Here’s why I think Macy’s (NYSE: M) may be an interesting opportunity at today’s prices.
Macy’s has consistently generated over $1B in normalized net income over the last ten years (except for 2020 and 2021, which is understandable).
Given the ecommerce threat is no stronger today than five years ago, it seems like a reasonable bet to say they’ll continue to make $1B in net income over the next 10 years. The FCF to equity is a little less consistent because cap ex is sometimes chunky, but I think management is smart enough to only spend more on cap ex than depreciation when the ROI is justified. So, net income is a reasonable proxy for FCF to equity.
If you believe Macy’s (and Bloomingdales) will be around for 10 years in roughly the same form, then buying the business for $10B seems like decent value.
They have $3B in debt (with no material maturities till 2027), so the equity is worth about $7B.
The current market cap is 4.6B, so there’s about 50% upside here.
Management is authorized to do $1.4B in buybacks if they want to. They only have $800M in cash, so it’s likely not all happening soon, but that would be a 30% reduction in outstanding shares at today’s price.
Margins may actually get a little bit better going forward to the extent supply chain issues are mostly resolved and inventories are about 20% lower than pre-pandemic average. My sense is that the most die hard Macy’s shoppers skew older (50+) and they may actually be feeling more flush today with social security checks indexed to inflation and yields on cash at 4.5%.
The one wild card for both Gap and Macy’s is the rise of Chinese ecommerce brands like Shien and Temu. I think this is more of a risk for Gap than Macy’s given Macy’s older customer demographic. The other risk to Macy’s is the continued growth of retailers like TJ Maxx. Spending may shift away from Macy’s to TJX if customers are feeling the pinch from a recession. At about 7.5x normalized FCF, I think the risk reward is still compelling.