Department store chain Macy's (M -2.03%) was in a fight for survival even before the coronavirus contagion took hold. The pandemic's hit to the overall economy may well deliver the knockout punch.
That's not to say that Macy's name won't live on one way or another. Indeed, the moniker itself has monetary value, holding a cache with plenty of consumers. This is not to suggest any impending doom will immediately take hold. The company continues to put up a good fight, maneuvering to withstand the nasty headwinds.
On balance, however, the task ahead is just too great for investors to take a shot on a turnaround. Macy's as we know it today likely won't survive what happens once COVID-19 is in the rearview mirror.
Ineffective initiatives
Macy's and its peers like Nordstrom and even J.C. Penney were on top of the world 25 years ago when mall-mania was almost frenzied. Then Amazon.com arrived, and while it wasn't immediate, the advent of e-commerce eventually began to take a measurable toll. Macy's top line peaked in 2014, and the steady sales decline since then has prompted store closures, which in turn prompted more sales declines, exacerbating a vicious cycle that steered earnings in the wrong direction.
Image source: Getty Images.
To its credit, the department store chain has pushed back. In early 2018, Macy's established its so-called Growth50 initiative meant to squeeze outsized growth from 50 stores that were best-positioned to pull the company out of its slump. Largely rooted in remodels and amenities, the program showed enough promise for management to expand it to another 100 locations last year. Earlier this year, the company announced the launch of Market by Macy's -- a small-format, neighborhood-oriented kind of store that offers a more intimate experience. In between the launch of those efforts, Macy's ramped up its use of e-commerce while improving its inventory mix.
They're all worthy strategies that take aim at the right targets. That is, they seek to connect more consumers with the right merchandise at a marketable price. In the circumstances that Macy's now faces, however, these initiatives are apt to fall short of hopes.
The "s" word
The short version of a long story: Consumer interest in brick-and-mortar shopping is waning and may continue to shrink now that the coronavirus outbreak has trained even more shoppers to stay at home and shop online. Assuming the COVID contagion permanently shutters some stores, consumers will have even less of a reason to visit the malls where most Macy's stores are located.
All of it works against Macy's, which was already on flimsy financial footing going into the current chapter of the retail apocalypse. "If we do require furloughs or layoffs," CEO Jeff Gennette said late last month, "it will be in order to ensure the survival of the company."
Anytime any CEO uses the word "survival" in any context, that company is already in deep trouble.
And Macy's is in trouble, to be sure. Just a handful of days later, Macy's did end up furloughing most of its workers. That was around the same time the retailer drew every bit of a $1.5 billion credit facility it already had at its disposal before the outbreak took hold. But it's already got nearly $1 billion worth of debt coming due before early 2022, and was sitting on $3.6 billion in long-term debt as of the end of last fiscal year.
Refinancing won't come easy or be cheap. Fitch Ratings downgraded Macy's bonds to BB+ at the beginning of April, officially categorizing it as "junk." Fitch thinks Macy's can survive, but it won't be easy, particularly if the fallout from the COVID-19 outbreak lingers past Fitch's assumption that stores will remain closed through the middle of May.
For perspective, Macy's did $24.5 billion in business last year, but only turned a little more than $1.7 billion of it into operating income. Interest expenses and taxed whittled that figure down to roughly $1.1 billion, and the new debt just taken on will only add to its total expenses at a point in time when it doesn't need any more.
Not worth the risk
Although the world will eventually work past this sweeping economic slowdown, it's difficult to say it hasn't already taken a sizable toll on names that were already struggling. Macy's is easily in that cohort of companies, opting to sell off parts of its valuable real estate portfolio starting a couple of years ago, only to then lease that square footage back from its new owners. Little of what Macy's has done in the meantime has actually helped grow the business either. It's only helped slow the demise. The coronavirus outbreak will hasten it again. As of their most recent looks, analysts aren't particularly optimistic.
Data source: Thomson Reuters and Refinitiv. Chart by author.
It's not the end of the Macy's name itself. If and when the department store chain becomes desperate enough, it will somehow find new life, perhaps in a new form under a new ownership structure. To that end, while the company itself hasn't confirmed or denied it, Reuters reported this week that the company has enlisted the help of an investment bank as well as debt-restructuring attorneys. If that's true -- and there's no reason to think there's not at least a kernel of truth to the report -- then Macy's may already be waving a white flag.
Given the whole picture, there's little to like about owning this stock -- at least not anytime soon.
