasted going to the store.

Hate all retailers that try to push me to "buy online and pick up at the store".

 

Anyway, sorry for rant here, it was triggered by that l2inc article. Others might have different opinions and all that. :)

 

I do not have opinion or position in M.

 

Peace.

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OT?

 

I've said somewhere else that "buy online and pick up at the store" seems to be dumbest thing ever to me. It's a marriage of two bad parts: you buy online, so you cannot physically touch/see/try on; and you have to pick up at the store, so you have to go to the store wasting time, energy, gas, etc. I want the complete opposite: "buy at home (online) but with physical tryout as if I was at the store and get it shipped to me". This would marry the best parts: physical tryout and no time wasted going to the store.

Hate all retailers that try to push me to "buy online and pick up at the store".

 

Anyway, sorry for rant here, it was triggered by that l2inc article. Others might have different opinions and all that. :)

 

I do not have opinion or position in M.

 

Peace.

 

I have the same opinion as you.  The going to the store part is by far the worst part of acquiring new things.  It far outweighs the disadvantages of not being able to physically see/handle the object.  But we are both men (if I am making a correct assumption of your gender), both my wife and daughter love to shop in person at physical stores.  Since more than half the population is made up of women, I don't think brick and mortar retailers will all die in the near future.  That said, my wife and daughter both like to shop at physical locations, or they shop on line, as you pointed out the "ship to store" is always the worst of both worlds.  It's a hassle.

 

 

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Right. I completely understand the attraction of physical shopping (browsing), so I don't diss brick&mortars. There are tons of things that I and others physical shop and might continue for a while. There's also social aspect of shops and shopping malls that will hold for a while.

 

I was talking purely about "buy online, ship to store". I understand why this is attractive to retailers: lure online buyers to the store, save on shipping costs. But as a customer I hate it.

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Right. I completely understand the attraction of physical shopping (browsing), so I don't diss brick&mortars. There are tons of things that I and others physical shop and might continue for a while. There's also social aspect of shops and shopping malls that will hold for a while.

 

I was talking purely about "buy online, ship to store". I understand why this is attractive to retailers: lure online buyers to the store, save on shipping costs. But as a customer I hate it.

 

Shop online, Pick up in store makes no sense to me. To win, the  B&M retailers need to emphasize the service aspect, as well as the touch/feel/try aspect. They cannot compete with online retailers on price and convenience any more.

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I thought this article was fantastically bad. It's shocking that it was written by Scott Galloway, a professor who everyone says is brilliant. I think it is newspaper-level analysis at best. Just because companies are investing in e-commerce doesn't mean the money isn't being incinerated. A few paragraphs in, I could just feel he was going to mention Shop Your Way, and Macy's stock performance in 2014, and he didn't fail to do either!

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Stock massively down today, and I started nibbling. I originally got interested in M after Starboard Value engaged with the company during the summer. Some details of Starboard's thesis (which sees value north of $100/sh) is here: http://video.cnbc.com/gallery/?video=3000401003

 

Current price is around 10x earnings; the multiple is more modest depending on your outlook for 2016. Reasonably shareholder-friendly management, with significant buy-backs and a shrinking share count.

 

Almost seems too good to be true. The buyback has erased almost 25% of shares in the past four years alone. The real estate should put a floor under the stock, but it seems no one cares about real estate until you are willing to monetize it and I don't see Macy's doing so. The number one thing holding me back from making this a giant investment is the bad taste I have in my mouth from being a long time Sears Holdings shareholder. Year after year they bought back stock and were selling below their liquidation value. It's never worked out. Macy's should be different in that their stores are much nicer and more appealing to shop. I have a small but increasing position. I can't believe the stock is priced this low considering the intrinsic value and the buyback.

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The anatomy of the Macy's thesis is that there's value in the real estate, retail, and the credit card processing

 

Macy's generates a 14% ebitda margin.  In reality, there is a lot of free rent embedded in that 14% margin.  In the CNBC video presentation, Starboard highlighted what he thinks the actual retail margin is.  If I recall correctly, it breaks down to roughly $4bn of EBITDA for the whole complex

$800mm of credit card processing EBITDA - this should be a higher EV/EBITDA business than the generic retail EV/EBITDA

Then you can figure out what the OpCo/PropCo should be.  Macy's has pretty much came out and said that they are not doing an OpCo/PropCo, but they are electing to monetize property on a JV basis

My gut feeling is that Starboard is not done with their activist agenda yet.  No management team will ever allow an activist to just come in and move to an OpCo/PropCo.  Retail is an inherently risky business.  Once you go the OpCo/PropCo route, it adds a ton of fixed cost that can quickly sinking the ship once you experience a rough patch in performance. 

 

The big picture is still is Macy's relevant in the long run?  But if Starboard can get the company to monetize a good chunk of real estate quickly, then Macy's has a quick event driven angle to it. 

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The anatomy of the Macy's thesis is that there's value in the real estate, retail, and the credit card processing

 

Macy's generates a 14% ebitda margin.  In reality, there is a lot of free rent embedded in that 14% margin.  In the CNBC video presentation, Starboard highlighted what he thinks the actual retail margin is.  If I recall correctly, it breaks down to roughly $4bn of EBITDA for the whole complex

$800mm of credit card processing EBITDA - this should be a higher EV/EBITDA business than the generic retail EV/EBITDA

Then you can figure out what the OpCo/PropCo should be.  Macy's has pretty much came out and said that they are not doing an OpCo/PropCo, but they are electing to monetize property on a JV basis

My gut feeling is that Starboard is not done with their activist agenda yet.  No management team will ever allow an activist to just come in and move to an OpCo/PropCo.  Retail is an inherently risky business.  Once you go the OpCo/PropCo route, it adds a ton of fixed cost that can quickly sinking the ship once you experience a rough patch in performance. 

 

The big picture is still is Macy's relevant in the long run?  But if Starboard can get the company to monetize a good chunk of real estate quickly, then Macy's has a quick event driven angle to it.

 

+1

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Macy's more than JCP, has more exposure to the recent years of tourist spending.  I was in there 34th st Herald square location a couple of weeks ago.  The place is gigantic and certainly worth a ton of money.  Obviously, the most important is the first floor.  Macy's in the last few years has turn the first floor into a bit of a flashy luxury boutique, i.e. Louis Vuitton, Burberry, etc.  It's a bit of a weird experience shopping for luxury in that building.  It was kind of built for the newly rich of China.  The shopping experience isn't pleasurable in the same way as 5th Ave or a Nordstrom.  There is also a suffocating musk of perfumes and cologne on the first floor that makes me want to vomit.

 

What does all of this mean?  Well, there's $4 billion that is tied to the 34th St real estate and in recent years they have set up this type of luxury, but in some ways tacky, shopping experience that may or may not work with luxury fading a bit.  Just thinking out loud. 

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Any examples of a quick realization of real estate assets in retail. I recall efforts in JCP, TGT and Sears. TGT and JCP did not happen at all, Sears took a long time and in a way did not separate at all yet.

 

Look at what Hudson Bay has been doing.  They bought Saks and then took out a mortgage on SAKs Fifth Ave location at 35% LTV.  Saks paid $2.9 billion for the entire Saks enterprise and the appraisal of the building was for $3.7 billion.  They took out a $1.25 billion mortgage at 4% interest rate.   

 

http://dealbook.nytimes.com/2014/11/24/a-deal-mortgaging-the-store-values-saks-at-3-7-billion/?_r=0

 

Big picture, very hard to extract real estate value when the operation is struggling, Sears, JCP, Ruby Tuesday etc.  Easier when the operations is steady and cashflowing. 

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Some details of Starboard's thesis (which sees value north of $100/sh) is here: http://video.cnbc.com/gallery/?video=3000401003

The way Starboard valued the real estate seemed suspect to me. They said they valued most of it based on the rent stream Macy's could support and attached a ~6% cap rate to that. Based on that method aren't you basically just manufacturing a number? I'd want to know what the real estate could fetch in an open market transaction. If I own a house, my house is worth what the next guy will pay for it, not the annual mortgage I can pay / .06.

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There's been a lot of focus on the value of the real estate, but I think the market is overlooking the quality of the underlying business.  They are the only main player in the mid-market segment (Kohls, JCP, Sears etc competing for the lower end, Saks, Nordstrom etc competing for the high end), and they are the also largest department store out there, which gives them a lot of purchasing power over vendors as well as access to the top brands. This results in consistently higher gross margins compared with competitors. They also have one of the most far sighted management teams out of all the old-school retailers, and I think they've invested something like 3 bn into their online business over the last few years. Currently 15% of their sales comes from online sales (estimate; they don't break out online sales any more because of what I think is a pretty bad reason), and this should be growing every year. So I don't think this is a business that is going extinct by any means. 9x I think is a very good price for this caliber of business.

 

The real estate is just the icing on the cake.

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There's been a lot of focus on the value of the real estate, but I think the market is overlooking the quality of the underlying business.  They are the only main player in the mid-market segment (Kohls, JCP, Sears etc competing for the lower end, Saks, Nordstrom etc competing for the high end), and they are the also largest department store out there, which gives them a lot of purchasing power over vendors as well as access to the top brands. This results in consistently higher gross margins compared with competitors. They also have one of the most far sighted management teams out of all the old-school retailers, and I think they've invested something like 3 bn into their online business over the last few years. Currently 15% of their sales comes from online sales (estimate; they don't break out online sales any more because of what I think is a pretty bad reason), and this should be growing every year. So I don't think this is a business that is going extinct by any means. 9x I think is a very good price for this caliber of business.

 

The real estate is just the icing on the cake.

 

+1

 

On the topic of real estate, what is the best way to search for and research individual properties? I know people do it with tax assessment, is that the correct way? I just want to get a feel for all the trophy Macy's properties starting with Herald Square. Thanks

 

 

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There's been a lot of focus on the value of the real estate, but I think the market is overlooking the quality of the underlying business.  They are the only main player in the mid-market segment (Kohls, JCP, Sears etc competing for the lower end, Saks, Nordstrom etc competing for the high end), and they are the also largest department store out there, which gives them a lot of purchasing power over vendors as well as access to the top brands. This results in consistently higher gross margins compared with competitors. They also have one of the most far sighted management teams out of all the old-school retailers, and I think they've invested something like 3 bn into their online business over the last few years. Currently 15% of their sales comes from online sales (estimate; they don't break out online sales any more because of what I think is a pretty bad reason), and this should be growing every year. So I don't think this is a business that is going extinct by any means. 9x I think is a very good price for this caliber of business.

 

The real estate is just the icing on the cake.

 

I agree.  Given that there isn't a lot a big department store expansion going on, and Macy's is pretty much the cream of the crop when it comes to department stores at this time, most of the real estate that Macy's owns is far more valuable with Macy's occupying it than otherwise.  There are always exceptions however.  The Macy's in my town just closed because it was a stand alone store located literally 3 miles from a mall location with a larger footprint.  Also a developer gave Macy's $12M for the property, not to put another big department store, but to build a mixed-use center with offices, retail, cinema, hotel, parking garages, & restaurants.  I think these types of locations have more value than mall/stripmall type real estate.

 

Bedford Macy's to close its doors

 

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I'm on the fence with Macys. I definitely see value. I would think the bear case in the short and long term are as follows:

 

Short Term:

Macys has outsized exposure relative to other retailers to tourists and the strong dollar and the weakening global economy hurts Macys more than other domestic retailers. 

A lot of these semi luxury names -- handbags and other fashion names have been struggling mightily recently and Macys is exposed to this market in a big way.

(Very short term) The mild winter in the NE will definitely hammer the quarterly profits as they will have a hard time selling coats.

 

Long Term:

Death of the Mall

Death of the Department Store Model

 

While Macys may not be killed off in these scenarios the economics are going to be uncertain.

 

 

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Long Term:

Death of the Mall

Death of the Department Store Model

 

 

Where are people going to shop if this actually happens?

 

Or is the thesis that people just aren't going to shop any more?

 

I think the trend is towards smaller specialty shops in open air mixed use "lifestyle centers" like the one that will be replacing the Macy's in my town that I mentioned above.

 

So you go to a shoe store for shoes, or maybe even more specifically, the Nike store, and The Coach store for a bag, and the Northface store for a coat. Not to a mall or a department store.

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Long Term:

Death of the Mall

Death of the Department Store Model

 

 

Where are people going to shop if this actually happens?

 

Or is the thesis that people just aren't going to shop any more?

 

I think the trend is towards smaller specialty shops in open air mixed use "lifestyle centers" like the one that will be replacing the Macy's in my town that I mentioned above.

 

So you go to a shoe store for shoes, or maybe even more specifically, the Nike store, and The Coach store for a bag, and the Northface store for a coat. Not to a mall or a department store.

 

I'm sorry but I'm from Asia, and in Asia you would go to the shoe store for shoes (maybe the Nike store) or the Coach store for a bag, as you say, but these stores would be located in indoor shopping malls. So the rise of specialty retailers would not precipitate the death of the mall, quite the opposite in fact.

 

Some department stores are also located in said malls, whilst others may have their own separate properties.

 

Is it different in the States?

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Wall Street currently hates Macy's so much that it's now pricing in below zero growth into perpetuity.

 

http://www.moneychimp.com/articles/valuation/dcf.htm

 

Plug in $4.50 for E.P.S. for Macy's and zero growth with an 11% discount rate and you get an intrinsic value higher than today's price.

 

What's amazing is that investors have become so negative that they're now digging their own graves. The opportunity to outwit Wall Street is being handed to Macy's on a silver platter.  All Macy's needs to do with it's double digit earnings yield is repurchase 10% of it's shares annually. They can create 10% E.P.S. growth and raise the dividend 10% annually, and they don't need to actually grow at all.

 

Over the past five years, Macy's has repurchased over $6 billion of shares. Today's market cap is $12 billion. In my life, nearly every time you find a company who's stock that is pricing in zero growth, but the company is buying back stock so rapidly that they can repurchase every single share in less than ten years, it's a huge buying opportunity.

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Wall Street currently hates Macy's so much that it's now pricing in below zero growth into perpetuity.

 

http://www.moneychimp.com/articles/valuation/dcf.htm

 

Plug in $4.50 for E.P.S. for Macy's and zero growth with an 11% discount rate and you get an intrinsic value higher than today's price.

 

What's amazing is that investors have become so negative that they're now digging their own graves. The opportunity to outwit Wall Street is being handed to Macy's on a silver platter.  All Macy's needs to do with it's double digit earnings yield is repurchase 10% of it's shares annually. They can create 10% E.P.S. growth and raise the dividend 10% annually, and they don't need to actually grow at all.

 

Over the past five years, Macy's has repurchased over $6 billion of shares. Today's market cap is $12 billion. In my life, nearly every time you find a company who's stock that is pricing in zero growth, but the company is buying back stock so rapidly that they can repurchase every single share in less than ten years, it's a huge buying opportunity.

 

Macy's actually has not grown that much. Since 2007, they have grown revenues from 26 billion to 28 billion annually in 2014. Adjusted for inflation, that is negative growth. Add a bit top line pressure from online sales to the mix and it does not take much to see Macy's shrinking, even in nominal numbers.

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