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SUMMARY
Parkev Tatevosian, CFA, discusses Macy's stock performance, management strategies, and a lesser-known asset that could benefit shareholders. The analysis highlights Macy's undervalued real estate portfolio as a significant factor supporting the stock's investment case despite operational headwinds.
MAIN POINTS
- Macy's stock rebounded from pandemic lows, delivering strong returns over six years.
- The company faces declining revenues as consumer preferences shift to off-price retailers.
- Management is closing underperforming stores and experimenting with in-store brands to adapt.
- Macy's trades at a modest valuation, with a discounted cash flow estimate suggesting further upside.
- The real estate portfolio, carried at depreciated book values, holds significant unrecognized market value.
- Potential real estate sales could offset business decline and provide hidden value to shareholders.
DETAILED ANALYSIS
Macy's has experienced a remarkable recovery since the pandemic, with shares rising from approximately $5 to nearly $24, representing a fivefold increase over six years. Despite this impressive performance, the company is not considered a growth stock; instead, it faces persistent challenges as consumer shopping habits increasingly favor off-price retailers such as TJ Maxx, Ross, Marshalls, and Burlington. This shift has contributed to a decline in Macy's revenues, which have fallen from about $27 billion to $22.7 billion in recent years.
In response, management has implemented a strategy of closing underperforming stores and optimizing the store footprint, while also introducing new in-store concepts like Finish Line and Toys R Us to attract customers, though with mixed results.
Financially, Macy's maintains a modest operating profitability of 3.87% and currently trades at a forward price-to-earnings ratio of 10.2, slightly higher than its historical average but still within a reasonable range for a declining business. A discounted cash flow analysis values the company at around $29 per share, indicating a potential 23% upside from current levels over the next 12 to 18 months. However, the most compelling aspect of Macy's investment case lies in its substantial real estate holdings.
Many of Macy's locations are owned outright and have been depreciated on the balance sheet to near zero, despite their actual market values being significantly higher due to decades of appreciation, particularly in prime locations. For example, a property acquired for $100 million decades ago could now be worth several times that amount, yet it remains recorded at its depreciated cost, providing a hidden asset not reflected in the company's market capitalization.
A previous offer from a real estate firm valued Macy's property portfolio at approximately $5 billion, nearly matching the company's entire market cap of $6.2 billion. This discrepancy highlights a strategic advantage for investors: even as Macy's core retail operations face structural decline, the underlying real estate assets offer a buffer and potential upside. This hidden value supports the rationale for holding Macy's stock, as the eventual monetization of these properties could deliver significant returns to shareholders, offsetting operational headwinds.
LINKS
- YouTube channel membership for early access, spreadsheets, and Discord community.
- Special offer for The Motley Fool Stock Advisor.
- Parkev Tatevosian's book on evaluating publicly traded companies.
- Fiscal.ai investment research platform with a viewer discount.
- Webull investing platform sign-up with bonus shares.
- Substack newsletter subscription for monthly updates.