Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Can a Shrinking Macy’s survive the Age of Amazon?

No retailer is more vulnerable in the age of Amazon a shrinking Macy’s (NYSE: M).

To explain, Amazon (NASDAQ: AMZN) sells everything Macy’s carries and offers the convenience of shopping from home. In fact, Wells Fargo analysts expect Amazon to surpass Macy’s sales of apparel and shoes in 2019, Geekwire reports. Hence, Amazon will supplant Macy’s as America’s top apparel retailer.

Moreover, Macy’s resources are a fraction of Amazon’s resources. For example, Amazon reports revenues of $72.382 billion; a gross profit of $27.597 billion, and cash and short-term investments of $41.25 billion for 4th Quarter 2018.

Meanwhile, Macy’s records, cash and short-term investments of $1.162 billion, a gross profit of $3.167 billion, and revenues of $8.455 billion on 2 February 2019.

Why Macy’s Cannot Compete with Amazon

Under these circumstances, Macy’s cannot compete with Amazon because its resources are far smaller.

Additionally, many of Macy’s resources are shrinking. Notably, Stockrow estimates Macy’s revenue growth shrank by -2.5% in the last quarter of 2018. Consequently, Macy’s quarterly revenues fell from $8.672 billion in February 2018 to $8.455 billion in February 2019.

In addition, Macy’s quarterly gross profit fell from $3.349 billion in February 2018 to $3.167 billion in February 2019. In addition, Macy’s quarterly net income from $1.347 billion on 3 February 2018 to $740 million in February 2019.

Additionally, Macy’s quarterly operating cash flow fell from $1.577 billion on February 3, 2018 to $1.306 billion on 2 February 2019. Plus, Macy’s quarterly free cash flow fell from $1.566 billion in February 2018 to $1.404 billion in February 2019.

Macy’s Cannot compete with Amazon

Effectively, Macy’s is generating less cash from lower sales as Amazon’s popularity explodes.

To elaborate, Macy’s needs to get customers into its stores to see its merchandise. Meanwhile, Amazon; and all its merchandise, are right in front of the customer’s face.

Moreover, Amazon profits from Macy’s advertising. To explain a customer who likes who like a shirt in a Macy’s TV spot, will probably shop for it on Amazon. In addition, Prime makes online shopping free and easy.

Finally, The Verge claims Amazon is working on a free one-day Prime shipping option. Thus, if there is something a customer wants fast, Amazon could soon it bring it to her door in a few hours.

Now Walmart is coming for Macy’s

Nor is Amazon, the only danger. Now, America’s largest brick and mortar retailer; Walmart, is coming for Macy’s customers.

To explain, Walmart (NYSE: WMT) is now competing directly with Macy’s by offering concierge shipping services for urban customers. Specifically, Walmart’s Store No. 8 incubator operates a concierge they call Jetblack in New York City, Bloomberg reports.

Like Amazon, concierge’s make shopping easy and convenient. For instance, Jetblack offers personal shopping by text message, fast and free courier delivery, complimentary gift-wrapping, and hassle-free returns. Thus, a busy soccer mom has no reason to set foot in a department store with Jetblack.

I wonder how Macy’s can stay in business when its primary customers; women, do most of their shopping by phone. I think Jetblack is a big direct threat to Macy’s because Store No. 8 is trying to develop digital robots that can handle any shopping request.

If Jetblack’s digital robots work, Walmart can roll them out nationwide and compete with Macy’s in all markets. Walmart is testing Jetblack because it needs upper class customers with more money. Services like Jetblack are an effort to get those customers.

Does Macy’s Have a Future?

Consequently, Macy’s (NYSE: M) best hope for the future could be to join forces with Amazon, Walmart, or something like Jetblack.

To explain, Macy’s could service Amazon or Jetblack orders in its stores. Specifically, Jetblack could deliver merchandise from Macy’s stores to customers. In addition, Macy’s could serve as a “service center” accepting Jetblack returns and supporting several delivery services.

Moreover, Macy’s could make money by renting or leasing portions of its stores to online retailers like Jetblack, Instacart, or Amazon. Interestingly, Kohl’s (NYSE: KSS) has Amazon service centers in its stores.

Consequently, Macy’s stores could be reborn as urban; or suburban, fulfillment centers supporting delivery networks. Moreover, Macy’s could add amenities like salons, spas, grocery stores, bars, shoe repair, cooking classes, tailor shops, and restaurants to its stores.

How Much Value Does Macy’s Have?

Intriguingly, Macy’s could have far more value than Mr. Market thinks because of its footprint.

For example, Macy’s operates 680 Macy’s and Bloomingdale department stores, and 190 specialty shops. In fact, Macy’s operates five specialty chains: Blue Mercury, Bloomingdale’s the Outlet, Macy’s Backstage, and STORY. In addition, Macy’s footprint covers 43 states, Puerto Rico, Guam, and the District of Columbia.

Therefore, I think Macy’s could leverage its resources into a next-generation retail platform. To clarify, this platform could combine online shopping, robot concierges, same-day delivery, and brick and mortar retail. Plus, Macy’s could sell “experiences” such as spa treatment or cooking classes to customers.

Yes, Macy’s is a Value Investment

Thus, I consider Macy’s (NYSE: M) a weak value investment at the $23.24 it traded at on 3 May 2019. Macy’s is weak because its business is shrinking and its cash is limited.  

To explain, I believe Macy’s resources are potentially worth than the share price. Thus Macy’s is a risky value investment because it has a lot of untapped potential.

In particular, Macy’s could generate income by selling or leasing space to other retailers in its stores. Moreover, Macy’s can cut expenses and generate more money by adopting a combination store business model.

To demonstrate, Kohl’s and Aldi are opening joint-venture stores that combine a small department store and a grocery store. Thus, Macy’s could profit from excess space by partnering with retailers like Kroger (NYSE KR), Aldi, Walgreens (NASDAQ: WBA), Amazon/Whole Foods, Home Depot (NYSE: HD), Lowe’s (NYSE: LOW), or Walmart to open combination stores.

Combination stores are perfect for robot concierge services like Jetblack because they could support couriers with one stop pickup for groceries, hot meals, meal kits, shoes, apparel, and many other items. Thus, evolving technology gives Macy’s vast amounts of potential value

Macy’s is a Respectable Dividend Stock

Finally, I consider Macy’s a respectable dividend stock because it paid 37.7₵ a share on 1 April 2019.

However, that dividend has not grown in three years. In fact, Macy’s dividend has not grown since June 2016 when it paid 36₵. Thus, Macy’s is not a good income stock. However, Macy’s shareholders enjoyed a 6.5% dividend yield, a $1.51 annualized payout, and a payout ratio of 38.4% on 3 May 2019.

Those seeking a low-price dividend stock with a lot of speculative growth potential should investigate Macy’s. However, investors should realize that Macy’s; like any other department store chain, carries a lot of risks in the age of Amazon.

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