Market Mad House

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

The Death Spiral

The End of Department Stores at Macy’s

We might be witnessing the end of traditional department stores at Macys’ (NYSE: M). Service and employees are being cut in stores as the iconic retailer implements a no-frill shopping model more akin to Walmart than a traditional department store.

Macy’s is testing self-service at three Illinois stores by stacking boxes of on the floor and eliminating the stockroom, The Chicago Tribune reported. The idea is cut costs by eliminating the need for shoe salespeople.

Another “innovation” will allow sales associates to request shoes from the stockroom via a tablet, The Tribune reported. A runner will pull the order and take it out to the customers in an attempt to improve efficiency.

Other changes involve displaying shoes by category rather than brand and trimming in store selection back to just best sellers. That sounds as if Macy’s is slowly transforming itself into a discount store to cut costs. One objective for the shoe transformation might be to capture business from Payless Shoe Source; which is planning to close 1,000 stores as part of bankruptcy reorganization.

Macy’s selling Off Real Estate

The desperation seems to be growing at Macy’s, the chain is even selling off floors of some of its stores. Macy’s plans to sell office space in the top floors of its downtown store on Chicago’s State Street, The Tribune reported.

The idea there is to trim operating expenses while adding new revenues by getting rid of stock and employees. An ulterior motive is to bring more potential shoppers into the building in the form of workers or clients from the offices, Chief Financial Officer Karen Hoguet said in the last earnings call.

Macy’s certainly needs more customers; sales at established stores fell by 5.2% during the last quarter. That was the ninth straight quarter of declining sales in a row.

Macy’s Dilemma: Americans aren’t Shopping Anymore

Macy’s is struggling to deal with dramatic changes in American shopping habits that are being driven by Amazon (NASDAQ: AMZN). Department stores’ sales and foot traffic are falling because tens of millions of Americans are abandoning shopping.

Large numbers of people have decided that they no longer want to spend several hours a week pushing a shopping cart around a big box. Many others have decided that they no longer want to spend their Saturday or Sunday afternoons at the mall. Why go to those places when you can do all your shopping at home on the couch?

Macy’s attempt to develop a hybrid department store/office building is an attempt to solve that dilemma. Another possible solution is a combination department store/apartment building where people live in units on the upper floors of old department stores.

Is Macy’s a Value Investment?

All the potential uses to which Macy’s real-estate holdings can be put will cause many people to wonder if the department store brand is a value investment. Value hunters’ interest will be raised by Macy’s very low price; $23.64 a share on May 30, 2017.

That’s a very low price for one of the two largest clothing retailers in America. There is a lot of value at Macy’s for a very low price, the company had a market capitalization of $7.198billion on May 30, 2017, that was under the enterprise value of $12.66 billion.

Ycharts data indicates that there is a lot of potential for value at Macy’s including:

  • $25.34 billion in revenue as of April 30, 2017.


  • $571 million in net income.


  • $19.64 billion in assets.

  • $1.201 billion in cash and short-term investments.


  • $2.027 billion in cash from operations.


There were also some serious problems including a free cash flow of just $57 million on April 30, 2017. Macy’s is clearly struggling to survive even though it has quite a few resources.

Is Macy’s Doomed?

Despite the resources there is plenty of evidence to justify the conclusion that Macy’s is doomed. The biggest indicator of doom at Macy’s can be found in the revenues.

Revenues have been falling substantially for nine state quarters, since January of 2015 to be exact. On January 31, 2015, Macy’s reported revenues of $28.11 billion in revenues, a number that fell to $25.34 billion by April 30, 2017. Macy’s revenues have by $2.77 billion, or nearly 10% in a little over two years.

That translated to a revenue drop off of $440 million during the last quarter. Numbers like that indicate Macy’s business might be sustainable on a long term basis.

Is Macy’s Business Sustainable?

Skeptics will see these numbers and wonder if Macy’s business is sustainable? Particularly in the threat of Amazon, which is well on its way to becoming America’s top clothing retailer.

The recent revenue losses at Macy’s came after Amazon launched its own clothing lines similar to Macy’s. Amazon rolled out eight lines of clothes over the past year including Lark & Ro for women, and Button Down which is only available to Prime subscribers, James & Erin, Society New York, Scout + Ro for kids, North Eleven and Franklin Tailored for men.

Another menace is Target (NYSE: TGT) which regularly sells high fashion items such as Lilly Pulitzer dresses at bargain basement prices with its flash sales. An even greater threat is Walmart (NYSE: WMT) which has transformed its website into marketplace similar to Amazon’s. now sells 50 million items and its sales grew by 63% during first quarter 2017.

Yes, Macy’s is Doomed

All that competition is certainly taking a toll on Macy’s. The department store chain’s net income has fallen by $952 million by around $950 million a quarter over the last nine quarters. Back in January 2015, Macy’s reported a net income of $1.526 billion that fell to $574 million on April 30, 2017.

If those net income losses continue Macy’s will be operating at a loss next year. Therefore Macy’s business is not sustainable without radical changes.

Even though investors were rewarded with a 13.93% return on equity on April 30, 2017 Macy’s appears doomed. Also doomed is the dividend of 37.75¢ which is scheduled for June 13, 2017.

Investors should stay away from Macy’s because it faces massive losses and an expensive restructuring just to survive. The traditional department store business is dead and Macy’s faces a struggle to avoid the death spiral. Therefore it is not a good investment.