Macy's (M -4.17%) shares trade well below book value. Stock for the time-honored retailer carries an extremely low P/E ratio, and the dividend is out of this world. After reporting a surprise in holiday sales, one might think that the department store manager is a steal right now.
There's more to this story though. No matter how you slice it, retail is at a crossroads (especially fashion retail). Digital sales from e-commerce names like Amazon have changed things. Is Macy's capable of handling the changes?
Largely overshadowed this week by the general market sell-off related to novel coronavirus fears, Macy's on Tuesday reported a decent fourth quarter when compared with expectations, but overall sales remain a problem.
Net sales for the quarter were stagnant year over year at $8.34 billion vs. $8.46 billion a year ago. Comparable sales declined by 0.5% on an owned plus licensed basis, compared to comp sales growth of 0.7% (or 2% with a shifted calendar).
Overall, the fourth quarter wasn't terribly impressive. Operating margins declined to 6.7% of net sales, compared to 12.4% a year ago. Net income declined 54.1% year over year to $340 million, with diluted earnings per share of $1.09 vs. $2.37 a year ago. Adjusted EPS of $2.12 might have outpaced expectations of $1.96, but the situation is still in decline.
Full-year 2019 financial results weren't any better. Comp sales declined 0.7% on an owned-plus-licensed basis versus 2% growth in 2018. Full-year diluted earnings per share fell 49.15% year over year to $1.81. Adjusted diluted earnings also fell by 30.4% to $2.91 per share.
Is there still value?
Macy's still has a ton of assets. The company carries $6.4 billion in total shareholders' equity. When you compare that to the stock's market capitalization of $4.5 billion, these shares trade at a big discount to the company's book value. On an earnings basis, the stock is also very cheap. With full-year 2019 earnings of $1.81 per diluted share, the stock has a trailing P/E ratio of 8. That's cheap for a stock offering a 10.3% dividend yield.
The question is whether that value will remain down the road.
The company's so-called "Polaris Strategy" is a means by which it is aiming to improve the situation. Putting more emphasis on customer relationships, quality fashion, an improved store portfolio, and increased digital growth all sound like good ideas. It's the execution that will matter.
The retailer has suffered from the fallout in shopping malls. Store portfolio optimization translates to store closures in my eyes. The company has already announced that it will be closing 30 stores this year.
We've seen this game before with J.C. Penney. I like to think that Macy's is a better run enterprise than J.C. Penney and that the quality real estate assets (such as its flagship store in New York) make it a higher-quality operation. Nonetheless, store closures don't always lead to an improvement in the bottom line. You still have to find a way to drive sales if you want long-term earnings potential.
The big thing here will be improving online presence. The challenge for Macy's is that its product line is largely limited to clothes and perfume. The retailers that are making it have a broader inventory and can implement the "order-pickup" trend that brings shoppers to stores. The major stores and real estate have potential in terms of retaining some brick-and-mortar strength, as well as potential leasing opportunities for the company's buildings. Nonetheless, Macy's is certainly losing out to online competitors.
Where's the value?
So, is Macy's a value stock or a value trap? It's hard to turn down that double-digit dividend, and it's hard to ignore the fact that you can acquire shares for less than the total equity on the balance sheet.
Nonetheless, there's not a ton here to love other than valuation. Guidance for 2020 suggests continued declines on an owned plus licensed basis. Those comp sales are forecast to decline by 2.5% to 1.5% for the year. The $2.45 to $2.65 per diluted share provided in the guidance would be another decline from 2019's adjusted earnings of $2.91 per diluted share.
Right now, it doesn't seem wise to put money into something like this. There are plenty of other names to consider if you are looking for retail exposure.
Macy's is a name you want to root for. I've rooted for it for a long time. Unfortunately, that doesn't always equate to a solid investment. I cannot get behind Macy's at this point. There's technical value, but the current trends don't indicate much promise.