This is no time to be a retailer on Wall Street. A plethora of leading retail brands has met with derision from investors, who fear the long-term effects of a decline in shopping malls and doubt the ability of brick and mortar retailers to transition to a meaningful online presence. Iconic retailer Macy’s has not been exempt from these forces.
Macy’s stock peaked in mid-2015 just shy of $70 per share. It is now trading at $21 a share – a decline of nearly 70%. The company’s most recent earnings release from a month ago showed a decline in comp sales of 5.2%, while operating income sank 20% from the year before.
Like most department store operators, though, Macy’s continues to own an extremely valuable real estate portfolio, with locations in many of the United States’ premiere metropolitan areas. As store closings accelerate, the company has already started taking advantage of its premiere assets. During 2016, it received $675 million in cash for real estate transactions and further monetization has taken place this year, with a Minneapolis store sold for $59 million in February and a $270 million transaction for its Brooklyn store in January. It has also retained Brookfield Asset Management to help it monetize as much of the portfolio as possible.
How much is its remaining real estate worth? A total of 382 stores were owned by Macy’s at the beginning of this year, including its valuable flagship in midtown Manhattan. Starboard Value, an investment advisor, previously put the aggregate real estate value at nearly $21 billion in 2015. That figure is likely lower now because of completed transactions since the analysis. But, it’s remarkably high when compared to the value investors are placing on the entire company. With a little less than 309 million shares outstanding, Macy’s market cap is a mere $6.7 billion. Adding back Macy’s $5.5 billion in net debt implies an enterprise value of $12.2 billion – only about 60% of the value Starboard placed solely on the company’s real estate. Adding in working capital of $680 million also slightly increases the potential liquidation value.
As the saying goes, “a bird in the hand is worth two in the bush.” There is little doubt that beyond the actual appraisal of real estate, time is needed to complete the transactions – should they ever occur, making a discount in the valuation rational. Yet, that discount also ignores any potential value in the operating company. Even a declining business can still hold value. Last year Macy’s revenue was $25.8 billion and the company was still profitable. It also pays dividends equivalent to a yield of nearly 7%, while routinely repurchasing stock.
Macy’s may not be the future, but value remains in this cigar butt.
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