Please ensure Javascript is enabled for purposes of website accessibility

Why Macy's Could Look Very Different in the Next Few Years

By Motley Fool Staff - Feb 16, 2018 at 8:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The reduction in the corporate tax rate will boost Macy's cash flow. It could also encourage the company to become more aggressive about selling off non-core real estate.

Macy's (M 9.91%) stock has struggled in the past few years as weak sales trends have undermined its profitability. The company's sales declines have encouraged management to focus more attention on monetizing some of the company's highly valuable real estate.

In this segment from Industry Focus: Consumer Goods, Vincent Shen and Adam Levine-Weinberg dig into the potential impact of tax reform on Macy's real estate strategy. Since real estate sales often lead to significant one-time gains, a lower tax rate could cause management to view asset sales even more favorably going forward.

A full transcript follows the video.

This video was recorded on Feb. 13, 2018.

Vincent Shen: Our last part of the discussion, I want to focus on one last company that could really change over the next few years given some unique aspects of its asset base and the long-term vision that management seems to be pursuing for the company. How did the cards fall, then, as a result of the tax reform for Macy's?

Adam Levine-Weinberg: Macy's is definitely a unique case here, and it could be, possibly, the biggest beneficiary in the retail sector from this change in the tax law. Similar to Kohl's, Macy's stock trades at a very low price to free cash flow ratio. In a scenario where nothing really major changes, you're going to have more cash flow, which Macy's can use to pay down debt, continue paying its really high dividend -- it has one of the highest dividend yields out there right now -- and it can also eventually, maybe later in 2018 or if not, in 2019, it could start buying back stock again. In the past year or so, it's been focusing on paying down debt rather than trying to buy back stock.

But outside of its core retail business, Macy's has also been starting to sell excess real estate. And the idea is, Macy's, over its more than 100-year history, has built stores all over the country. And some of them are actually in extremely valuable locations. And some of those stores, while they're profitable, they're not really making enough money to pay for the opportunity cost of what the real estate would be worth if it were to be sold. So sometimes, that's because the Macy's store is in a really great mall, where the mall owner wants to redevelop that Macy's store to put in luxury stores or restaurants or entertainment spaces that can generate higher rents. In other cases, Macy's has these downtown stores in really hot real estate markets like New York, San Francisco, even Chicago might fit into that.

The problem for Macy's is, when it sells these assets, if it's built a store 50 years ago or even 100 years ago, it built that store at a much lower cost than what the sale price would be. So every time it sells one of these stores to another investor, it has to pay a pretty big tax bill because of that asset sale gain. So with a high corporate tax rate where the taxes might take up 40% of the sale price, or close to that, it definitely would give Macy's pause as to whether it should sell the store or keep operating it, because obviously, the longer you operate the store, you're just paying taxes as you go, as opposed to paying a giant tax bill all at once. With this tax reform bill, now you have a lower rate, so that might encourage Macy's to start selling off properties at a faster rate, because now there's a lower tax penalty to doing that. And it's actually particularly good timing, because Macy's, as I mentioned, has been ramping up this strategy. They have a strategic partnership with Brookfield Asset Management, a huge firm in private equity and real estate management that's looking into several dozen Macy's store sites and ways to either redevelop the store or do additional real estate development on the parking lots or things of that nature. So that's definitely a project that could lead to substantial proceeds for Macy's.

Beyond that, it's looking into ways to monetize the upper floors of its humongous stores, both in Chicago and New York. So as these projects eventually turn into deals that bring in cash for Macy's, now it's not going to be paying as much tax, so it may have an incentive to speed up this movement. And that's pretty important, because most people who have analyzed this think that Macy's real estate is worth more than the entire company's valuation right now. So being able to sell off that real estate, bring in cash, pay down debt, and return cash to shareholders, could be really transformative for Macy's share price performance.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Macy's, Inc. Stock Quote
Macy's, Inc.
M
$20.96 (9.91%) $1.89

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
336%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.