Consumerism is rebounding, to be sure. Mall parking lots are a bit more crowded than they were just a few months ago. Although the bar was set low, the 9.8% year-over-year jump in retail spending in the U.S. says people are willing and able to shop again. Consumer confidence is also as high as it's been since the pandemic took hold. Most of the nation's remaining retailers -- along with their investors -- can breathe a small sigh of relief.
There are some exceptions, however, with the most prolific of them being iconic department store chain Macy's (NYSE:M). While its recovery effort is commendable as well as measurable, it's recovering back into a situation that's even less favorable for it now than before the coronavirus contagion began. Four specific faults stand out.
1. Macy's is a generalist in a specialty-oriented arena
There was a time when consumers preferred visiting one store to meet all their needs, and to be fair, the success of Walmart and Target says people still like some retailers to offer a little of everything.
On the fashion front, though, things have changed. The St. Louis Federal Reserve (which tracks and reports such data) says spending at department stores in the U.S. peaked at $232 billion in 2020 and has steadily declined to 2019's pre-COVID tally of $134 billion. Meanwhile, the country's total retail spending hit a record high $451 billion in 2019. Sales at furniture, sporting goods, clothing and accessory, and home improvement stores are all up for this timeframe.
Read between the lines. People don't browse anymore. They know what they want, and they go to where they know they can get it.
2. Off-mall is the new at-the-mall
Kudos to Macy's for thinking outside the box. The company announced in early 2020 that part of its revitalization strategy would include tests of smaller off-mall (think strip malls and urban lifestyle centers) stores called Market by Macy's. The second of these stores opened early this year, with an untold number of these locales in the works. The shift will develop a presence closer to where consumers live, work, and shop.
The move just can't happen fast enough, however. The company still operates more than 700 conventional department stores, most of which are located at malls. While it's true that most top-tier, high-traffic malls are primed to thrive, smaller and lower-traffic malls aren't. Coresight Research estimates one-fourth of the country's roughly 1,000 malls will be closed by 2025, at least some of which will clip Macy's brick-and-mortar footprint.
3. Debt and lease obligations are creeping higher
Macy's rightfully prioritized its survival in the midst of the coronavirus pandemic. But the company is forced to live with the effect of decisions made over the course of the past year.
To this end, Macy's long-term debt load as of the end of January was $4.4 billion, up from $3.6 billion a year earlier, and long-term lease liabilities grew from $2.9 billion to nearly $3.2 billion. Meanwhile, inventories of $3.8 billion are about two-thirds of the $5.2 billion worth of goods the company was holding early last year.
Liquidity is well up, for the record, rising from less than $700 million then to nearly $1.7 billion as of the end of January; the retailer is ensuring it's able to pay for whatever needs might surface in the foreseeable future. It's moving into that future with more debt and fewer assets, though.
Indeed, the balance sheet we see may still underestimate Macy's forward-looking challenges.
On the surface, the decision to sell its owned real estate makes sense, as these agreements have raised much-needed cash. These sale-leaseback agreements aren't one-sided, though. Stores sold to a landlord had been rent-free space, but the new owners require recurring rent payments, which hadn't been incurred in the past. Macy's owed $421 million worth of rent last year alone.
Moreover, the way lease obligations linked to leaseback obligations are described on a balance sheet understates the amount of rent payments coming due by removing interest expenses linked to them. Adding this expense back in ratchets Macy's future rent obligations up to more than $7.0 billion.
These are costs the department store chain just doesn't need while it's trying to turn things around against the odds.
4. Tomorrow's consumers prefer online shopping
Finally, the chief reason to steer clear of Macy's until further notice is also the most obvious one... modern consumers are increasingly looking to the web to shop, even for apparel.
Macy's has an e-commerce presence, mind you. Its fourth-quarter digital business grew 21% year over year, extending last year's streak of online sales growth.
Consider the circumstances, though. In the midst of a pandemic that largely kept shoppers trapped at home, it would have been surprising if the company hadn't been able to produce double-digit digital sales growth. This success doesn't make it an e-commerce contender. The fashion sliver of this market is arguably better addressed by the likes of Cutter & Buck or Pink Lily, both of which are built from the ground up as online retailing outfits that aren't bogged down by an enormous (and expensive) brick-and-mortar footprint.
Never say never, of course. Macy's might eventually work its way out of trouble. The name itself certainly carries weight.
Given the sizable risk relative to a minimal reward, though, this is a stock best left avoided. There are far better alternatives out there, even within the challenged retail sector.