Macy's (NYSE:M) wrapped up its 2018 fiscal year last week. The iconic department store giant won't report its full results until later this month, but it already reduced its full-year earnings per share guidance to a range of $3.95 to $4.00 in an early January investor update. (On the bright side, that's still higher than Macy's initial EPS forecast for fiscal 2018.)
However, despite this earnings miss -- which was driven by a revenue slowdown in December -- Macy's likely ended the fiscal year with quite a bit of cash on its balance sheet. That could give the company the flexibility to restart a meaningful share buyback program this year.
The fourth quarter is the time for cash flow
Like most of its peers, Macy's generates the vast majority of its annual cash flow in the holiday quarter. In recent years, the company has typically generated operating cash flow of at least $1.5 billion in the fourth quarter.
While the holiday season didn't quite live up to Macy's expectations, $1.5 billion still seems like a reasonable estimate of its operating cash flow for last quarter. Based on management's full-year guidance and Macy's capital expenditures for the first three quarters of fiscal 2018, the company probably spent between $300 million and $400 million on capex during the period. That would put its quarterly free cash flow between $1.1 billion and $1.2 billion.
Macy's used most of this cash flow for a massive debt tender offer last quarter. The company repurchased $750 million of its debt in December, strengthening its balance sheet. Macy's also used approximately $116 million to pay its regular quarterly dividend.
While the debt repayments and dividends represented a significant use of cash, Macy's still should have had at least $200 million to $300 million left over to add to its cash reserves.
Asset sales will add to the haul
Macy's also completed several asset sales during the fourth quarter, representing an additional source of cash. Most notably, the company completed the sale of the I. Magnin building -- part of its San Francisco flagship store -- just before the end of the fiscal year, reaping proceeds of $250 million.
Macy's also sold two stand-alone furniture stores in the Chicago suburbs for $26 million and a full-line store in Nanuet, New York, for $11.5 million during the fourth quarter, according to various news reports. There also may have been some smaller asset sales that did not make the headlines.
Thus, Macy's likely received close to $300 million from its asset sale activity last quarter. Adding that sum to its excess free cash flow (after debt repayments and dividends), Macy's probably increased its cash balance from $736 million in early November to roughly $1.2 billion to $1.3 billion by the end of fiscal 2018.
Time to restart buybacks?
Macy's ended the third quarter with adjusted debt of 2.6 times earnings before interest, taxes, depreciation, and amortization (EBITDA). This was well within its leverage ratio target range of 2.5 to 2.8 times adjusted EBITDA.
Adjusted EBITDA declined last quarter, but Macy's $750 million in debt repayments should have more than offset this change. As a result, the company's leverage ratio probably improved to around 2.5 times EBITDA. With Macy's having met the low end of its long-term leverage target, it won't need to spend heavily on debt reduction going forward.
Thus, Macy's should be able to return some of its cash pile to shareholders by restarting its stock buyback program. Macy's ended fiscal 2016 with $1.7 billion of authorization remaining on its share repurchase program, but it didn't buy back any stock over the past two years, focusing on debt reduction instead. With Macy's stock trading for less than eight times forward earnings and annual free cash flow routinely reaching $1 billion -- more than twice what the company pays out in dividends each year -- this would seem like a great time for Macy's to resume its buybacks.