Corner of Berkshire & Fairfax Message Board

General Category => Investment Ideas => Topic started by: Grey512 on November 11, 2015, 09:26:14 AM

Title: M - Macy's
Post by: Grey512 on November 11, 2015, 09:26:14 AM
Stock massively down today, and I started nibbling. I originally got interested in M after Starboard Value engaged with the company during the summer. Some details of Starboard's thesis (which sees value north of $100/sh) is here: http://video.cnbc.com/gallery/?video=3000401003

Current price is around 10x earnings; the multiple is more modest depending on your outlook for 2016. Reasonably shareholder-friendly management, with significant buy-backs and a shrinking share count.
Title: Re: M - Macy's
Post by: ccplz on November 11, 2015, 11:51:37 AM
Has anyone seen this: http://www.l2inc.com/the-future-of-retail-looks-like-macys-not-amazon/2015/blog ?
Title: Re: M - Macy's
Post by: Jurgis on November 11, 2015, 12:27:08 PM
OT?

I've said somewhere else that "buy online and pick up at the store" seems to be dumbest thing ever to me. It's a marriage of two bad parts: you buy online, so you cannot physically touch/see/try on; and you have to pick up at the store, so you have to go to the store wasting time, energy, gas, etc. I want the complete opposite: "buy at home (online) but with physical tryout as if I was at the store and get it shipped to me". This would marry the best parts: physical tryout and no time wasted going to the store.
Hate all retailers that try to push me to "buy online and pick up at the store".

Anyway, sorry for rant here, it was triggered by that l2inc article. Others might have different opinions and all that. :)

I do not have opinion or position in M.

Peace.
Title: Re: M - Macy's
Post by: rkbabang on November 11, 2015, 12:41:35 PM
OT?

I've said somewhere else that "buy online and pick up at the store" seems to be dumbest thing ever to me. It's a marriage of two bad parts: you buy online, so you cannot physically touch/see/try on; and you have to pick up at the store, so you have to go to the store wasting time, energy, gas, etc. I want the complete opposite: "buy at home (online) but with physical tryout as if I was at the store and get it shipped to me". This would marry the best parts: physical tryout and no time wasted going to the store.
Hate all retailers that try to push me to "buy online and pick up at the store".

Anyway, sorry for rant here, it was triggered by that l2inc article. Others might have different opinions and all that. :)

I do not have opinion or position in M.

Peace.

I have the same opinion as you.  The going to the store part is by far the worst part of acquiring new things.  It far outweighs the disadvantages of not being able to physically see/handle the object.   But we are both men (if I am making a correct assumption of your gender), both my wife and daughter love to shop in person at physical stores.  Since more than half the population is made up of women, I don't think brick and mortar retailers will all die in the near future.   That said, my wife and daughter both like to shop at physical locations, or they shop on line, as you pointed out the "ship to store" is always the worst of both worlds.  It's a hassle.

Title: Re: M - Macy's
Post by: Jurgis on November 11, 2015, 12:52:40 PM
Right. I completely understand the attraction of physical shopping (browsing), so I don't diss brick&mortars. There are tons of things that I and others physical shop and might continue for a while. There's also social aspect of shops and shopping malls that will hold for a while.

I was talking purely about "buy online, ship to store". I understand why this is attractive to retailers: lure online buyers to the store, save on shipping costs. But as a customer I hate it.
Title: Re: M - Macy's
Post by: Spekulatius on November 14, 2015, 08:49:21 PM
Right. I completely understand the attraction of physical shopping (browsing), so I don't diss brick&mortars. There are tons of things that I and others physical shop and might continue for a while. There's also social aspect of shops and shopping malls that will hold for a while.

I was talking purely about "buy online, ship to store". I understand why this is attractive to retailers: lure online buyers to the store, save on shipping costs. But as a customer I hate it.

Shop online, Pick up in store makes no sense to me. To win, the  B&M retailers need to emphasize the service aspect, as well as the touch/feel/try aspect. They cannot compete with online retailers on price and convenience any more.
Title: Re: M - Macy's
Post by: innerscorecard on November 14, 2015, 11:04:10 PM
Has anyone seen this: http://www.l2inc.com/the-future-of-retail-looks-like-macys-not-amazon/2015/blog ?

I thought this article was fantastically bad. It's shocking that it was written by Scott Galloway, a professor who everyone says is brilliant. I think it is newspaper-level analysis at best. Just because companies are investing in e-commerce doesn't mean the money isn't being incinerated. A few paragraphs in, I could just feel he was going to mention Shop Your Way, and Macy's stock performance in 2014, and he didn't fail to do either!
Title: Re: M - Macy's
Post by: FCharlie on November 15, 2015, 05:20:38 AM
Stock massively down today, and I started nibbling. I originally got interested in M after Starboard Value engaged with the company during the summer. Some details of Starboard's thesis (which sees value north of $100/sh) is here: http://video.cnbc.com/gallery/?video=3000401003

Current price is around 10x earnings; the multiple is more modest depending on your outlook for 2016. Reasonably shareholder-friendly management, with significant buy-backs and a shrinking share count.

Almost seems too good to be true. The buyback has erased almost 25% of shares in the past four years alone. The real estate should put a floor under the stock, but it seems no one cares about real estate until you are willing to monetize it and I don't see Macy's doing so. The number one thing holding me back from making this a giant investment is the bad taste I have in my mouth from being a long time Sears Holdings shareholder. Year after year they bought back stock and were selling below their liquidation value. It's never worked out. Macy's should be different in that their stores are much nicer and more appealing to shop. I have a small but increasing position. I can't believe the stock is priced this low considering the intrinsic value and the buyback.
Title: Re: M - Macy's
Post by: BG2008 on November 15, 2015, 08:17:10 AM
The anatomy of the Macy's thesis is that there's value in the real estate, retail, and the credit card processing

Macy's generates a 14% ebitda margin.  In reality, there is a lot of free rent embedded in that 14% margin.  In the CNBC video presentation, Starboard highlighted what he thinks the actual retail margin is.  If I recall correctly, it breaks down to roughly $4bn of EBITDA for the whole complex
$800mm of credit card processing EBITDA - this should be a higher EV/EBITDA business than the generic retail EV/EBITDA
Then you can figure out what the OpCo/PropCo should be.  Macy's has pretty much came out and said that they are not doing an OpCo/PropCo, but they are electing to monetize property on a JV basis
My gut feeling is that Starboard is not done with their activist agenda yet.  No management team will ever allow an activist to just come in and move to an OpCo/PropCo.  Retail is an inherently risky business.  Once you go the OpCo/PropCo route, it adds a ton of fixed cost that can quickly sinking the ship once you experience a rough patch in performance.   

The big picture is still is Macy's relevant in the long run?  But if Starboard can get the company to monetize a good chunk of real estate quickly, then Macy's has a quick event driven angle to it. 
Title: Re: M - Macy's
Post by: merkhet on November 15, 2015, 08:32:15 AM
The anatomy of the Macy's thesis is that there's value in the real estate, retail, and the credit card processing

Macy's generates a 14% ebitda margin.  In reality, there is a lot of free rent embedded in that 14% margin.  In the CNBC video presentation, Starboard highlighted what he thinks the actual retail margin is.  If I recall correctly, it breaks down to roughly $4bn of EBITDA for the whole complex
$800mm of credit card processing EBITDA - this should be a higher EV/EBITDA business than the generic retail EV/EBITDA
Then you can figure out what the OpCo/PropCo should be.  Macy's has pretty much came out and said that they are not doing an OpCo/PropCo, but they are electing to monetize property on a JV basis
My gut feeling is that Starboard is not done with their activist agenda yet.  No management team will ever allow an activist to just come in and move to an OpCo/PropCo.  Retail is an inherently risky business.  Once you go the OpCo/PropCo route, it adds a ton of fixed cost that can quickly sinking the ship once you experience a rough patch in performance.   

The big picture is still is Macy's relevant in the long run?  But if Starboard can get the company to monetize a good chunk of real estate quickly, then Macy's has a quick event driven angle to it.

+1
Title: Re: M - Macy's
Post by: Spekulatius on November 15, 2015, 09:47:22 AM
Any examples of a quick realization of real estate assets in retail. I recall efforts in JCP, TGT and Sears. TGT and JCP did not happen at all, Sears took a long time and in a way did not separate at all yet.
Title: Re: M - Macy's
Post by: BG2008 on November 15, 2015, 11:11:56 AM
Macy's more than JCP, has more exposure to the recent years of tourist spending.  I was in there 34th st Herald square location a couple of weeks ago.  The place is gigantic and certainly worth a ton of money.  Obviously, the most important is the first floor.  Macy's in the last few years has turn the first floor into a bit of a flashy luxury boutique, i.e. Louis Vuitton, Burberry, etc.  It's a bit of a weird experience shopping for luxury in that building.  It was kind of built for the newly rich of China.  The shopping experience isn't pleasurable in the same way as 5th Ave or a Nordstrom.  There is also a suffocating musk of perfumes and cologne on the first floor that makes me want to vomit.

What does all of this mean?  Well, there's $4 billion that is tied to the 34th St real estate and in recent years they have set up this type of luxury, but in some ways tacky, shopping experience that may or may not work with luxury fading a bit.  Just thinking out loud. 
Title: Re: M - Macy's
Post by: BG2008 on November 15, 2015, 11:18:25 AM
Any examples of a quick realization of real estate assets in retail. I recall efforts in JCP, TGT and Sears. TGT and JCP did not happen at all, Sears took a long time and in a way did not separate at all yet.

Look at what Hudson Bay has been doing.  They bought Saks and then took out a mortgage on SAKs Fifth Ave location at 35% LTV.  Saks paid $2.9 billion for the entire Saks enterprise and the appraisal of the building was for $3.7 billion.  They took out a $1.25 billion mortgage at 4% interest rate.   

http://dealbook.nytimes.com/2014/11/24/a-deal-mortgaging-the-store-values-saks-at-3-7-billion/?_r=0

Big picture, very hard to extract real estate value when the operation is struggling, Sears, JCP, Ruby Tuesday etc.  Easier when the operations is steady and cashflowing. 
Title: Re: M - Macy's
Post by: JayGatsby on November 15, 2015, 12:06:27 PM
Some details of Starboard's thesis (which sees value north of $100/sh) is here: http://video.cnbc.com/gallery/?video=3000401003
The way Starboard valued the real estate seemed suspect to me. They said they valued most of it based on the rent stream Macy's could support and attached a ~6% cap rate to that. Based on that method aren't you basically just manufacturing a number? I'd want to know what the real estate could fetch in an open market transaction. If I own a house, my house is worth what the next guy will pay for it, not the annual mortgage I can pay / .06.
Title: Re: M - Macy's
Post by: ccplz on November 17, 2015, 01:31:03 PM
There's been a lot of focus on the value of the real estate, but I think the market is overlooking the quality of the underlying business.  They are the only main player in the mid-market segment (Kohls, JCP, Sears etc competing for the lower end, Saks, Nordstrom etc competing for the high end), and they are the also largest department store out there, which gives them a lot of purchasing power over vendors as well as access to the top brands. This results in consistently higher gross margins compared with competitors. They also have one of the most far sighted management teams out of all the old-school retailers, and I think they've invested something like 3 bn into their online business over the last few years. Currently 15% of their sales comes from online sales (estimate; they don't break out online sales any more because of what I think is a pretty bad reason), and this should be growing every year. So I don't think this is a business that is going extinct by any means. 9x I think is a very good price for this caliber of business.

The real estate is just the icing on the cake.
Title: Re: M - Macy's
Post by: Mephistopheles on November 17, 2015, 02:11:18 PM
There's been a lot of focus on the value of the real estate, but I think the market is overlooking the quality of the underlying business.  They are the only main player in the mid-market segment (Kohls, JCP, Sears etc competing for the lower end, Saks, Nordstrom etc competing for the high end), and they are the also largest department store out there, which gives them a lot of purchasing power over vendors as well as access to the top brands. This results in consistently higher gross margins compared with competitors. They also have one of the most far sighted management teams out of all the old-school retailers, and I think they've invested something like 3 bn into their online business over the last few years. Currently 15% of their sales comes from online sales (estimate; they don't break out online sales any more because of what I think is a pretty bad reason), and this should be growing every year. So I don't think this is a business that is going extinct by any means. 9x I think is a very good price for this caliber of business.

The real estate is just the icing on the cake.

+1

On the topic of real estate, what is the best way to search for and research individual properties? I know people do it with tax assessment, is that the correct way? I just want to get a feel for all the trophy Macy's properties starting with Herald Square. Thanks

Title: Re: M - Macy's
Post by: rkbabang on November 17, 2015, 03:35:57 PM
There's been a lot of focus on the value of the real estate, but I think the market is overlooking the quality of the underlying business.  They are the only main player in the mid-market segment (Kohls, JCP, Sears etc competing for the lower end, Saks, Nordstrom etc competing for the high end), and they are the also largest department store out there, which gives them a lot of purchasing power over vendors as well as access to the top brands. This results in consistently higher gross margins compared with competitors. They also have one of the most far sighted management teams out of all the old-school retailers, and I think they've invested something like 3 bn into their online business over the last few years. Currently 15% of their sales comes from online sales (estimate; they don't break out online sales any more because of what I think is a pretty bad reason), and this should be growing every year. So I don't think this is a business that is going extinct by any means. 9x I think is a very good price for this caliber of business.

The real estate is just the icing on the cake.

I agree.  Given that there isn't a lot a big department store expansion going on, and Macy's is pretty much the cream of the crop when it comes to department stores at this time, most of the real estate that Macy's owns is far more valuable with Macy's occupying it than otherwise.  There are always exceptions however.  The Macy's in my town just closed because it was a stand alone store located literally 3 miles from a mall location with a larger footprint.  Also a developer gave Macy's $12M for the property, not to put another big department store, but to build a mixed-use center (http://encore.bz/wp-content/uploads/2015/08/Bedford-Place-Brochure-Web.pdf) with offices, retail, cinema, hotel, parking garages, & restaurants.  I think these types of locations have more value than mall/stripmall type real estate.

Bedford Macy's to close its doors (http://www.unionleader.com/article/20150817/NEWS02/150819386/1007/NEWS02&template=mobileart)
Title: Re: M - Macy's
Post by: ccplz on November 17, 2015, 08:38:44 PM
What is the bear case? E-commerce?
Title: Re: M - Macy's
Post by: krazeenyc on November 18, 2015, 06:48:23 AM
I'm on the fence with Macys. I definitely see value. I would think the bear case in the short and long term are as follows:

Short Term:
Macys has outsized exposure relative to other retailers to tourists and the strong dollar and the weakening global economy hurts Macys more than other domestic retailers. 
A lot of these semi luxury names -- handbags and other fashion names have been struggling mightily recently and Macys is exposed to this market in a big way.
(Very short term) The mild winter in the NE will definitely hammer the quarterly profits as they will have a hard time selling coats.

Long Term:
Death of the Mall
Death of the Department Store Model

While Macys may not be killed off in these scenarios the economics are going to be uncertain.

Title: Re: M - Macy's
Post by: ccplz on November 18, 2015, 02:26:58 PM

Long Term:
Death of the Mall
Death of the Department Store Model


Where are people going to shop if this actually happens?

Or is the thesis that people just aren't going to shop any more?
Title: Re: M - Macy's
Post by: Spekulatius on November 18, 2015, 04:41:37 PM

Long Term:
Death of the Mall
Death of the Department Store Model


Where are people going to shop if this actually happens?

Or is the thesis that people just aren't going to shop any more?

1) Online
2) Specialty stores
3) Outlets
Title: Re: M - Macy's
Post by: rkbabang on November 18, 2015, 04:46:26 PM

Long Term:
Death of the Mall
Death of the Department Store Model


Where are people going to shop if this actually happens?

Or is the thesis that people just aren't going to shop any more?

I think the trend is towards smaller specialty shops in open air mixed use "lifestyle centers" like the one that will be replacing the Macy's in my town that I mentioned above.

So you go to a shoe store for shoes, or maybe even more specifically, the Nike store, and The Coach store for a bag, and the Northface store for a coat. Not to a mall or a department store.
Title: Re: M - Macy's
Post by: ccplz on November 18, 2015, 04:49:38 PM

Long Term:
Death of the Mall
Death of the Department Store Model


Where are people going to shop if this actually happens?

Or is the thesis that people just aren't going to shop any more?

I think the trend is towards smaller specialty shops in open air mixed use "lifestyle centers" like the one that will be replacing the Macy's in my town that I mentioned above.

So you go to a shoe store for shoes, or maybe even more specifically, the Nike store, and The Coach store for a bag, and the Northface store for a coat. Not to a mall or a department store.

I'm sorry but I'm from Asia, and in Asia you would go to the shoe store for shoes (maybe the Nike store) or the Coach store for a bag, as you say, but these stores would be located in indoor shopping malls. So the rise of specialty retailers would not precipitate the death of the mall, quite the opposite in fact.

Some department stores are also located in said malls, whilst others may have their own separate properties.

Is it different in the States?
Title: Re: M - Macy's
Post by: FCharlie on November 18, 2015, 05:10:11 PM
Wall Street currently hates Macy's so much that it's now pricing in below zero growth into perpetuity.

http://www.moneychimp.com/articles/valuation/dcf.htm

Plug in $4.50 for E.P.S. for Macy's and zero growth with an 11% discount rate and you get an intrinsic value higher than today's price.

What's amazing is that investors have become so negative that they're now digging their own graves. The opportunity to outwit Wall Street is being handed to Macy's on a silver platter.  All Macy's needs to do with it's double digit earnings yield is repurchase 10% of it's shares annually. They can create 10% E.P.S. growth and raise the dividend 10% annually, and they don't need to actually grow at all.

Over the past five years, Macy's has repurchased over $6 billion of shares. Today's market cap is $12 billion. In my life, nearly every time you find a company who's stock that is pricing in zero growth, but the company is buying back stock so rapidly that they can repurchase every single share in less than ten years, it's a huge buying opportunity.
Title: Re: M - Macy's
Post by: Spekulatius on November 18, 2015, 05:38:31 PM
Wall Street currently hates Macy's so much that it's now pricing in below zero growth into perpetuity.

http://www.moneychimp.com/articles/valuation/dcf.htm

Plug in $4.50 for E.P.S. for Macy's and zero growth with an 11% discount rate and you get an intrinsic value higher than today's price.

What's amazing is that investors have become so negative that they're now digging their own graves. The opportunity to outwit Wall Street is being handed to Macy's on a silver platter.  All Macy's needs to do with it's double digit earnings yield is repurchase 10% of it's shares annually. They can create 10% E.P.S. growth and raise the dividend 10% annually, and they don't need to actually grow at all.

Over the past five years, Macy's has repurchased over $6 billion of shares. Today's market cap is $12 billion. In my life, nearly every time you find a company who's stock that is pricing in zero growth, but the company is buying back stock so rapidly that they can repurchase every single share in less than ten years, it's a huge buying opportunity.

Macy's actually has not grown that much. Since 2007, they have grown revenues from 26 billion to 28 billion annually in 2014. Adjusted for inflation, that is negative growth. Add a bit top line pressure from online sales to the mix and it does not take much to see Macy's shrinking, even in nominal numbers.
Title: Re: M - Macy's
Post by: ccplz on November 18, 2015, 06:03:41 PM
Wall Street currently hates Macy's so much that it's now pricing in below zero growth into perpetuity.

http://www.moneychimp.com/articles/valuation/dcf.htm

Plug in $4.50 for E.P.S. for Macy's and zero growth with an 11% discount rate and you get an intrinsic value higher than today's price.

What's amazing is that investors have become so negative that they're now digging their own graves. The opportunity to outwit Wall Street is being handed to Macy's on a silver platter.  All Macy's needs to do with it's double digit earnings yield is repurchase 10% of it's shares annually. They can create 10% E.P.S. growth and raise the dividend 10% annually, and they don't need to actually grow at all.

Over the past five years, Macy's has repurchased over $6 billion of shares. Today's market cap is $12 billion. In my life, nearly every time you find a company who's stock that is pricing in zero growth, but the company is buying back stock so rapidly that they can repurchase every single share in less than ten years, it's a huge buying opportunity.

Macy's actually has not grown that much. Since 2007, they have grown revenues from 26 billion to 28 billion annually in 2014. Adjusted for inflation, that is negative growth. Add a bit top line pressure from online sales to the mix and it does not take much to see Macy's shrinking, even in nominal numbers.

Shrinking sales does not mean sinking net income. Also 11% is a rather conservative estimate for M's cost of capital.
Title: Re: M - Macy's
Post by: rkbabang on November 19, 2015, 08:05:52 AM
Wall Street currently hates Macy's so much that it's now pricing in below zero growth into perpetuity.

http://www.moneychimp.com/articles/valuation/dcf.htm

Plug in $4.50 for E.P.S. for Macy's and zero growth with an 11% discount rate and you get an intrinsic value higher than today's price.

What's amazing is that investors have become so negative that they're now digging their own graves. The opportunity to outwit Wall Street is being handed to Macy's on a silver platter.  All Macy's needs to do with it's double digit earnings yield is repurchase 10% of it's shares annually. They can create 10% E.P.S. growth and raise the dividend 10% annually, and they don't need to actually grow at all.

Over the past five years, Macy's has repurchased over $6 billion of shares. Today's market cap is $12 billion. In my life, nearly every time you find a company who's stock that is pricing in zero growth, but the company is buying back stock so rapidly that they can repurchase every single share in less than ten years, it's a huge buying opportunity.

It may look cheap now, but not cheap enough for me yet.  I am keeping it on my watch list though, because I think Mr. Market is going to give us a huge buying opportunity after the holiday quarter's earnings are released.  Amazon is going to own this holiday shopping season like never before and I have a feeling that retail stocks will drop to a level of ridiculousness that Macy's (and maybe Walmart and some others) will be a no brainer of a buy.  If I'm wrong, I'm going to pass on this one though.
Title: Re: M - Macy's
Post by: Spekulatius on November 19, 2015, 05:48:27 PM
Wall Street currently hates Macy's so much that it's now pricing in below zero growth into perpetuity.

http://www.moneychimp.com/articles/valuation/dcf.htm

Plug in $4.50 for E.P.S. for Macy's and zero growth with an 11% discount rate and you get an intrinsic value higher than today's price.

What's amazing is that investors have become so negative that they're now digging their own graves. The opportunity to outwit Wall Street is being handed to Macy's on a silver platter.  All Macy's needs to do with it's double digit earnings yield is repurchase 10% of it's shares annually. They can create 10% E.P.S. growth and raise the dividend 10% annually, and they don't need to actually grow at all.

Over the past five years, Macy's has repurchased over $6 billion of shares. Today's market cap is $12 billion. In my life, nearly every time you find a company who's stock that is pricing in zero growth, but the company is buying back stock so rapidly that they can repurchase every single share in less than ten years, it's a huge buying opportunity.

Macy's actually has not grown that much. Since 2007, they have grown revenues from 26 billion to 28 billion annually in 2014. Adjusted for inflation, that is negative growth. Add a bit top line pressure from online sales to the mix and it does not take much to see Macy's shrinking, even in nominal numbers.

Shrinking sales does not mean sinking net income. Also 11% is a rather conservative estimate for M's cost of capital.

If they move more of their business online, I am fairly certain that their margins will take a huge hit. The Macy story since the recession is one of margin expansion, there was very little organic growth. Now that the revenues start to shrink, there is a significant risk that margins take a huge hit, which will take earnings and cash flow down as well, and there goes the share buyback...

I have a sticker on my forehead that retail turnarounds are tough.
Title: Re: M - Macy's
Post by: ccplz on November 19, 2015, 05:50:08 PM
You are right, retail turnarounds are tough, almost impossible

Macy's is not struggling and fortunately for longs do not need a turnaround.
Title: Re: M - Macy's
Post by: Picasso on November 19, 2015, 05:54:08 PM
Yeah I wouldn't call M a turnaround yet. Maybe in a couple years it might be.

Anyone have a long term chart of SSS and the equity performance?
Title: Re: M - Macy's
Post by: ccplz on November 23, 2015, 01:36:30 PM
http://fortune.com/2015/11/06/amazon-retailers-ecommerce/

Digital sales are 17% of total sales for Macy's.
Title: Re: M - Macy's
Post by: Grey512 on January 08, 2016, 10:57:41 AM
This worked out poorly
Stock price is down. Starboard made little/no progress.
I sat on a decent paper loss and now sold to deploy capital elsewhere. This was not a massively expensive mistake, but it was a mistake, still. So let's deconstruct.

Lessons learned:

1. 'Financial engineering'-led activist theses are faulty. There's only so much value that can be created through conversions to REITs, etc etc.  When activists come and say that you have to move some assets around, change the signposts on some things and - voila - the stock price will double, then beware.

2. 10x earnings is not enough for a secularly challenged business, all else equal. Maybe it's the environment, maybe' its me being hasty, maybe it's the Jeff Smith magic, but I ended up lowering my standards and buying this anyway at 10x earnings. I probably subconsciously knew that 10x P/E is not cheap enough here but I ignored that.

3. The drop from $50 to $40 made me think 'there could be a bargain here'; it's a case of the 'reversion-to-the-mean fallacy'.

Overall - I get the feeling that activism in general is about to hit a significant speed-bump. 2010-2014 was probably a bubble for activism.
Title: Re: M - Macy's
Post by: ccplz on January 08, 2016, 11:08:26 AM
Are you actually an idiot? Did you even have a thesis in the first place or were you just blindly following Starboard into the trade?
Title: Re: M - Macy's
Post by: rkbabang on January 08, 2016, 11:15:41 AM
Are you actually an idiot?

If only we all had the intelligence, wit, and wisdom of ccplz, none of us would ever make an investment which turns out badly.  In the presence of greatness we are all but idiots.
Title: Re: M - Macy's
Post by: intothebreach on January 08, 2016, 11:20:20 AM
As the OP Grey512 started this thread (and actually pointed to Starboard's thesis) which has now been viewed over 3,000 times and received over 30 replies.

And now because he's candid enough to admit a mistake and share his lessons learned instead of staying mum on the topic, he ends up being called an idiot. Remember: you get the behaviors you reward and promote. I don't know about you, but I'd rather encourage more ideas and more sharing of lessons learned.
Title: Re: M - Macy's
Post by: Grey512 on January 08, 2016, 11:39:42 AM
Am I an idiot? Maybe. 20-40% of the time the market certainly makes me feel like an idiot.

intothebreach, rkbabang - thanks folks. I've thought of more post-mortem lessons here:

4. Outright longs vs hedging. Had I understood the sector better, I might have been better off short-selling a correlated name in the retail space (on a premise analogous to 'Apple doing well is bad for Blackberry'). Instead, I just bought M and did not hedge it with anything.

5. Have a clear gameplan. Looking back, at the time I bought M, I think it wasn't entirely clear in my mind whether I planned this to be a short-term hold, a medium-term hold or a long-term mainstay in my portfolio. After I bought this around $40, if this had immediately gone to $50 in a month, I would have sold. Instead, if it gradually headed back towards $50 over a period of a year or so, I am not sure what I would have done.

So all in all - a speculative move with a flimsy thesis, gone bad. I think I've made some of these mistakes before, but they 'looked' or 'felt' different, if you know what I mean. Re-learning some of the same lessons again.
Title: Re: M - Macy's
Post by: rkbabang on January 08, 2016, 11:54:10 AM
Am I an idiot? Maybe. 20-40% of the time the market certainly makes me feel like an idiot.

intothebreach, rkbabang - thanks folks. I've thought of more post-mortem lessons here:

4. Outright longs vs hedging. Had I understood the sector better, I might have been better off short-selling a correlated name in the retail space (on a premise analogous to 'Apple doing well is bad for Blackberry'). Instead, I just bought M and did not hedge it with anything.

5. Have a clear gameplan. Looking back, at the time I bought M, I think it wasn't entirely clear in my mind whether I planned this to be a short-term hold, a medium-term hold or a long-term mainstay in my portfolio. After I bought this around $40, if this had immediately gone to $50 in a month, I would have sold. Instead, if it gradually headed back towards $50 over a period of a year or so, I am not sure what I would have done.

So all in all - a speculative move with a flimsy thesis, gone bad. I think I've made some of these mistakes before, but they 'looked' or 'felt' different, if you know what I mean. Re-learning some of the same lessons again.

Thanks for your candor. #5 is one I struggle with.  I sometimes buy a little of something because it looks cheap without a clear plan.  My most recent version of this was buying WFM.  I bought a tiny bit when it was around $29 a few months ago.  Now I have this really small position (even if it does well it won't make a material difference in my portfolio), the price is a little higher, and there are better values out there so I probably won't buy any more.  I'll probably end up selling it for a short-term gain meaning after commissions and taxes I will make very little, if anything.  A failure to plan is a plan to fail.

Title: Re: M - Macy's
Post by: krazeenyc on January 08, 2016, 02:13:13 PM
Am I an idiot? Maybe. 20-40% of the time the market certainly makes me feel like an idiot.

intothebreach, rkbabang - thanks folks. I've thought of more post-mortem lessons here:

4. Outright longs vs hedging. Had I understood the sector better, I might have been better off short-selling a correlated name in the retail space (on a premise analogous to 'Apple doing well is bad for Blackberry'). Instead, I just bought M and did not hedge it with anything.

5. Have a clear gameplan. Looking back, at the time I bought M, I think it wasn't entirely clear in my mind whether I planned this to be a short-term hold, a medium-term hold or a long-term mainstay in my portfolio. After I bought this around $40, if this had immediately gone to $50 in a month, I would have sold. Instead, if it gradually headed back towards $50 over a period of a year or so, I am not sure what I would have done.


So all in all - a speculative move with a flimsy thesis, gone bad. I think I've made some of these mistakes before, but they 'looked' or 'felt' different, if you know what I mean. Re-learning some of the same lessons again.

I agree with of your statements about financial engineering, piggybacking, and Macys at least possibly being secularly challenged. But basically nothing has changed about Macy's business from when you first posted til now. Other than the very short term performance that was impacted by the ridiculously warm NE weather -- it was 70 degrees in NYC around Christmas -- warmer than in LA.  I'm actually surprised they did as well as they did. The only thing that has changed is the stock price and the mood of the market. Obviously i can understand you deciding that you really don't know enough about Macys to take a position and bail -- that's generally not a bad idea to bail on an investment you're not comfortable in. 

I'm actually fairly pessimistic about any transformative real estate transactions and not sure what impact if any Starboard will have. That being said I think Macys is quite cheap and I actually initiated a small position (<1%) at basically the closing price today (a couple days ago).  My thesis is simple at this price -- they have a fairly good business (IMO), are fairly cheap <10x PE, and have a lot of valuable real estate protecting you on the downside.
Title: Re: M - Macy's
Post by: BG2008 on January 08, 2016, 02:40:20 PM
I think that you do the deep dive and scrubbing of Macy's asset, you'll find that there are a lot of "real estate" that can be "unlocked" without detriment to the retail operation.   For example, selling off the top floors of downtown Brooklyn and Seattle made all the sense in the world.  Once you get to the 5th or 6th floor of a department store, it no longer makes sense to use it as retail.  What good is retail real estate if you need to go up 9 flights of escalators.  Fortunately, in places like NYC, SF, and Chicago, these space are very valuable as office conversions.  I believe that those assets are worth $5-7bn.  But monetizing the top floor will likely yield about $1 billion in cash proceeds.  Frankly, I prefer them to retain ownership and keep the JV interest in the office conversion.  The value in those 3-4 trophy assets is in the millions of foot traffic, not necessarily in Macy's operation.  However, Macy's is generating a good chunk of cashflow from operating those assets.  What I'm trying to say is that whether Macy's works or not in the long run, Herald Square, Union Square in SF, and Chicago will always have "alternative use" value that isn't gonna go away due to Macy's not functioning as a retailer.  An entire block in NYC is worth something!!!   

Aside from this, Macy's also have mall space in some of the top malls in the US.  Roosevelt Field Mall, Aventura etc.  Generally, I believe that there's a bifurcation of Malls.  B and Cs overtime will die.  As can potentially grow overtime or simply have much longer staying power.  They are fun to walk through and shop in.  Even Blue Nile, a pure retailer, recently took some mall space in Roosevelt Field Mall.  Simon is aggressively courting online retailer to showroom their products.  You'll be surprised to know what Macy's owns.

I tend to agree with Krazeenyc that Macy's is one of the better department store retailers out there. 

   
Title: Re: M - Macy's
Post by: peridotcapital on January 08, 2016, 03:20:31 PM
This worked out poorly
Stock price is down. Starboard made little/no progress.
I sat on a decent paper loss and now sold to deploy capital elsewhere. This was not a massively expensive mistake, but it was a mistake, still. So let's deconstruct.

Lessons learned:

1. 'Financial engineering'-led activist theses are faulty. There's only so much value that can be created through conversions to REITs, etc etc.  When activists come and say that you have to move some assets around, change the signposts on some things and - voila - the stock price will double, then beware.

2. 10x earnings is not enough for a secularly challenged business, all else equal. Maybe it's the environment, maybe' its me being hasty, maybe it's the Jeff Smith magic, but I ended up lowering my standards and buying this anyway at 10x earnings. I probably subconsciously knew that 10x P/E is not cheap enough here but I ignored that.

3. The drop from $50 to $40 made me think 'there could be a bargain here'; it's a case of the 'reversion-to-the-mean fallacy'.

Overall - I get the feeling that activism in general is about to hit a significant speed-bump. 2010-2014 was probably a bubble for activism.

The risk in bailing so soon is that you might make an even bigger mistake by selling in the mid 30's. We get a warm winter causing retail comps to go from low single digit positives to low/mid single digit negatives and the market concludes all bricks and mortar is dead, sells down every stock tremendously, and crowns Amazon the default winner. Typical short term thinking.

If you take a longer term view I think you'll find that Macy's has above-average management, above average real estate, and a stock price in the 30's that is very cheap on a free cash flow basis. Let's assume for a second that they continue to use free cash flow to buyback shares and pay a nice dividend. Some real estate monetizations will also give some extra kick. Where could FCF per share be in 3-5 years, even if you assume flat comps? Should Macy's trade at 10-12x that number? Add in the dividend accumulation and I think we could look back at say, wow, Macy's was $35?

FD: long
Title: Re: M - Macy's
Post by: FCharlie on January 10, 2016, 12:36:14 PM



The risk in bailing so soon is that you might make an even bigger mistake by selling in the mid 30's. We get a warm winter causing retail comps to go from low single digit positives to low/mid single digit negatives and the market concludes all bricks and mortar is dead, sells down every stock tremendously, and crowns Amazon the default winner. Typical short term thinking.

If you take a longer term view I think you'll find that Macy's has above-average management, above average real estate, and a stock price in the 30's that is very cheap on a free cash flow basis. Let's assume for a second that they continue to use free cash flow to buyback shares and pay a nice dividend. Some real estate monetizations will also give some extra kick. Where could FCF per share be in 3-5 years, even if you assume flat comps? Should Macy's trade at 10-12x that number? Add in the dividend accumulation and I think we could look back at say, wow, Macy's was $35?

FD: long

I agree 1,000%.

I think the past few months have just been a bad time to own retail. You can blame it on the weather, or Amazon, or whatever... but the long term earnings power of Macy's is not impaired. Excluding weather, Macy's says the same store sales decline for this current quarter would have been 1%. That's not terrible. Will every summer be abnormally cool and every winter be abnormally warm going forward? I think not, and I'm looking forward to some better results in the future. In the meantime, whether they create a REIT or not, the real estate is still there and it's very valuable. I like that Macy's isn't selling it's real estate or simply spinning off a REIT. I think more value can be created with partnerships and joint ventures. Who knows, perhaps Macy's can allow a developer to build a couple billion dollars worth of offices/condos above the NYC stores. I'd prefer that than to just have a lump sum cash infusion for selling the real estate.

Remember, if the real estate was worth $125 per share this summer, imagine what it will be in a few years once Macy's has repurchased another $5 billion worth of stock. I'm not predicting this, but in all reality, if the market continues to treat this stock like a pile of crap, the real estate "per share" could be $500 or more one day. 
Title: Re: M - Macy's
Post by: fareastwarriors on January 10, 2016, 09:00:28 PM
Activist Investor Starboard Urges Macy’s to Strike Real-Estate Deals

http://www.wsj.com/articles/activist-investor-starboard-urges-macys-to-strike-real-estate-deals-letter-1452485020 (http://www.wsj.com/articles/activist-investor-starboard-urges-macys-to-strike-real-estate-deals-letter-1452485020)
Title: Re: M - Macy's
Post by: Grey512 on January 11, 2016, 04:21:13 AM
What I struggled with is the contradiction between these two general statements/ideas:
"Macy's is the best and most well-run player in its sector"
"Macy's real estate is under valued"

Is Macy's really well-run? Isn't it the job of the management to take the assets that the company has (e.g. real estate) and then generate an appropriate cash return from those assets? If we assume for a second that Macy's management are smart and doing their job well, maybe the real estate is really most valuable in Macy's hands and its current configuration. In the end, any asset is worth the stream of cash flows that it can generate over its lifetime. We all can see the stream of cash flows that Macy's assets are generating. Can someone else really take some of those RE assets, remodel them, re-lease them and generate more cash flows than Macy's? Is it really a slam-dunk?

I've avoided Sears and the whole Sears saga so far, but am looking through it now. The Sears bulls appear to have been focused on real estate. I am not a real estate expert, but what I keep going back to is the fundamental truth that any asset is intrinsically worth the (discounted) stream of cash flows that it will generate.

Looking at the whole thing another way, realization of value at Macy's here depends on liquidity in a general sense because I don't buy that Macy's management can magically flip some operational switches to lift the EBITDA margin - retail is a tough, tough business. Therefore, according to activists (and some on this board), some of Macy's illiquid assets need to be monetized in the public or private markets. But my sense is that liquidity is decreasing; there's less and less appetite for illiquidity or illiquid assets - one can only look at what's happening in the SWF space, which will cascade down. So I think another reason why I sold Macy's is because I don't think that it's an equity that will do well in a global market regime which I think we're in for the next few years, which is a regime of low liquidity, low appetite for illiquidity, and an accelerated shift to e-commerce.
Title: Re: M - Macy's
Post by: DTEJD1997 on January 11, 2016, 06:16:32 AM



The risk in bailing so soon is that you might make an even bigger mistake by selling in the mid 30's. We get a warm winter causing retail comps to go from low single digit positives to low/mid single digit negatives and the market concludes all bricks and mortar is dead, sells down every stock tremendously, and crowns Amazon the default winner. Typical short term thinking.

If you take a longer term view I think you'll find that Macy's has above-average management, above average real estate, and a stock price in the 30's that is very cheap on a free cash flow basis. Let's assume for a second that they continue to use free cash flow to buyback shares and pay a nice dividend. Some real estate monetizations will also give some extra kick. Where could FCF per share be in 3-5 years, even if you assume flat comps? Should Macy's trade at 10-12x that number? Add in the dividend accumulation and I think we could look back at say, wow, Macy's was $35?

FD: long

I agree 1,000%.

I think the past few months have just been a bad time to own retail. You can blame it on the weather, or Amazon, or whatever... but the long term earnings power of Macy's is not impaired. Excluding weather, Macy's says the same store sales decline for this current quarter would have been 1%. That's not terrible. Will every summer be abnormally cool and every winter be abnormally warm going forward? I think not, and I'm looking forward to some better results in the future. In the meantime, whether they create a REIT or not, the real estate is still there and it's very valuable. I like that Macy's isn't selling it's real estate or simply spinning off a REIT. I think more value can be created with partnerships and joint ventures. Who knows, perhaps Macy's can allow a developer to build a couple billion dollars worth of offices/condos above the NYC stores. I'd prefer that than to just have a lump sum cash infusion for selling the real estate.

Remember, if the real estate was worth $125 per share this summer, imagine what it will be in a few years once Macy's has repurchased another $5 billion worth of stock. I'm not predicting this, but in all reality, if the market continues to treat this stock like a pile of crap, the real estate "per share" could be $500 or more one day.

Macy's has real estate worth $125/share?  whut whut?  In a few years that could be $500/share?

In my local market, Macy's has some good property, but it also has worthless stuff.  I live less than a mile away from a Macy's that has 5 floors.  Two of the five floors are currently open for business.

Obviously, the NYC property is worth a bundle!  I have seen estimates that it might be worth $1 billion.  Might it be worth more in the future?  Under what circumstances could it be worth $2 billion? 

How much longer will real estate go up in NYC?

I have no doubt that M has valuable real estate that could be monetized.  I am somewhat skeptical that it is worth hundreds of dollars per share.
Title: Re: M - Macy's
Post by: krazeenyc on January 11, 2016, 06:26:47 AM



The risk in bailing so soon is that you might make an even bigger mistake by selling in the mid 30's. We get a warm winter causing retail comps to go from low single digit positives to low/mid single digit negatives and the market concludes all bricks and mortar is dead, sells down every stock tremendously, and crowns Amazon the default winner. Typical short term thinking.

If you take a longer term view I think you'll find that Macy's has above-average management, above average real estate, and a stock price in the 30's that is very cheap on a free cash flow basis. Let's assume for a second that they continue to use free cash flow to buyback shares and pay a nice dividend. Some real estate monetizations will also give some extra kick. Where could FCF per share be in 3-5 years, even if you assume flat comps? Should Macy's trade at 10-12x that number? Add in the dividend accumulation and I think we could look back at say, wow, Macy's was $35?

FD: long

I agree 1,000%.

I think the past few months have just been a bad time to own retail. You can blame it on the weather, or Amazon, or whatever... but the long term earnings power of Macy's is not impaired. Excluding weather, Macy's says the same store sales decline for this current quarter would have been 1%. That's not terrible. Will every summer be abnormally cool and every winter be abnormally warm going forward? I think not, and I'm looking forward to some better results in the future. In the meantime, whether they create a REIT or not, the real estate is still there and it's very valuable. I like that Macy's isn't selling it's real estate or simply spinning off a REIT. I think more value can be created with partnerships and joint ventures. Who knows, perhaps Macy's can allow a developer to build a couple billion dollars worth of offices/condos above the NYC stores. I'd prefer that than to just have a lump sum cash infusion for selling the real estate.

Remember, if the real estate was worth $125 per share this summer, imagine what it will be in a few years once Macy's has repurchased another $5 billion worth of stock. I'm not predicting this, but in all reality, if the market continues to treat this stock like a pile of crap, the real estate "per share" could be $500 or more one day.

Macy's has real estate worth $125/share?  whut whut?  In a few years that could be $500/share?

In my local market, Macy's has some good property, but it also has worthless stuff.  I live less than a mile away from a Macy's that has 5 floors.  Two of the five floors are currently open for business.

Obviously, the NYC property is worth a bundle!  I have seen estimates that it might be worth $1 billion.  Might it be worth more in the future?  Under what circumstances could it be worth $2 billion? 

How much longer will real estate go up in NYC?

I have no doubt that M has valuable real estate that could be monetized.  I am somewhat skeptical that it is worth hundreds of dollars per share.

Most estimates I've seen on the Herald Square real estate value peg it around $3B. Starboard, in my opinion is a bit optimistic at $4B. They put $400MM in capex on that store alone from 2011-2014.

I'm not as bullish on the total value of their real estate and I'm also wary of their willingness to do a deal involving Herald Square.
Title: Re: M - Macy's
Post by: BG2008 on January 11, 2016, 08:37:28 AM



The risk in bailing so soon is that you might make an even bigger mistake by selling in the mid 30's. We get a warm winter causing retail comps to go from low single digit positives to low/mid single digit negatives and the market concludes all bricks and mortar is dead, sells down every stock tremendously, and crowns Amazon the default winner. Typical short term thinking.

If you take a longer term view I think you'll find that Macy's has above-average management, above average real estate, and a stock price in the 30's that is very cheap on a free cash flow basis. Let's assume for a second that they continue to use free cash flow to buyback shares and pay a nice dividend. Some real estate monetizations will also give some extra kick. Where could FCF per share be in 3-5 years, even if you assume flat comps? Should Macy's trade at 10-12x that number? Add in the dividend accumulation and I think we could look back at say, wow, Macy's was $35?

FD: long

I agree 1,000%.

I think the past few months have just been a bad time to own retail. You can blame it on the weather, or Amazon, or whatever... but the long term earnings power of Macy's is not impaired. Excluding weather, Macy's says the same store sales decline for this current quarter would have been 1%. That's not terrible. Will every summer be abnormally cool and every winter be abnormally warm going forward? I think not, and I'm looking forward to some better results in the future. In the meantime, whether they create a REIT or not, the real estate is still there and it's very valuable. I like that Macy's isn't selling it's real estate or simply spinning off a REIT. I think more value can be created with partnerships and joint ventures. Who knows, perhaps Macy's can allow a developer to build a couple billion dollars worth of offices/condos above the NYC stores. I'd prefer that than to just have a lump sum cash infusion for selling the real estate.

Remember, if the real estate was worth $125 per share this summer, imagine what it will be in a few years once Macy's has repurchased another $5 billion worth of stock. I'm not predicting this, but in all reality, if the market continues to treat this stock like a pile of crap, the real estate "per share" could be $500 or more one day.

Macy's has real estate worth $125/share?  whut whut?  In a few years that could be $500/share?

In my local market, Macy's has some good property, but it also has worthless stuff.  I live less than a mile away from a Macy's that has 5 floors.  Two of the five floors are currently open for business.

Obviously, the NYC property is worth a bundle!  I have seen estimates that it might be worth $1 billion.  Might it be worth more in the future?  Under what circumstances could it be worth $2 billion? 

How much longer will real estate go up in NYC?

I have no doubt that M has valuable real estate that could be monetized.  I am somewhat skeptical that it is worth hundreds of dollars per share.

Could you share the name of that location and city and state?  Thank you.  Some of the "easiest to monetize" locations are multi-story where the upper floors are vacant or underutilized.  If the neighborhood is valuable, then you can sell off the top floors.  If the neighborhood isn't, then it's likely not worth much. 
Title: Re: M - Macy's
Post by: BG2008 on January 11, 2016, 09:10:06 AM



The risk in bailing so soon is that you might make an even bigger mistake by selling in the mid 30's. We get a warm winter causing retail comps to go from low single digit positives to low/mid single digit negatives and the market concludes all bricks and mortar is dead, sells down every stock tremendously, and crowns Amazon the default winner. Typical short term thinking.

If you take a longer term view I think you'll find that Macy's has above-average management, above average real estate, and a stock price in the 30's that is very cheap on a free cash flow basis. Let's assume for a second that they continue to use free cash flow to buyback shares and pay a nice dividend. Some real estate monetizations will also give some extra kick. Where could FCF per share be in 3-5 years, even if you assume flat comps? Should Macy's trade at 10-12x that number? Add in the dividend accumulation and I think we could look back at say, wow, Macy's was $35?

FD: long

I agree 1,000%.

I think the past few months have just been a bad time to own retail. You can blame it on the weather, or Amazon, or whatever... but the long term earnings power of Macy's is not impaired. Excluding weather, Macy's says the same store sales decline for this current quarter would have been 1%. That's not terrible. Will every summer be abnormally cool and every winter be abnormally warm going forward? I think not, and I'm looking forward to some better results in the future. In the meantime, whether they create a REIT or not, the real estate is still there and it's very valuable. I like that Macy's isn't selling it's real estate or simply spinning off a REIT. I think more value can be created with partnerships and joint ventures. Who knows, perhaps Macy's can allow a developer to build a couple billion dollars worth of offices/condos above the NYC stores. I'd prefer that than to just have a lump sum cash infusion for selling the real estate.

Remember, if the real estate was worth $125 per share this summer, imagine what it will be in a few years once Macy's has repurchased another $5 billion worth of stock. I'm not predicting this, but in all reality, if the market continues to treat this stock like a pile of crap, the real estate "per share" could be $500 or more one day.

Macy's has real estate worth $125/share?  whut whut?  In a few years that could be $500/share?

In my local market, Macy's has some good property, but it also has worthless stuff.  I live less than a mile away from a Macy's that has 5 floors.  Two of the five floors are currently open for business.

Obviously, the NYC property is worth a bundle!  I have seen estimates that it might be worth $1 billion.  Might it be worth more in the future?  Under what circumstances could it be worth $2 billion? 

How much longer will real estate go up in NYC?

I have no doubt that M has valuable real estate that could be monetized.  I am somewhat skeptical that it is worth hundreds of dollars per share.

$1 billion is a ridiculous valuation for Herald Square.  The rule of thumb for Manhattan Real Estate years ago used to be $1,000 per square foot for residential.  Just plain vanilla residential, not your ultra high end with 360 views etc.  Office space was always worth less.  Post recession, that number is probably closer to $1,500 for residential.  Office is probably hovering around high hundreds, low $1,000 per square foot depending on location, built etc.  What's really valuable is street level retail space.  Asking rent in the Herald Square area is $891 per square foot.  Of course, there is only so much prime street level retail frontage.  At 2.2 million square foot spread over 9 stories, I would say that only 30% of the first floor qualifies for that $891 per square foot.   The rest deserves a flat $700 per square foot price to be converted into office/residential space.  Based on my math, you have 2.1mm sqft @ $700 which equates to $1.47bn plus the 73.33k sqft that nets you $891 per square foot.  The retail is worth at least $653mm at 10x rent based on my figure.  Come to think of it, this figure seems low.  Given Macy's Herald's square frontage on 6th Ave and on the entire 34th St.  7th Ave and 35th street frontage is not worth much.  I can get to a $2.12 billion valuation fairly easily.  This is likely a low end number for me to start out with.  If you get more detailed, then you can figure out its true value. 

https://www.rebny.com/content/rebny/en/newsroom/press-releases/2014/REBNY_Retail_Report_Rents_Rise_Shopping_Corridors.html

The great thing about Macy's real estate is that so much of its value is in the amount of foot traffic at its location.  If Macy's cease to work as a retailer one day, the millions of visitors that come to Herald Square is still worth billions of dollars.  There are always alternative use for its location other than Macy's (at least for the prime locations)   
Title: Re: M - Macy's
Post by: DTEJD1997 on January 11, 2016, 10:21:13 AM



The risk in bailing so soon is that you might make an even bigger mistake by selling in the mid 30's. We get a warm winter causing retail comps to go from low single digit positives to low/mid single digit negatives and the market concludes all bricks and mortar is dead, sells down every stock tremendously, and crowns Amazon the default winner. Typical short term thinking.

If you take a longer term view I think you'll find that Macy's has above-average management, above average real estate, and a stock price in the 30's that is very cheap on a free cash flow basis. Let's assume for a second that they continue to use free cash flow to buyback shares and pay a nice dividend. Some real estate monetizations will also give some extra kick. Where could FCF per share be in 3-5 years, even if you assume flat comps? Should Macy's trade at 10-12x that number? Add in the dividend accumulation and I think we could look back at say, wow, Macy's was $35?

FD: long

I agree 1,000%.

I think the past few months have just been a bad time to own retail. You can blame it on the weather, or Amazon, or whatever... but the long term earnings power of Macy's is not impaired. Excluding weather, Macy's says the same store sales decline for this current quarter would have been 1%. That's not terrible. Will every summer be abnormally cool and every winter be abnormally warm going forward? I think not, and I'm looking forward to some better results in the future. In the meantime, whether they create a REIT or not, the real estate is still there and it's very valuable. I like that Macy's isn't selling it's real estate or simply spinning off a REIT. I think more value can be created with partnerships and joint ventures. Who knows, perhaps Macy's can allow a developer to build a couple billion dollars worth of offices/condos above the NYC stores. I'd prefer that than to just have a lump sum cash infusion for selling the real estate.

Remember, if the real estate was worth $125 per share this summer, imagine what it will be in a few years once Macy's has repurchased another $5 billion worth of stock. I'm not predicting this, but in all reality, if the market continues to treat this stock like a pile of crap, the real estate "per share" could be $500 or more one day.

Macy's has real estate worth $125/share?  whut whut?  In a few years that could be $500/share?

In my local market, Macy's has some good property, but it also has worthless stuff.  I live less than a mile away from a Macy's that has 5 floors.  Two of the five floors are currently open for business.

Obviously, the NYC property is worth a bundle!  I have seen estimates that it might be worth $1 billion.  Might it be worth more in the future?  Under what circumstances could it be worth $2 billion? 

How much longer will real estate go up in NYC?

I have no doubt that M has valuable real estate that could be monetized.  I am somewhat skeptical that it is worth hundreds of dollars per share.

Could you share the name of that location and city and state?  Thank you.  Some of the "easiest to monetize" locations are multi-story where the upper floors are vacant or underutilized.  If the neighborhood is valuable, then you can sell off the top floors.  If the neighborhood isn't, then it's likely not worth much.

There are (were) at least two locations locally that aren't worth nothing for Macy's.  The locations would be Harper Woods & Southfield.  The Eastland mall (HarperWoods) has had some problems lately with people being shot & killed.  Please see:

http://detroit.cbslocal.com/2016/01/01/3-teens-charged-with-murder-of-17-year-old-outside-eastland-mall/

The mall has also had some problems with it's owners paying the mortgage note.  Please see:

http://michronicleonline.com/2015/07/21/eastland-center-mall-in-financial-woes/

The words that come to mind when describing the design of the Macy's store are "Fuhrer Bunker".  The store literally has NO WINDOWS and looks like a WWII pill box.  It is not inviting or conducive to shooting.

There is not going to be any rehabilitation of the real estate there...other than perhaps a wrecking ball & bulldozer.

There is a glut of real estate in MI, especially near the city of Detroit.  The city of Harper Woods is going to be in some real trouble as they spent many many millions of dollars rebuilding & upgrading their high school years ago.  Eastland Mall is their largest property taxpayer.  I doubt that the property taxes are being paid on it now.

So this is an example of an "F" Macy's location...
Title: Re: M - Macy's
Post by: rkbabang on January 11, 2016, 10:26:25 AM

The words that come to mind when describing the design of the Macy's store are "Fuhrer Bunker".  The store literally has NO WINDOWS and looks like a WWII pill box.  It is not inviting or conducive to shooting.


It appears to be conducive to shooting.
Title: Re: M - Macy's
Post by: DTEJD1997 on January 11, 2016, 10:27:31 AM

The words that come to mind when describing the design of the Macy's store are "Fuhrer Bunker".  The store literally has NO WINDOWS and looks like a WWII pill box.  It is not inviting or conducive to shooting.


It appears to be conducive to shooting.

Sorry about that...conducive to "SHOPPING" is what I meant to write....
Title: Re: M - Macy's
Post by: fareastwarriors on January 11, 2016, 04:35:25 PM
Is Your Macy’s Closing?

Macy’s has released the list of stores that will be closed

http://www.wsj.com/articles/is-your-macys-closing-1452116178 (http://www.wsj.com/articles/is-your-macys-closing-1452116178)
Title: Re: M - Macy's
Post by: Mungerish on January 12, 2016, 11:18:57 AM
I have looked at this closely for a few months now. Although I generally admire much of what Starboard has done and Jeff Smith in a general way..... There is definitely a sense of financial engineering going on when you consider that the original proposal was to spin out the real estate into a REIT structure. In that case shareholders would've been getting current income taxed in a preferential way from the distributions, direct ownership of the real estate and future appreciation thereof.
A JV structure does not seem to afford those same benefits of ownership.

StarBoard's latest proposal says that Macy's can still control the property, can still keep all their cash flow and the only real difference is that your swapping out debt at the operating company level for debt at the real estate JV level.
Hudson Bay Company is basically the model for this transaction based on what they did with Saks Fifth Avenue properties and some other real estate in Canada. They then did a follow-on transaction and sold a portion of their interest in the JV to outside institutional investors in June of this year. While they got a nice pop out of both of those announcements and transactions, the stock is basically right back down to where it was prior to the first transaction. This may be due to other acquisitions they're making and so forth….. But the reality is that it was more of a trade and investment.  Retail has been under attack for some time and the enemy is gaining ground.
Since I don't have any long term faith in the department store model as being a good business with any kind of competitive advantage…. I think I'm going to pass. Macy's may be around for a long time and I think many women would miss it if it closed tomorrow. That being said, I don't feel like owning something that is in decline and will require constant vigilance to see if the inevitable train is now coming through the other end of the tunnel so I can get out of the way in time.
The idea of monetizing the credit card operation and separating out the real estate from the retail business was very intriguing and a good one I believe. However, the most current proposal seems a bit weak based on the way they talk about executing the plan, and I'm sure that has to do with management not wanting to go along with the REIT before the window closed by the IRS for single-purpose transactions like this.
It's hard to pass because it looks like money lying in the street….. But much of the real estate is in malls and we have me way more malls we need. Once you monetize a few of the top floors of the iconic locations I don't see how any value is created by doing JVs….
Title: Re: M - Macy's
Post by: Grey512 on January 12, 2016, 01:19:19 PM
I have looked at this closely for a few months now. Although I generally admire much of what Starboard has done and Jeff Smith in a general way..... There is definitely a sense of financial engineering going on when you consider that the original proposal was to spin out the real estate into a REIT structure. In that case shareholders would've been getting current income taxed in a preferential way from the distributions, direct ownership of the real estate and future appreciation thereof.
A JV structure does not seem to afford those same benefits of ownership.

StarBoard's latest proposal says that Macy's can still control the property, can still keep all their cash flow and the only real difference is that your swapping out debt at the operating company level for debt at the real estate JV level.
Hudson Bay Company is basically the model for this transaction based on what they did with Saks Fifth Avenue properties and some other real estate in Canada. They then did a follow-on transaction and sold a portion of their interest in the JV to outside institutional investors in June of this year. While they got a nice pop out of both of those announcements and transactions, the stock is basically right back down to where it was prior to the first transaction. This may be due to other acquisitions they're making and so forth….. But the reality is that it was more of a trade and investment.  Retail has been under attack for some time and the enemy is gaining ground.
Since I don't have any long term faith in the department store model as being a good business with any kind of competitive advantage…. I think I'm going to pass. Macy's may be around for a long time and I think many women would miss it if it closed tomorrow. That being said, I don't feel like owning something that is in decline and will require constant vigilance to see if the inevitable train is now coming through the other end of the tunnel so I can get out of the way in time.
The idea of monetizing the credit card operation and separating out the real estate from the retail business was very intriguing and a good one I believe. However, the most current proposal seems a bit weak based on the way they talk about executing the plan, and I'm sure that has to do with management not wanting to go along with the REIT before the window closed by the IRS for single-purpose transactions like this.
It's hard to pass because it looks like money lying in the street….. But much of the real estate is in malls and we have me way more malls we need. Once you monetize a few of the top floors of the iconic locations I don't see how any value is created by doing JVs….
Thanks. I think this is a very balanced and lucid view.
Title: Re: M - Macy's
Post by: ccplz on January 12, 2016, 04:43:01 PM
Did anyone take a look at the Starboard presentation?

http://www.starboardvalue.com/publications/Starboard_Value_LP_Presentation_M_01.11.16.pdf

Where did they get their number for M's credit card earnings from?

(Slide 6, $776)
Title: Re: M - Macy's
Post by: BG2008 on January 12, 2016, 05:03:33 PM
Did anyone take a look at the Starboard presentation?

http://www.starboardvalue.com/publications/Starboard_Value_LP_Presentation_M_01.11.16.pdf

Where did they get their number for M's credit card earnings from?

(Slide 6, $776)

In the 10-K, it's is presented as a reduction of G&A expenses if I recall correctly.  This is actually a topic that I'm trying to dig into a bit deeper. 
Title: Re: M - Macy's
Post by: BG2008 on January 12, 2016, 10:13:50 PM
http://www.wsj.com/articles/big-lease-play-in-flushing-1452478260

Crown Acquisition bought the ground lease of Macy's in Flushing.  This is one of those prized assets.  The location is right outside of the subway station at the end of the 7 train.  Demographic trends is phenomenal as Flushing is a Mecca for young and older Chinese in the Tri-State area. 

Macy's leases this space.  However, this maybe one of these long duration leases which in essence makes it "ownership like"  If anyone else has detail, please do share. 
Title: Re: M - Macy's
Post by: Phaceliacapital on January 19, 2016, 07:47:11 AM
Let the games begin:

Macy’s Could Be Bought by PE Firm and REIT: Greenlight
2016-01-19 15:44:56.320 GMT


By Janet Freund
     (Bloomberg) -- In 4Q letter, Greenlight reports new position in Macy’s, at avg price of $45.69/shr.

  * "Wouldn’t surprise us if a private equity firm teamed up
    with a REIT to buy the company and unlock the value
    privately’’
  * Even still, shrs are cheap at 5x Ebitda, 7x equity FCF
  * M up as much as 5.6% to highest intraday since Nov. 30
  * NOTE: Jan. 11, Macy’s Worth $70/Shr in JV Transaction Plan,
    Starboard Says Link
Title: Re: M - Macy's
Post by: ccplz on March 20, 2016, 01:56:13 AM
This worked out poorly
Stock price is down. Starboard made little/no progress.
I sat on a decent paper loss and now sold to deploy capital elsewhere. This was not a massively expensive mistake, but it was a mistake, still. So let's deconstruct.

Lessons learned:

1. 'Financial engineering'-led activist theses are faulty. There's only so much value that can be created through conversions to REITs, etc etc.  When activists come and say that you have to move some assets around, change the signposts on some things and - voila - the stock price will double, then beware.

2. 10x earnings is not enough for a secularly challenged business, all else equal. Maybe it's the environment, maybe' its me being hasty, maybe it's the Jeff Smith magic, but I ended up lowering my standards and buying this anyway at 10x earnings. I probably subconsciously knew that 10x P/E is not cheap enough here but I ignored that.

3. The drop from $50 to $40 made me think 'there could be a bargain here'; it's a case of the 'reversion-to-the-mean fallacy'.

Overall - I get the feeling that activism in general is about to hit a significant speed-bump. 2010-2014 was probably a bubble for activism.

Looking back, I wonder if the mistake you made was in buying the stock or selling it at that time.

Maybe you should do your own homework next time so you would have the conviction to hold (or buy more) if the stock does go down, rather than just blindly follow others into a trade.
Title: Re: M - Macy's
Post by: BG2008 on July 19, 2016, 08:28:49 AM
Stock massively down today, and I started nibbling. I originally got interested in M after Starboard Value engaged with the company during the summer. Some details of Starboard's thesis (which sees value north of $100/sh) is here: http://video.cnbc.com/gallery/?video=3000401003

Current price is around 10x earnings; the multiple is more modest depending on your outlook for 2016. Reasonably shareholder-friendly management, with significant buy-backs and a shrinking share count.

Does anyone have a copy of the original presentation that Starboard used during this presentation? 

Does anyone have more information on Macy's credit card processing?
Title: Re: M - Macy's
Post by: xtreeq on July 19, 2016, 10:24:48 PM
Does anyone have a copy of the original presentation that Starboard used during this presentation? 

Does anyone have more information on Macy's credit card processing?

Did you mean this one?
http://www.starboardvalue.com/publications/Starboard_Value_LP_Presentation_M_01.11.16.pdf
http://www.starboardvalue.com/publications/Starboard_Value_LP_Letter_to_M_01.11.16.pdf
Title: Re: M - Macy's
Post by: BG2008 on July 20, 2016, 06:55:01 AM
Not these.  When Starboard presented at the delivering Alpha event, they used a presentation in the video.   
Title: Re: M - Macy's
Post by: BG2008 on November 14, 2016, 03:21:15 PM
Details on expected use for Macy's Men's store in Union Square in SF

http://www.sfchronicle.com/bayarea/article/Former-Macy-s-Men-s-Store-likely-to-host-mix-10609750.php#photo-11795071
Title: Re: M - Macy's
Post by: DTEJD1997 on February 03, 2017, 10:08:03 AM
Hey all:

Macy's has spiked up today on rumors of a takeover by Hudson's Bay of Canada.

Seems kind of unusual in that M has 5X the market value of Hudson's Bay?

Hudson's Bay would also have line up a ton of debt...and probably liquidate a bunch of the real estate.  Of course, Hudson's Bay is pretty good at this type of move...

Anybody have any thoughts?
Title: Re: M - Macy's
Post by: Gregmal on February 03, 2017, 02:53:22 PM
IMO and mine only this is the new SHLD and a great trading vehicle to keep an eye on for the next few years. The company clearly has some immensely valuable assets. Personally I don't see how a larger PE shop doesnt swallow this if it is truly up for grabs, but nonetheless like SHLD was for many years, this will likely provide the keen observer many opportunities to swing rather out-sized trades in short periods of time.
Title: Re: M - Macy's
Post by: cherzeca on February 04, 2017, 11:52:31 AM
IMO and mine only this is the new SHLD and a great trading vehicle to keep an eye on for the next few years. The company clearly has some immensely valuable assets. Personally I don't see how a larger PE shop doesnt swallow this if it is truly up for grabs, but nonetheless like SHLD was for many years, this will likely provide the keen observer many opportunities to swing rather out-sized trades in short periods of time.

this is a RE play for RE investors and a turnaround play for retail investors.  if a consortium of RE/retail can get involved, this could be interesting...or another toys r us
Title: Re: M - Macy's
Post by: Value^2 on February 04, 2017, 09:27:09 PM
Hey all:

Macy's has spiked up today on rumors of a takeover by Hudson's Bay of Canada.

Seems kind of unusual in that M has 5X the market value of Hudson's Bay?

Hudson's Bay would also have line up a ton of debt...and probably liquidate a bunch of the real estate.  Of course, Hudson's Bay is pretty good at this type of move...

Anybody have any thoughts?

Another Robert Campeau  type of deal in the making...
Title: Re: M - Macy's
Post by: lemsinge on March 29, 2017, 03:12:25 PM
Thinking it's pretty oversold at this point (most of the retail market is). Yield over 5%, strong ratios. I also find it interesting that two new board members (last two years) are specifically real estate experts. However, might be a more short term play for me.

Anyone else have an opinion on its current price?
Title: Re: M - Macy's
Post by: DTEJD1997 on March 29, 2017, 06:11:04 PM
Hey all:

I've been doing a little thinking about Macy's....

A). If you are buying as a real estate play, I would temper my expectations about that just a bit...In my area of the country, several Macy's have shut down.  The stores that closed have been around for a long, long time.  I think the one near me had president Kennedy attend it's opening in the early 60's.  It is a very dated building.  It kind of looks like it was from the "Fuhrer Bunker school of architecture".  The building is 4 stories high...It is a solid concrete box.  There is not a single window in it...Obviously the doors are made mainly of glass and you can see through those, and the area immediately around the entrance, but other than it, it literally a concrete box.  Looks like it is designed for an impending atomic attack.  Who would want to buy it?  How would it be re-purposed?  The land it sits on is not at all valuable.  The cost to tear it down would probably be greater than the value of the land.

B). Macy's is a pretty decent retailer I think.  If they can't make a go of these locations, who can?  The interwebs are making a lot of retail spaces obsolete.  Macy's is not the only retailer shutting stores and putting real estate up for sale.  A couple of other retailers are doing this.  That is going to put further pressure on the market.

C). Here in the Detroit area, houses are selling, and some people have money burning a hole in their pockets.  If Detroiters have money, the end is nigh, and the end of the cycle is approaching...

Of course, Detroit is a weird spot, and I'm sure they have valuable properties in other spots of the country...but don't expect their whole portfolio to work out.
Title: Re: M - Macy's
Post by: negative alpha on March 30, 2017, 12:09:28 PM
I think it's a distraction to think about Macy's as a real estate play, because it shifts the focus away from the operating business. Even if the real estate is successfully monetized, the resulting cash has to be invested back into the retail business where customers are showing a strong preference for the cheap and/or convenient. If mall real estate is your thing, why not just invest in a Seritage or CBL and forget about trying to make a department store work?
Title: Re: M - Macy's
Post by: DTEJD1997 on July 28, 2017, 05:04:44 PM
Hey all:

Anybody have any interest in Macy's?

I've been doing a little poking around....There was a writeup on VIC recently, showing some interesting possibilities:

A). Certainly a lot of M's property is worthless, or just one step away.  THIS IS A CERTAINTY.  In my area, "Eastland" and "Northland" had Macy's that shutdown.  There is a distinct possibility that the real estate on these locations is worthless, OR just one step away from it.  Harris Kupperman of "Adventures in Capitalism" has an interesting blog posting about this very thing.  There is a Macy's listed for sale outside of Cleveland at a FUNCTIONAL mall (probably "C" class?) at under $10/sq. ft. to PURCHASE IT!  It is attached to a mall that is still open.  You also get some amount of acreage that mainly consists of parking spaces.

If somebody had an idea & the capital, they could probably make a lot of money!  There is NO WAY that you could come any where close to building this property for what it is listed at.

I would strongly suspect that the empty locations in Michigan are similarly priced.

SO A GOOD AMOUNT OF THEIR PROPERTIES ARE WORTH NOTHING.

B). SOME PROPERTIES ARE WORTH A LOT.

The VIC article speculates that the Herald Square mall location is worth $4BB.  That the Downtown Macy's is worth $3BB and the remainder of their CLASS A malls ware worth $6.2BB.

If Herald Square and Downtown are truly worth $7BB, they could come close to paying off all their debt...OR it is close to the market cap of the company. 

If that is true, OR being close to true,  I would posit that it is IMPERATIVE that M sell those properties...Maybe get a provision that they can conduct retail operation through the Christmas selling season.

Then, over the upcoming year, just get rid of the closed locations.  They could pay off their debt, pay a huge dividend, or some combination.

If these values are correct, and I were a "activist" investor, I would tell management that their job is to sell those two properties, pay down debt, pay a "special" dividend, and retrench the business.  If they can't/won't do this...they can hit the road and find employment elsewhere....

Any thoughts?

Title: Re: M - Macy's
Post by: atbed on July 29, 2017, 08:10:06 AM
Hey all:

Anybody have any interest in Macy's?

I've been doing a little poking around....There was a writeup on VIC recently, showing some interesting possibilities:

A). Certainly a lot of M's property is worthless, or just one step away.  THIS IS A CERTAINTY.  In my area, "Eastland" and "Northland" had Macy's that shutdown.  There is a distinct possibility that the real estate on these locations is worthless, OR just one step away from it.  Harris Kupperman of "Adventures in Capitalism" has an interesting blog posting about this very thing.  There is a Macy's listed for sale outside of Cleveland at a FUNCTIONAL mall (probably "C" class?) at under $10/sq. ft. to PURCHASE IT!  It is attached to a mall that is still open.  You also get some amount of acreage that mainly consists of parking spaces.

If somebody had an idea & the capital, they could probably make a lot of money!  There is NO WAY that you could come any where close to building this property for what it is listed at.

I would strongly suspect that the empty locations in Michigan are similarly priced.

SO A GOOD AMOUNT OF THEIR PROPERTIES ARE WORTH NOTHING.

B). SOME PROPERTIES ARE WORTH A LOT.

The VIC article speculates that the Herald Square mall location is worth $4BB.  That the Downtown Macy's is worth $3BB and the remainder of their CLASS A malls ware worth $6.2BB.

If Herald Square and Downtown are truly worth $7BB, they could come close to paying off all their debt...OR it is close to the market cap of the company. 

If that is true, OR being close to true,  I would posit that it is IMPERATIVE that M sell those properties...Maybe get a provision that they can conduct retail operation through the Christmas selling season.

Then, over the upcoming year, just get rid of the closed locations.  They could pay off their debt, pay a huge dividend, or some combination.

If these values are correct, and I were a "activist" investor, I would tell management that their job is to sell those two properties, pay down debt, pay a "special" dividend, and retrench the business.  If they can't/won't do this...they can hit the road and find employment elsewhere....

Any thoughts?

I just worry that this is a value trap. There is a flood of space coming and it has been accelerating. Valuations are weakening. Sellers want to package the good and the bad together, but it makes more sense for buyers to cherry pick the best assets with the best demographics and competitive market dynamics.

You've pointed out a few examples that add to my worry. If they sell as is, I fear the property is worth way less than the estimates in Starboard's estimate. Their presentation was published before retail apocalypse became a buzz word. Much has happened since.

In NYC for example, I think Herald Square is worth 25% less than 4B. Cap rates are up since the presentation. There is also a significant amount of retail supply in that sub-market. In addition, the property is a landmarked property and I think that increases the difficulty to redevelop. Plus the property is overbuilt. Recent zoning changes above Herald Square also gives capital a bigger opportunity set.

Anyway, I think RE is worth low-teens in an as is basis. On a SOTP basis (including OpCo), EV definitely trades at a discount. But that was the case according to Starboard's presentation two years ago.

I get we want to buy a dollar for less, but where is that dollar heading at the present? (Both retail and property)

Does Macy's retail have to be turned for there to be value? There could be. If Macy's OpCo can't be turned, it will push a ton of supply onto the market that needs to be developed. Are there enough top golf's, Dave and Buster's, Floor & Decors, restaurants, Trader Joe's, and Kushners (condos) to absorb the space?
Title: Re: M - Macy's
Post by: DTEJD1997 on July 30, 2017, 09:06:26 PM
Hey all:

I spent the other night staying home studying real estate & the Macy's situation.

I am a LOT less enthusiastic about M than I was the other day.

It turns out that Starboard value sold their position in M.

I am somewhat skeptical about the value of the real estate...Maybe it is there, maybe it isn't...Another problem is that IF the value is there today, will it be there tomorrow?  There is no question that retail is going to be under pressure.

There also might be severe problems with their lower value locations.  These locations have absolutely NO value as retail locations.  I mean none at all...actually LESS than zero.  The only value they could possibly have is to be re-purposed to call centers or storage, or warehouse/interweb operations.  HOWEVER, a goodly number of these locations are hemmed in by agreements/deed restrictions with the mall operators. 

Then you've got to consider the absolute flagship locations.  TONS of value there, no doubt...but these might make up goodly amount of sales.  Even more importantly, there is probably a psychological attachment that management has to these locations.  They will not sell these locations under any reasonable circumstance.  THUS, management is there to simply run the business, not return value to shareholders or maximize capital.  They are there to sell shoes, purses, clothing, and so on AND to get PAID themselves.  You've got a huge agency problem here.

I am going to do some more research & scuttlebutt, but I'm leaning towards this being a value trap.  Value is there, but is likely going to shrink, and management is hostile towards shareholder interest.
Title: Re: M - Macy's
Post by: atbed on July 31, 2017, 06:10:32 AM
In my opinion, Macy's had under 1B in free cash flow last year. I believe the real estate is worth ~$12B only if there is a lease attached. If OpCo had to pay fair market rents, it would soak up a substantial amount of last year's FCF. So by my calculation, there's ~400M in FCF after accounting for taxes. Since there are a lot of retailers out there trading at 10%+ FCF yields, I chose a 13% FCF yield which I think reflects Macy's relative value. Overall, that gets me a ~$15B SOTP.

Obviously, there will be opportunities to develop their real estate. In addition, there is a chance they turn around retail. I just have a hard time seeing them turn things around. And if they are doing poorly when the economy is okay, I wonder how they will do when we actually get a recession.
Title: Re: M - Macy's
Post by: atbed on August 03, 2017, 06:57:20 AM
https://www.bloomberg.com/news/articles/2017-08-03/retail-shakeout-forces-mall-owners-to-rework-development-plans

Expectations are for another step-up in store closures in 2018, to ~13K.
Title: Re: M - Macy's
Post by: BG2008 on October 20, 2017, 01:40:00 PM
Oh the Irony

Amazon moves into the Macy's retail location that it sold to Starwood.  So there is literally an Amazon office above the Macy's store in Downtown Seattle.  Ouch
Title: Re: M - Macy's
Post by: DTEJD1997 on August 15, 2018, 10:36:53 AM
Hey all:

Macy's down 14% today on a small earnings beat?

Sure, the stock has done very well lately, but this seems to be a bit of an over reaction?

Earnings should be about $4/share for the year.

Any thoughts?
Title: Re: M - Macy's
Post by: FCharlie on December 12, 2018, 01:29:06 PM
Will someone please help me understand Macy's debt repurchases?

The company has been tendering for their debt for years. They have also been buying in the open market. They continue to choose high coupon debt that trades above par instead of buying longer dated debt that trades below par.

Here's a press release for reference:

http://investors.macysinc.com/phoenix.zhtml?c=84477&p=irol-newsArticle&ID=2380456

For example. Macy's is offering 110 cents on the dollar for 6.65% bonds that mature in 2024.  Meanwhile, they have 4.3% bonds that mature in 2043 that trade for 73 cents on the dollar as well as 5.125% bonds that mature in 2042 that trade for 82.7 cents on the dollar.

Obviously the ones they are buying have a higher coupon, but they end up taking a loss on the repurchase, which lowers book value. Alternatively, if they chose to buy the 2042 & 2043 bonds, they would be able to buy significantly more of them simply because of their lower price. The yields are similar, and they would eliminate more of their future obligation with the same amount of dollars, which would increase their book value.

There has to be a reason why they continue to do this. They did a similar tender a year ago as well. I just can't for the life of me understand why they would choose to pay $1,100 to eliminate $1,000 of debt when they can pay $730 to eliminate $1,000 of debt.

Title: Re: M - Macy's
Post by: bizaro86 on December 12, 2018, 01:44:38 PM
Will someone please help me understand Macy's debt repurchases?

The company has been tendering for their debt for years. They have also been buying in the open market. They continue to choose high coupon debt that trades above par instead of buying longer dated debt that trades below par.

Here's a press release for reference:

http://investors.macysinc.com/phoenix.zhtml?c=84477&p=irol-newsArticle&ID=2380456

For example. Macy's is offering 110 cents on the dollar for 6.65% bonds that mature in 2024.  Meanwhile, they have 4.3% bonds that mature in 2043 that trade for 73 cents on the dollar as well as 5.125% bonds that mature in 2042 that trade for 82.7 cents on the dollar.

Obviously the ones they are buying have a higher coupon, but they end up taking a loss on the repurchase, which lowers book value. Alternatively, if they chose to buy the 2042 & 2043 bonds, they would be able to buy significantly more of them simply because of their lower price. The yields are similar, and they would eliminate more of their future obligation with the same amount of dollars, which would increase their book value.

There has to be a reason why they continue to do this. They did a similar tender a year ago as well. I just can't for the life of me understand why they would choose to pay $1,100 to eliminate $1,000 of debt when they can pay $730 to eliminate $1,000 of debt.

Could there be tax motivations?
Title: Re: M - Macy's
Post by: Spekulatius on December 12, 2018, 06:04:22 PM
Will someone please help me understand Macy's debt repurchases?

The company has been tendering for their debt for years. They have also been buying in the open market. They continue to choose high coupon debt that trades above par instead of buying longer dated debt that trades below par.

Here's a press release for reference:

http://investors.macysinc.com/phoenix.zhtml?c=84477&p=irol-newsArticle&ID=2380456

For example. Macy's is offering 110 cents on the dollar for 6.65% bonds that mature in 2024.  Meanwhile, they have 4.3% bonds that mature in 2043 that trade for 73 cents on the dollar as well as 5.125% bonds that mature in 2042 that trade for 82.7 cents on the dollar.

Obviously the ones they are buying have a higher coupon, but they end up taking a loss on the repurchase, which lowers book value. Alternatively, if they chose to buy the 2042 & 2043 bonds, they would be able to buy significantly more of them simply because of their lower price. The yields are similar, and they would eliminate more of their future obligation with the same amount of dollars, which would increase their book value.

There has to be a reason why they continue to do this. They did a similar tender a year ago as well. I just can't for the life of me understand why they would choose to pay $1,100 to eliminate $1,000 of debt when they can pay $730 to eliminate $1,000 of debt.

Could there be tax motivations?

I am thinking the optics are better if you get rid of high coupon debt. The loss on extinguishing the debt is a one off and tend to get ignored and then you have years of saving high coupon payments, which make subsequent earnings look better. There is also a tax advantage of taking a loss upfront.
Title: Re: M - Macy's
Post by: Mephistopheles on August 14, 2019, 03:48:59 PM
Anyone looking at this? Bought some around $20-21 and then as it dropped this week. Earnings imo weren't too bad today, annual guidance lowered by $.20, gross margin guidance down 160bps or so. Yet the stock got annihilated.

Today, the equity is worth about $5 billion and net debt is $4 billion. The flagship properties (Herald Sq, Union Sq, State St) I think can easily fetch like $4 billion or so. That leaves like $5 billion for the rest of the properties and the business. To me this looks like it's selling for liquidation value...yet it is FCF positive.
Title: Re: M - Macy's
Post by: Parsad on August 14, 2019, 04:24:45 PM
Anyone looking at this? Bought some around $20-21 and then as it dropped this week. Earnings imo weren't too bad today, annual guidance lowered by $.20, gross margin guidance down 160bps or so. Yet the stock got annihilated.

Today, the equity is worth about $5 billion and net debt is $4 billion. The flagship properties (Herald Sq, Union Sq, State St) I think can easily fetch like $4 billion or so. That leaves like $5 billion for the rest of the properties and the business. To me this looks like it's selling for liquidation value...yet it is FCF positive.

Herald Square alone is $4B...they can also build an 80 story tower above Herald Square if they wanted. 

We bought a ton of Macy's around $19 nearly two years ago, saw it go back up to $39, but we were waiting for long-term gains to kick in before selling.  It started dropping about 2 months before long-term gains would have kicked in, and has kept falling till today.

When we bought it just under two years ago it had $6B in net debt, $1.4M CF, P/E of 6, 7.5% dividend yield, real estate worth about $12-15B conservatively.

Today, is has $4B in net debt, $1.3M CF, P/E of 5, 9.2% dividend yield, real estate still worth $12-15B conservatively.

All you have to do is a Sears/Seritage split here, and you unlock $30-40 per share in real estate value with the retail business trading at another $10-12.  Because they would be paying close to market rent, the retail business would trade at only 4-5 times CF after increased rent expense.  But you free up the  extremely valuable real estate which will go up in value, and let the retail business fight or die. 

Cheers!
Title: Re: M - Macy's
Post by: Mephistopheles on August 14, 2019, 04:51:49 PM
Anyone looking at this? Bought some around $20-21 and then as it dropped this week. Earnings imo weren't too bad today, annual guidance lowered by $.20, gross margin guidance down 160bps or so. Yet the stock got annihilated.

Today, the equity is worth about $5 billion and net debt is $4 billion. The flagship properties (Herald Sq, Union Sq, State St) I think can easily fetch like $4 billion or so. That leaves like $5 billion for the rest of the properties and the business. To me this looks like it's selling for liquidation value...yet it is FCF positive.

Herald Square alone is $4B...they can also build an 80 story tower above Herald Square if they wanted. 

We bought a ton of Macy's around $19 nearly two years ago, saw it go back up to $39, but we were waiting for long-term gains to kick in before selling.  It started dropping about 2 months before long-term gains would have kicked in, and has kept falling till today.

When we bought it just under two years ago it had $6B in net debt, $1.4M CF, P/E of 6, 7.5% dividend yield, real estate worth about $12-15B conservatively.

Today, is has $4B in net debt, $1.3M CF, P/E of 5, 9.2% dividend yield, real estate still worth $12-15B conservatively.

All you have to do is a Sears/Seritage split here, and you unlock $30-40 per share in real estate value with the retail business trading at another $10-12.  Because they would be paying close to market rent, the retail business would trade at only 4-5 times CF after increased rent expense.  But you free up the  extremely valuable real estate which will go up in value, and let the retail business fight or die. 

Cheers!

Yea, agreed with everything. I'm also thinking that a sale lease back is the best thing for the company. How do you estimate the RE value at $12-15 b? The only base I have for valuation is Starboard's presentation from a few years ago which estimates it at $21 billion, which I agree is not nearly that high now. I try to be conservative so I just count the trophy properties for now. I feel a lot of the B and C properties are worthless...

Re Herald square, $4 billion might be a bit high. I'm using Lord and Taylors WeWork transaction as a comp which was $850 million for 676,000 square feet. If we use the same ratio for Herald Square's 2.1 million feet, I get $2.7 billion. Yes they can build a tower over the site but that would take quite a bit of capex too and not sure what it's really worth.
Title: Re: M - Macy's
Post by: BG2008 on August 14, 2019, 05:08:10 PM
Have you guys been to New York lately?  They can't give away retail space on Madison Ave away and it used to command $1,000 a square foot in rent. 
Title: Re: M - Macy's
Post by: Spekulatius on August 14, 2019, 05:17:59 PM
If you like real estate, just buy real estate. you can buy it at 40% discount to NAV - MAC, TCO, VNO, SLG....no need to mess around with retail.
Title: Re: M - Macy's
Post by: Gregmal on August 14, 2019, 05:24:11 PM
If you like real estate, just buy real estate. you can buy it at 40% discount to NAV - MAC, TCO, VNO, SLG....no need to mess around with retail.

Which is funny, because O, NNN, ADC, STOR, etc; almost entirely consisting of retail, trade at substantial PREMIUMS to NAV...Weird world we live in.

EDIT: I'd also point out the disparity between traditional office, which is getting a garbage valuation as Spek mentioned, and then Wework or the like...crazy.
Title: Re: M - Macy's
Post by: Mephistopheles on August 14, 2019, 05:31:14 PM
If you like real estate, just buy real estate. you can buy it at 40% discount to NAV - MAC, TCO, VNO, SLG....no need to mess around with retail.

I've looked at both MAC and TCO, own tiny amounts. I don't like the high debt load. In contrast, Macy's management has done a great job consistently reducing debt, and they've got quite a ways to go.
Title: Re: M - Macy's
Post by: BG2008 on August 14, 2019, 05:56:34 PM
Just some thought on the retail/real estate combo.  When you own a retailer that has a lot of real estate, you are simultaneously a landlord to ONE SINGLE tenant and the tenant itself. So you're a landlord with extremely concentrated single tenant risk.  There are no publicly traded REIT that have close to that level of concentration.  As your operation deterioates, your tenant credit risk also spikes.  I own enough warehouses to be aware of what Amazon and other e-commerce folks are doing to increase the density of their distribution network.  I would bet that the competitor's moat is increasing every  day.  Yet Macy's can't afford to invest in Omnichannel capabilities.  There is a bit of a death spiral involved in that as people go to malls/retail stores less, the cashflow drops, the company engages in cost cutting which means that customer service deteriorates.  It becomes a vicious cycle at the same when your competitors are widening their moat with 2 day delivery going to 1 day and further going to 2 hours.   Good luck gentleman, I hope you don't need it.  But you likely will.   
Title: Re: M - Macy's
Post by: SHDL on August 14, 2019, 06:50:48 PM
Also the new tariffs are obviously a big deal for these guys (and similar retailers) given their thin margins and apparent lack of pricing power.  Note that their potential impact is not reflected in the revised guidance that they just put out.
Title: Re: M - Macy's
Post by: TwoCitiesCapital on August 14, 2019, 07:38:57 PM
Will someone please help me understand Macy's debt repurchases?

The company has been tendering for their debt for years. They have also been buying in the open market. They continue to choose high coupon debt that trades above par instead of buying longer dated debt that trades below par.

Here's a press release for reference:

http://investors.macysinc.com/phoenix.zhtml?c=84477&p=irol-newsArticle&ID=2380456

For example. Macy's is offering 110 cents on the dollar for 6.65% bonds that mature in 2024.  Meanwhile, they have 4.3% bonds that mature in 2043 that trade for 73 cents on the dollar as well as 5.125% bonds that mature in 2042 that trade for 82.7 cents on the dollar.

Obviously the ones they are buying have a higher coupon, but they end up taking a loss on the repurchase, which lowers book value. Alternatively, if they chose to buy the 2042 & 2043 bonds, they would be able to buy significantly more of them simply because of their lower price. The yields are similar, and they would eliminate more of their future obligation with the same amount of dollars, which would increase their book value.

There has to be a reason why they continue to do this. They did a similar tender a year ago as well. I just can't for the life of me understand why they would choose to pay $1,100 to eliminate $1,000 of debt when they can pay $730 to eliminate $1,000 of debt.

If they're concerned about the mid-term outlook, this would be a way to get rid of near-term debt that would need to be rolled at the wrong time.

It's not an opportunistic reduction of debt at favorable prices. It's a disciplined approach to pushing out and reducing near term maturities and increasing cash flows.

Also, honestly, the IRR of buying 20+ year debt at a 20% discount isn't that great. They'd be better off buying shares to reducie dividend payments.
Title: Re: M - Macy's
Post by: Spekulatius on August 15, 2019, 04:09:52 AM
In wonder what the profit from their own line business looks like. They have no edge there.

They have a strategy to invest in the best 50 stores and maybe a 100 more - but they have a total 680 stores. What will happen to them? Also, doesn’t the strategy to invest in the best 50/150 stores encumber the best real estate too? The real estate in the other stores may not be worth much, after expenses to close them are accounted for.

Maybe it is now the time to make a bold move. Keep Bloomingdales and a few flagship stores, close the rest. It’s not an easy decision to make for management. If they make a big mistake they are toast. FWIW, I do agree that paying down the near term maturities is the right move. Cutting th dividend may be another one and eventually will happen, imo.
Title: Re: M - Macy's
Post by: Mephistopheles on August 15, 2019, 10:07:01 AM

 Also, doesn’t the strategy to invest in the best 50/150 stores encumber the best real estate too?

Well they can just do a sale leaseback. Leave the retail side to fend on it's own. As long as the top 50/150 stores pay market rent all is good.

Seritage did a good job in unlocking value and SHLD was infinitely worse than Macy's as a retailer. A seritage like transaction done today as a spinoff would unlock tremendous value. The top 150 stores are performing well mid single digit comps I think, so I don't see those properties selling for much less than current EV. Even if you assume everything else is worth zero.  Meanwhile they continue to knock down debt year after year making it even more compelling
Title: Re: M - Macy's
Post by: Foreign Tuffett on August 15, 2019, 11:10:14 AM

 Also, doesn’t the strategy to invest in the best 50/150 stores encumber the best real estate too?

Well they can just do a sale leaseback. Leave the retail side to fend on it's own. As long as the top 50/150 stores pay market rent all is good.

Seritage did a good job in unlocking value and SHLD was infinitely worse than Macy's as a retailer. A seritage like transaction done today as a spinoff would unlock tremendous value. The top 150 stores are performing well mid single digit comps I think, so I don't see those properties selling for much less than current EV. Even if you assume everything else is worth zero.  Meanwhile they continue to knock down debt year after year making it even more compelling

How are you defining "did a good job unlocking value" ?

I think a SHLD holder who participated in the rights offering and continued to hold SHLD and SRG is worse off than if they had sold SHLD after rights offering was announced.
Title: Re: M - Macy's
Post by: Mephistopheles on August 15, 2019, 11:21:09 AM

 Also, doesn’t the strategy to invest in the best 50/150 stores encumber the best real estate too?

Well they can just do a sale leaseback. Leave the retail side to fend on it's own. As long as the top 50/150 stores pay market rent all is good.

Seritage did a good job in unlocking value and SHLD was infinitely worse than Macy's as a retailer. A seritage like transaction done today as a spinoff would unlock tremendous value. The top 150 stores are performing well mid single digit comps I think, so I don't see those properties selling for much less than current EV. Even if you assume everything else is worth zero.  Meanwhile they continue to knock down debt year after year making it even more compelling

How are you defining "did a good job unlocking value" ?

I think a SHLD holder who participated in the rights offering and continued to hold SHLD and SRG is worse off than if they had sold SHLD after rights offering was announced.

Meaning they could have sold the shld portion and kept srg. I'm happy with Macy's but if the retail and RE were to separate, I think it would be valued higher than current price.
Title: Re: M - Macy's
Post by: Mephistopheles on August 27, 2019, 04:49:46 PM
Just some thought on the retail/real estate combo.  When you own a retailer that has a lot of real estate, you are simultaneously a landlord to ONE SINGLE tenant and the tenant itself. So you're a landlord with extremely concentrated single tenant risk.  There are no publicly traded REIT that have close to that level of concentration.  As your operation deterioates, your tenant credit risk also spikes.  I own enough warehouses to be aware of what Amazon and other e-commerce folks are doing to increase the density of their distribution network.  I would bet that the competitor's moat is increasing every  day.  Yet Macy's can't afford to invest in Omnichannel capabilities.  There is a bit of a death spiral involved in that as people go to malls/retail stores less, the cashflow drops, the company engages in cost cutting which means that customer service deteriorates.  It becomes a vicious cycle at the same when your competitors are widening their moat with 2 day delivery going to 1 day and further going to 2 hours.   Good luck gentleman, I hope you don't need it.  But you likely will.   

I highly respect your opinions on this message board, so it isn't easy for me to debate this issue with you.

I'm glad you mentioned warehouses. Macy's happens to own 16.5 million square feet of distribution/warehouse space. What is your take on its valuation?

I'm looking at this recent Blackstone acquistion of 179 million sq feet of warehouse space for $18.7 billion, which comes out to over $100/sqft. Using this same multiple, the Macy's space is worth $1.6 billion.

I briefly looked at M's real estate holdings, which totals 71.7 million square feet of owned space outright. This doesn't include the 21.5 million square feet of ground leased property. Excluding Herald Square and SF, it is 69.2 million feet of space. How much is this worth? I simply took Seritage's EV of $3.5 billion divided by its RE space of 32.7 million sq feet for which I get an EV of $107/sq ft. Apply this to M's 69.2 million sq feet and we get $7.4 billion RE value.

Add Herald Square at $1,250/sqft is $2.7 billion and Union Square at $1,000/sqft is $335 million, together for $3 Billion additional RE value.

So I add the warehouses of $1.6 + Retail RE $7.4 + Herald/Union Sq of $3 billion and I get a $12 billion value for its real estate alone, not including ground lease value.

It also excludes retail, credit card operations as well as Blue Mercury (which I think is a gem).

The stock today closed for an EV of $8.5 billion.

Those are my thoughts. Brick and mortar is apparently dead but Seritage keeps chugging along, this past quarter they signed another 700k sqft for $20/ft.
Title: Re: M - Macy's
Post by: BG2008 on September 02, 2019, 07:01:50 AM
Just some thought on the retail/real estate combo.  When you own a retailer that has a lot of real estate, you are simultaneously a landlord to ONE SINGLE tenant and the tenant itself. So you're a landlord with extremely concentrated single tenant risk.  There are no publicly traded REIT that have close to that level of concentration.  As your operation deterioates, your tenant credit risk also spikes.  I own enough warehouses to be aware of what Amazon and other e-commerce folks are doing to increase the density of their distribution network.  I would bet that the competitor's moat is increasing every  day.  Yet Macy's can't afford to invest in Omnichannel capabilities.  There is a bit of a death spiral involved in that as people go to malls/retail stores less, the cashflow drops, the company engages in cost cutting which means that customer service deteriorates.  It becomes a vicious cycle at the same when your competitors are widening their moat with 2 day delivery going to 1 day and further going to 2 hours.   Good luck gentleman, I hope you don't need it.  But you likely will.   

I highly respect your opinions on this message board, so it isn't easy for me to debate this issue with you.

I'm glad you mentioned warehouses. Macy's happens to own 16.5 million square feet of distribution/warehouse space. What is your take on its valuation?

I'm looking at this recent Blackstone acquistion of 179 million sq feet of warehouse space for $18.7 billion, which comes out to over $100/sqft. Using this same multiple, the Macy's space is worth $1.6 billion.

I briefly looked at M's real estate holdings, which totals 71.7 million square feet of owned space outright. This doesn't include the 21.5 million square feet of ground leased property. Excluding Herald Square and SF, it is 69.2 million feet of space. How much is this worth? I simply took Seritage's EV of $3.5 billion divided by its RE space of 32.7 million sq feet for which I get an EV of $107/sq ft. Apply this to M's 69.2 million sq feet and we get $7.4 billion RE value.

Add Herald Square at $1,250/sqft is $2.7 billion and Union Square at $1,000/sqft is $335 million, together for $3 Billion additional RE value.

So I add the warehouses of $1.6 + Retail RE $7.4 + Herald/Union Sq of $3 billion and I get a $12 billion value for its real estate alone, not including ground lease value.

It also excludes retail, credit card operations as well as Blue Mercury (which I think is a gem).

The stock today closed for an EV of $8.5 billion.

Those are my thoughts. Brick and mortar is apparently dead but Seritage keeps chugging along, this past quarter they signed another 700k sqft for $20/ft.

I used to look at Macy's and some of the other OpCo/PropCo the same way.  I was wrong in the past and I'll do my best to explain why I think the valuation metric you lay out is flawed.  It took me some pain and real capital loss before I realize my mistake.  The problem with your approach is that you are assuming the following:

1) The real estate is free and clear and can be readily sold or sale/leaseback to a buyer as of today
2) That the OpCo and PropCo can exist independently and somehow if you sold Herald Square, Macy's can somehow retain its retail operation and a RE buyer can somehow magically develop the Herald Square building.  It doesn't work like that.   Macy's will either lose the $200mm of EBITDAR (Rumored back in 2016) associated with the Herald Square RE or the buyer will have to assume the Macy's tenant risk. 
3) Now apply these dynamics to hundreds of locations and what you have is an issue that I call "tug boats vs tankers" 

What I used to fail to see is that these OpCo Propco issues are a mix of "melting ices" and "real estate development that demands 15-20% IRR"  If Macy's was Kohl's or a Dollar General and growing SSS, it is very easy.  You can simply do entirely sale leasebacks.  The drag on proceeds will simply be the capital gains taxes.  Because Macy's OpCo is a melting ice cube, there is no natural buyer for their properties with Macy's as a tenant.   Naturally, you need an operation like a Seritage to act as a "re-leasing" agent.  So Macy's is a tanker going in one direction with no expertise in real estate disposition or development.   Seritage and Howard Hughes is a tanker going in an opposite direction where they have a pipeline and culture and a process of executing on real estate development.  Talk to Seritage or HHC and see what they have laid out 5-10 years and you will see that there is a focus and a team of talented staff who is analyzing each property and trying to figure out a way to develop those assets.  So you're taking a blanket comparison and saying "Seritage owns this many sqft and Macy's owns this many sqft and they are apples to apples."  It is really an apple to orange comparison.  RE developers need a 15-20% levered IRR on their projects.  So you really should think that to unwind and re-position the RE, you need 15% IRR to dislodge the RE, find a buyer, and reposition the property.   I doubt that Macy's has a team like Seritgage and HHC.  Watching HHC develop their pipeline is like watching paint dry, albeit a profitable process.  But it is still an incredibly slow pace relative to other form of investing.  They are some of the most competent developers that I have come across and yet the process of getting zoning approval, putting the shovel in the ground, and putting up a building takes forever.  Look at how long the Seaport project in NYC has taken. 

Another way of looking at this is let's say you want to own a bunch of Macy's warehouse because you believe in the long term need for good warehouses.  So you can either buy 16 million sqft leased to 100 tenants with no single tenant taking up more than 3% of your footprint.  Or you can buy a 16 million sqft portfolio entirely leased to Macy's.  You can't take that Blackstone transaction and say that the Macy's portfolio will be worth exactly the same.  Warehouses today require a certain clear height, number of truck bays, etc.  I have no idea what Macy's warehouses look like.  But I doubt that they are considered Class A.  I think $50-60/sqft is likely that right price for Macy's portfolio which translate into a $1 billion value.  This is probably the only asset that could potentially appreciate in the long run. 

Now let's go back to talking about the retail assets. 
Title: Re: M - Macy's
Post by: BG2008 on September 02, 2019, 07:28:57 AM
Retail real estate is a tough sell.  That's not news.  One of the risk that people don't mention is people's perception after a recession.  I watched in amazement in how suburban office lost its value after the great recession.  Powerful trends emerge after an economic event.  It became very clear that urban multi-family are highly desirable and suburban office buildings are very undesirable.  The guys who own suburban offices often lost their buildings due to a vicious cycle of declining rent and lack of capital to fund TI and LC.  It is already looking tough for retail real estate.  I do see some green shoots in certain online only concepts getting into brick and mortar locations because ultimately they acknowledge that you do need physical locations for customers to try out products, Warby Parker, Mattress retailing, etc.  Nonetheless, I track what Amazon is doing and everyday, Amazon's moat keeps getting wider.  So we go through a recession and it is 2-3 years from now and Amazon had another 2-3 years to get further ahead.  I can see what happened to Sears happen to Macy's where lower sales results in the need to cut staff and inventory.  When a customer shows up and wants to buy, there is no one to help them transact.  This is not a sales drops by 1% and EBITDA drops by 1.5% business.  This is a sales drop by 1% and EBITDA drops by 5% type of business.  It can spiral out of control very quickly.  My wife recently ordered an espresso machine from Macy's.  We waited for 3 weeks and then finally got a notice that the product can't be fulfilled.  I wind up getting the product from Amazon and got our machine within 2 days and we are making delicious Latte at home. 

Look at SL Green and where they are trading at.  Now tell me who will buy Herald Square?  Let's say someone does decide to buy Herald Square.  Does Macy's move out?  Well that's $200mm of EBITDAR a year.  There is no retailer in NYC who is killing it.  There are spaces sitting empty on Madison Ave where they used to charge $900/sqft of rent.  It is scary out there and for good reasons.  This isn't CNBC proclaiming the "end of equities"  This is real and structural.

Is there a price. Probably.  But I am trying to evolve to buying higher quality companies.  It's not easy and you don't get to buy stuff at mid single digits FCF.  But I like owning stuff that will organically grow at low to mid single digits for the next 10 years.   If I am going to own businesses that will shrink over time, I want the shrink pattern to be 1% sales decline that result in 1-2% EBITDA decreases.  This is in my too hard pile.  Why lose sleep over Macy's when I can own Griffin Industrial Realty at $35/share with the NAV at $70 and that NAV is growing.  The portfolio is free and clear and could be taken over at a large premium on any given day.  I don't want to sweat out the survival of Macy's when I can join the evil empire that is Amazon and enjoy some tail wind at 50% of NAV and compounding at 12-13% a year before assigning any value to the narrowing of price/value gap.       
Title: Re: M - Macy's
Post by: BG2008 on September 02, 2019, 07:55:36 AM
Buffet owned a department store in Baltimore that was pretty much a net-net and owned its real estate.  He got out of it without making a profit.  I should have paid more attention to that fact back when I was involved with Macy's. 
Title: Re: M - Macy's
Post by: Mephistopheles on September 23, 2019, 10:01:46 AM




I used to look at Macy's and some of the other OpCo/PropCo the same way.  I was wrong in the past and I'll do my best to explain why I think the valuation metric you lay out is flawed.  It took me some pain and real capital loss before I realize my mistake.  The problem with your approach is that you are assuming the following:

1) The real estate is free and clear and can be readily sold or sale/leaseback to a buyer as of today
2) That the OpCo and PropCo can exist independently and somehow if you sold Herald Square, Macy's can somehow retain its retail operation and a RE buyer can somehow magically develop the Herald Square building.  It doesn't work like that.   Macy's will either lose the $200mm of EBITDAR (Rumored back in 2016) associated with the Herald Square RE or the buyer will have to assume the Macy's tenant risk. 
3) Now apply these dynamics to hundreds of locations and what you have is an issue that I call "tug boats vs tankers" 

What I used to fail to see is that these OpCo Propco issues are a mix of "melting ices" and "real estate development that demands 15-20% IRR"  If Macy's was Kohl's or a Dollar General and growing SSS, it is very easy.  You can simply do entirely sale leasebacks.  The drag on proceeds will simply be the capital gains taxes.  Because Macy's OpCo is a melting ice cube, there is no natural buyer for their properties with Macy's as a tenant.   Naturally, you need an operation like a Seritage to act as a "re-leasing" agent.  So Macy's is a tanker going in one direction with no expertise in real estate disposition or development.   Seritage and Howard Hughes is a tanker going in an opposite direction where they have a pipeline and culture and a process of executing on real estate development.  Talk to Seritage or HHC and see what they have laid out 5-10 years and you will see that there is a focus and a team of talented staff who is analyzing each property and trying to figure out a way to develop those assets.  So you're taking a blanket comparison and saying "Seritage owns this many sqft and Macy's owns this many sqft and they are apples to apples."  It is really an apple to orange comparison.  RE developers need a 15-20% levered IRR on their projects.  So you really should think that to unwind and re-position the RE, you need 15% IRR to dislodge the RE, find a buyer, and reposition the property.   I doubt that Macy's has a team like Seritgage and HHC.  Watching HHC develop their pipeline is like watching paint dry, albeit a profitable process.  But it is still an incredibly slow pace relative to other form of investing.  They are some of the most competent developers that I have come across and yet the process of getting zoning approval, putting the shovel in the ground, and putting up a building takes forever.  Look at how long the Seaport project in NYC has taken. 

Another way of looking at this is let's say you want to own a bunch of Macy's warehouse because you believe in the long term need for good warehouses.  So you can either buy 16 million sqft leased to 100 tenants with no single tenant taking up more than 3% of your footprint.  Or you can buy a 16 million sqft portfolio entirely leased to Macy's.  You can't take that Blackstone transaction and say that the Macy's portfolio will be worth exactly the same.  Warehouses today require a certain clear height, number of truck bays, etc.  I have no idea what Macy's warehouses look like.  But I doubt that they are considered Class A.  I think $50-60/sqft is likely that right price for Macy's portfolio which translate into a $1 billion value.  This is probably the only asset that could potentially appreciate in the long run. 

Now let's go back to talking about the retail assets. 

Hi BG2008, thanks for your detailed response. Regarding the SRG comparison. Yes, the culture at SRG is exclusively focused on RE development. But the fact is that Macy's does have an active partnership with Brookfield Properties as well as a SVP focused on the real estate, and a RE guy on the board. They are selling assets and densifying the space. On the other hand SRG has nearly 50% of unleased space as of last quarter.

They don't need to sell Herald square, I hope they don't. I think it's important to differentiate between the good stores and bad stores. 50% of brick and mortar sales occur at 150 locations. These are the locations where the company is focusing resources. I can't find data on the comps at these locations, but their online business is growing at double digits. They need to aggressively focus on downsizing the bottom 500 or so locations. Maybe reduce square footage to support the internet business? Current store count is 101 less than it was at the beginning of 2016, from 737 to 636.

How much of a threat is Amazon to the top 150 locations and the online/mobile business? Hard to say now but they are performing quite well. Maybe going forward they won't perform. But it is up to management at that point to act responsibly. They can start burning a billion dollars year after year like SHLD and destroy all of that value or they can do the right thing. I do like that they are paying down debt every single quarter. I wouldn't mind a dividend cut to 0 to be honest, buy back more debt and then some shares.

Let's see what happens. If I'm wrong I'll be the first to admit it.
Title: Re: M - Macy's
Post by: BG2008 on September 23, 2019, 01:29:35 PM




I used to look at Macy's and some of the other OpCo/PropCo the same way.  I was wrong in the past and I'll do my best to explain why I think the valuation metric you lay out is flawed.  It took me some pain and real capital loss before I realize my mistake.  The problem with your approach is that you are assuming the following:

1) The real estate is free and clear and can be readily sold or sale/leaseback to a buyer as of today
2) That the OpCo and PropCo can exist independently and somehow if you sold Herald Square, Macy's can somehow retain its retail operation and a RE buyer can somehow magically develop the Herald Square building.  It doesn't work like that.   Macy's will either lose the $200mm of EBITDAR (Rumored back in 2016) associated with the Herald Square RE or the buyer will have to assume the Macy's tenant risk. 
3) Now apply these dynamics to hundreds of locations and what you have is an issue that I call "tug boats vs tankers" 

What I used to fail to see is that these OpCo Propco issues are a mix of "melting ices" and "real estate development that demands 15-20% IRR"  If Macy's was Kohl's or a Dollar General and growing SSS, it is very easy.  You can simply do entirely sale leasebacks.  The drag on proceeds will simply be the capital gains taxes.  Because Macy's OpCo is a melting ice cube, there is no natural buyer for their properties with Macy's as a tenant.   Naturally, you need an operation like a Seritage to act as a "re-leasing" agent.  So Macy's is a tanker going in one direction with no expertise in real estate disposition or development.   Seritage and Howard Hughes is a tanker going in an opposite direction where they have a pipeline and culture and a process of executing on real estate development.  Talk to Seritage or HHC and see what they have laid out 5-10 years and you will see that there is a focus and a team of talented staff who is analyzing each property and trying to figure out a way to develop those assets.  So you're taking a blanket comparison and saying "Seritage owns this many sqft and Macy's owns this many sqft and they are apples to apples."  It is really an apple to orange comparison.  RE developers need a 15-20% levered IRR on their projects.  So you really should think that to unwind and re-position the RE, you need 15% IRR to dislodge the RE, find a buyer, and reposition the property.   I doubt that Macy's has a team like Seritgage and HHC.  Watching HHC develop their pipeline is like watching paint dry, albeit a profitable process.  But it is still an incredibly slow pace relative to other form of investing.  They are some of the most competent developers that I have come across and yet the process of getting zoning approval, putting the shovel in the ground, and putting up a building takes forever.  Look at how long the Seaport project in NYC has taken. 

Another way of looking at this is let's say you want to own a bunch of Macy's warehouse because you believe in the long term need for good warehouses.  So you can either buy 16 million sqft leased to 100 tenants with no single tenant taking up more than 3% of your footprint.  Or you can buy a 16 million sqft portfolio entirely leased to Macy's.  You can't take that Blackstone transaction and say that the Macy's portfolio will be worth exactly the same.  Warehouses today require a certain clear height, number of truck bays, etc.  I have no idea what Macy's warehouses look like.  But I doubt that they are considered Class A.  I think $50-60/sqft is likely that right price for Macy's portfolio which translate into a $1 billion value.  This is probably the only asset that could potentially appreciate in the long run. 

Now let's go back to talking about the retail assets. 

Hi BG2008, thanks for your detailed response. Regarding the SRG comparison. Yes, the culture at SRG is exclusively focused on RE development. But the fact is that Macy's does have an active partnership with Brookfield Properties as well as a SVP focused on the real estate, and a RE guy on the board. They are selling assets and densifying the space. On the other hand SRG has nearly 50% of unleased space as of last quarter.

They don't need to sell Herald square, I hope they don't. I think it's important to differentiate between the good stores and bad stores. 50% of brick and mortar sales occur at 150 locations. These are the locations where the company is focusing resources. I can't find data on the comps at these locations, but their online business is growing at double digits. They need to aggressively focus on downsizing the bottom 500 or so locations. Maybe reduce square footage to support the internet business? Current store count is 101 less than it was at the beginning of 2016, from 737 to 636.

How much of a threat is Amazon to the top 150 locations and the online/mobile business? Hard to say now but they are performing quite well. Maybe going forward they won't perform. But it is up to management at that point to act responsibly. They can start burning a billion dollars year after year like SHLD and destroy all of that value or they can do the right thing. I do like that they are paying down debt every single quarter. I wouldn't mind a dividend cut to 0 to be honest, buy back more debt and then some shares.

Let's see what happens. If I'm wrong I'll be the first to admit it.

How much of a threat is Amazon to the top 150 locations and the online/mobile business?  - I think a lot!!!! I didn't appreciate this as much in the past.  But Dept stores are structurally melting ice cubes unless they radically change their gameplan. 


Title: Re: M - Macy's
Post by: Mephistopheles on September 23, 2019, 06:58:14 PM

How much of a threat is Amazon to the top 150 locations and the online/mobile business?  - I think a lot!!!! I didn't appreciate this as much in the past.  But Dept stores are structurally melting ice cubes unless they radically change their gameplan.

That's why I like the RE as a margin of safety. How much is 70+ million feet of owned space, 20 million of ground leases and 16 million of distribution centers worth? I'm happy to pay $9 billion in EV and willing to give them a chance as they are fcf positive and paying down debt.

There's room for both online and brick and mortar. Many online only companies have opened up stores, there's value in having a physical presence.

Take a look at the sales per foot growth and re leasing spreads at SPG and MAC, they're doing well. Is all of the 90 million feet of Macy's space worth a lot? For sure not and a fair amount I'm sure is worthless. But what's the value of Herald Square with or without Macy's? State Street? Union Square? These three together may very well be a third of the enterprise value. Sure Macy's is a fair business at a great price but some of this real estate is the most wonderful retail space in the world at a wonderful price.
Title: Re: M - Macy's
Post by: TwoCitiesCapital on September 23, 2019, 07:32:15 PM

How much of a threat is Amazon to the top 150 locations and the online/mobile business?  - I think a lot!!!! I didn't appreciate this as much in the past.  But Dept stores are structurally melting ice cubes unless they radically change their gameplan.

That's why I like the RE as a margin of safety. How much is 70+ million feet of owned space, 20 million of ground leases and 16 million of distribution centers worth? I'm happy to pay $9 billion in EV and willing to give them a chance as they are fcf positive and paying down debt.

There's room for both online and brick and mortar. Many online only companies have opened up stores, there's value in having a physical presence.

Take a look at the sales per foot growth and re leasing spreads at SPG and MAC, they're doing well. Is all of the 90 million feet of Macy's space worth a lot? For sure not and a fair amount I'm sure is worthless. But what's the value of Herald Square with or without Macy's? State Street? Union Square? These three together may very well be a third of the enterprise value. Sure Macy's is a fair business at a great price but some of this real estate is the most wonderful retail space in the world at a wonderful price.

But that's his point though - right? The high-end RE value is captive as it won't be sold/developed to unlock that potential because those are primarily the locations where the store is doing well and cash flow positive.

The low-end stores don't make much money, but typically means they won't be sold for much either as others will struggle where Macy's has.

Without a repurposing vehicle like SRG to help rework the properties to a higher use, the real estate isn't worth much. And the value that it does have is a melting ice cube if used to prop up the retail operations as was done at Sears.

This is why this didn't work for JCP or for Sears. I'm not saying Macy's stock won't go up from here, but if it does it won't be because of the RE value IMO.
Title: Re: M - Macy's
Post by: Mephistopheles on September 23, 2019, 07:46:38 PM

How much of a threat is Amazon to the top 150 locations and the online/mobile business?  - I think a lot!!!! I didn't appreciate this as much in the past.  But Dept stores are structurally melting ice cubes unless they radically change their gameplan.

That's why I like the RE as a margin of safety. How much is 70+ million feet of owned space, 20 million of ground leases and 16 million of distribution centers worth? I'm happy to pay $9 billion in EV and willing to give them a chance as they are fcf positive and paying down debt.

There's room for both online and brick and mortar. Many online only companies have opened up stores, there's value in having a physical presence.

Take a look at the sales per foot growth and re leasing spreads at SPG and MAC, they're doing well. Is all of the 90 million feet of Macy's space worth a lot? For sure not and a fair amount I'm sure is worthless. But what's the value of Herald Square with or without Macy's? State Street? Union Square? These three together may very well be a third of the enterprise value. Sure Macy's is a fair business at a great price but some of this real estate is the most wonderful retail space in the world at a wonderful price.

But that's his point though - right? The high-end RE value is captive as it won't be sold/developed to unlock that potential because those are primarily the locations where the store is doing well and cash flow positive.

The low-end stores don't make much money, but typically means they won't be sold for much either as others will struggle where Macy's has.

Without a repurposing vehicle like SRG to help rework the properties to a higher use, the real estate isn't worth much. And the value that it does have is a melting ice cube if used to prop up the retail operations as was done at Sears.

This is why this didn't work for JCP or for Sears. I'm not saying Macy's stock won't go up from here, but if it does it won't be because of the RE value IMO.

Well I was saying under the scenario that Amazon kills even the best Macy's stores, the top 150 as BG2008 assumed. I'm saying in that situation I like the margin of safety provided by the owned real estate. If some day the herald square location stops making money, I'm confident that the building could be sold for significant sums.
Title: Re: M - Macy's
Post by: TwoCitiesCapital on September 24, 2019, 10:01:59 AM

How much of a threat is Amazon to the top 150 locations and the online/mobile business?  - I think a lot!!!! I didn't appreciate this as much in the past.  But Dept stores are structurally melting ice cubes unless they radically change their gameplan.

That's why I like the RE as a margin of safety. How much is 70+ million feet of owned space, 20 million of ground leases and 16 million of distribution centers worth? I'm happy to pay $9 billion in EV and willing to give them a chance as they are fcf positive and paying down debt.

There's room for both online and brick and mortar. Many online only companies have opened up stores, there's value in having a physical presence.

Take a look at the sales per foot growth and re leasing spreads at SPG and MAC, they're doing well. Is all of the 90 million feet of Macy's space worth a lot? For sure not and a fair amount I'm sure is worthless. But what's the value of Herald Square with or without Macy's? State Street? Union Square? These three together may very well be a third of the enterprise value. Sure Macy's is a fair business at a great price but some of this real estate is the most wonderful retail space in the world at a wonderful price.

But that's his point though - right? The high-end RE value is captive as it won't be sold/developed to unlock that potential because those are primarily the locations where the store is doing well and cash flow positive.

The low-end stores don't make much money, but typically means they won't be sold for much either as others will struggle where Macy's has.

Without a repurposing vehicle like SRG to help rework the properties to a higher use, the real estate isn't worth much. And the value that it does have is a melting ice cube if used to prop up the retail operations as was done at Sears.

This is why this didn't work for JCP or for Sears. I'm not saying Macy's stock won't go up from here, but if it does it won't be because of the RE value IMO.

Well I was saying under the scenario that Amazon kills even the best Macy's stores, the top 150 as BG2008 assumed. I'm saying in that situation I like the margin of safety provided by the owned real estate. If some day the herald square location stops making money, I'm confident that the building could be sold for significant sums.

Potentially - less massive redevelopment costs.

Because if Macy's can't make that location work, what is the likelihood another retailer will want to try? The building would have to be repurposed and that cost will come out of any purchase price.

Further, if the proceeds are used to support the remaining retail ops, you're not going to get full credit for the proceeds in the market either.

Not saying Macy's is a bad bet here - just saying the RE anchor didn't help JCP nor Sears and I don't understand why I should expect Macy's to be any different.
Title: Re: M - Macy's
Post by: BG2008 on September 24, 2019, 01:34:20 PM
TwoCitiesCapital,

Well said
Title: Re: M - Macy's
Post by: Mephistopheles on September 24, 2019, 02:56:15 PM


Potentially - less massive redevelopment costs.

Because if Macy's can't make that location work, what is the likelihood another retailer will want to try? The building would have to be repurposed and that cost will come out of any purchase price.

Further, if the proceeds are used to support the remaining retail ops, you're not going to get full credit for the proceeds in the market either.

Not saying Macy's is a bad bet here - just saying the RE anchor didn't help JCP nor Sears and I don't understand why I should expect Macy's to be any different.

Well, I don't know JCP well but regarding Sears, how about Seritage? It's 30 million sq feet selling for $3.6 billion EV. They've been spending well over $100/ft on redevelopment earning 10% unlevered and have a lot more to go in the pipeline. We can agree that Seritage RE needed/needs a lot more redevelopment than Macy's. Its portfolio is also worse quality wise, they don't have flagship downtown stores like Macy's. Not to mention, 50% of the space is currently vacant. SHLD also had many years of multi billion losses which Macy's doesn't need to have. But if you value Macy's (which is a much higher quality portfolio) on the same comps it's a steal. You just need the a leap of faith that management won't become stubborn like Lampert when the time comes.

If Macy's can't make the location work then who can? I don't know and I don't know that Macy's can't make it work, the jury is still out. Based on the evidence I see, internet retailers do benefit from brick and mortar locations. And not all segments of the retail industry are doing poorly. Incidentally, Macy's owns what appears to be a solid growing b&m retailer - Bluemercury.
Title: Re: M - Macy's
Post by: BG2008 on September 24, 2019, 03:15:36 PM
Mephistopheles,

I am moving on to researching companies that are cheap and higher quality.  I just can't spend my time discussing Macy's anymore.  I think the $/sqft metric is flawed.  It works if Macy's will spin out the RE into a separate company and put a competent CEO in there to develop the RE.  In it's current OpCo/PropCo form, I think you assigning value to the sqft is flawed per my previous posts.  Yes, Macy's is higher quality than Sears.  Sears was earning FCF until it abruptly declined.   I don't like investing when I need to trust CEO will liquidate the company and throw in towels.  Americans don't like throwing in the towels. 

Yes, there are internet guys who understands retail location has value.  But they are the Warby Parker of the world who takes 1,000 sqft.  The days of a 10,000 sqft Abercrombie is over.  Keep in mind, Herald Square and NYC locations all work on marginal supply/demand.  When you get to 98% occupancy, rent jumps.  When you are hovering at 80%, rent reacts very differently.  I don't know what they will do with Herald Square.  Frankly, I prefer that Herald Square is an empty shell with nothing in it. 

This is the last of my post on Macy's just like I said it was going to be my last on CBL and some of the mall spincos a few years ago.  We can really get into a lot of back and forth.  But I've shared my views and I will go hunt for the next higher quality company.   

Good luck, I hope you don't need it.
Title: Re: M - Macy's
Post by: TwoCitiesCapital on September 25, 2019, 08:01:13 AM


Potentially - less massive redevelopment costs.

Because if Macy's can't make that location work, what is the likelihood another retailer will want to try? The building would have to be repurposed and that cost will come out of any purchase price.

Further, if the proceeds are used to support the remaining retail ops, you're not going to get full credit for the proceeds in the market either.

Not saying Macy's is a bad bet here - just saying the RE anchor didn't help JCP nor Sears and I don't understand why I should expect Macy's to be any different.

Well, I don't know JCP well but regarding Sears, how about Seritage? It's 30 million sq feet selling for $3.6 billion EV. They've been spending well over $100/ft on redevelopment earning 10% unlevered and have a lot more to go in the pipeline. We can agree that Seritage RE needed/needs a lot more redevelopment than Macy's. Its portfolio is also worse quality wise, they don't have flagship downtown stores like Macy's. Not to mention, 50% of the space is currently vacant. SHLD also had many years of multi billion losses which Macy's doesn't need to have. But if you value Macy's (which is a much higher quality portfolio) on the same comps it's a steal. You just need the a leap of faith that management won't become stubborn like Lampert when the time comes.

If Macy's can't make the location work then who can? I don't know and I don't know that Macy's can't make it work, the jury is still out. Based on the evidence I see, internet retailers do benefit from brick and mortar locations. And not all segments of the retail industry are doing poorly. Incidentally, Macy's owns what appears to be a solid growing b&m retailer - Bluemercury.

Yes - there is SRG, which remains to be seen how well it turns out. It's been range bound since it's IPO and is operating at a loss while paying premium dollar for liquidity. Further, you have shareholders of Sears now suing to undo the transaction arguing, that in part, it contributed to the bankruptcy and removed assets from creditors' grasp.

SRG demonstrates that properties were basically worthless within Sears, and not achieving full value outside of it, AND can take years and a ton of capital before any of that value is unlocked.

On top of all of that, Macy's doesn't have an SRG-equivalent so they're still years BEHIND Sears/SRG in that regard.

If that's your thesis, just buy SRG and not Macy's.
Title: Re: M - Macy's
Post by: Spekulatius on September 25, 2019, 03:59:10 PM
Agree with above. Plenty of pure play RE players to be had a deep discount. I also second that SRG is showing that  real estate redevelopment is no panacea.