Market Mad House

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

The Death Spiral

How Fast Can Macy’s (M) Die?

Macy’s (M) and department stores are dying before our eyes. The retail legend plans to close 125 stores and kill 2,000 jobs in the next three years, USA Today reports.

I think Macy’s (NYSE: M) will close more stores and kill more jobs because CEO CEO Jeff Gennette says he wants to trim expenses by $2.1 billion by the end of 2022. USA Today estimates the planned closings will save $1.5 billion.

Hence, Macy’s will need to cut another $600 million from its budget. I think that means more jobs and department stores will die.

Macy’s Collapses

Macy’s (M) is collapsing fast. In 2020, Macy’s share price fell from $16.52 on 2 January to $9.05 on 20 November. Macy’s share price hit a high of $18.10 on 8 January 2020.

In 2020, Macy’s has experienced four straight quarters of falling revenue growth and revenue collapse. Stockrow estimates Macy’s revenue growth fell by 1.35% in the quarter ending on 31 January 2020. The revenue growth collapse accelerated to –44.54% in the quarter ending on 30 April 2020 and -34.87% in the quarter ending on 31 July 2020.

Macy’s quarterly revenues fell from $8.577 billion on 31 January 2020 to $3.148 billion on $3.727 billion on 31 July 2020. Macy’s began 2020 with an operating income of $560 million on 31 January.

Macy’s reported a quarterly operating loss of -$4.119 billion on 30 April 2020 that quarterly operating loss fell to -$631 million on 31 July 2020. I cannot see how Macy’s can stay open with operating losses that big.

However Macy’s did report a quarterly gross profit of $3.31 billion on 31 January 2020. The quarterly gross profit fell to $647 million on 30 April 2020 and rose to $1.009 billion on 31 July 2020.

How Much Cash Does Macy’s Generate?

However, Macy’s Inc. (NYSE: M) runs some cash through its stores. Macy’s had a quarterly operating cash flow of $1.436 billion on January 31, 2020.

The quarterly operating cash flow fell to -$164 million on 30 April 2020 and $157 million on 31 July 2020. In 2020, Macy’s ending cash flow went from $380 million on 31 January to $1.602 billion on 30 April to -$200 million on 31 January.

Unfortunately, Macy’s had to borrow $1.148 billion to stay in operation. To explain, Macy’s reported a quarterly financing cash flow of $1.148 billion on 30 April 2020. That quarterly operating cash flow fell to -$198 million on 31 July 2020.

Macy’s Loses Value

Macy’s (M) has lost value in 2020. Macy’s had $21.172 billion in total assets on 31 January 2020. The total assets fell to $18.581 billion on 30 April 2020 and $17.614 billion on 31 July 2020.

I guess the fall in value comes from the stores Macy’s is closing. However, I have to wonder what value empty department stores with no shoppers can have? I suspect the only value of those stores is as real estate.

Discounters; such as the TJX Companies (NYSE: TJX)could buy some of those stores.  However, discounters can only absorb a few of those empty stores. Moreover, companies such as TJX face a foot traffic collapse because of coronavirus. Hence, TJX could open fewer stores.

What to Do with a Dead Department Store?

Therefore, the only potential uses for dead department stores could be as fulfillment centers for online retailers and ghost kitchens. Amazon (AMZN) is exploring a plan to turn dead department stores into local or regional fulfillment centers, Fast Company notes.

 Another possibility is to convert dead department stores into ghost kitchens. A ghost kitchen is a commercial kitchen that cooks meals only for delivery services. The hope is that ghost kitchens will prepare meals for delivery services such as GrubHub (NYSE: GRUB).

Unfortunately, it is unclear how much demand there will be for ghost kitchens and small fulfillment centers. Thus, I predict they will demolish many dead department stores to make room for parking lots, apartments, or big-box stores.

One problem is that empty big-box stocks could make better locations for fulfillment centers or ghost kitchens. Disturbingly, I think America could soon be full of both dead department stores and empty big-boxes.

Could Macy’s become a REIT?

This creates a dilemma for Macy’s Inc. (NYSE: M) which operates around 834 stores under different names, including Bloomingdales. I think one future for Macy’s is as a real estate investment trust (REIT) for managing empty department store shells.

Notably, Eddie Lampert already tried at that at Sears with his misnamed Seritage Growth Properties (NYSE: SRG) REIT. The purpose of Seritage is to dispose of empty Sears and Kmart stores.

Predictably Seritage has suffered in 2020. Seritage’s share price fell from $39.21 on 2 January 2020 to $15.96 on 18 November 2020. Moreover, Seritage (SRG) reported a quarterly operating loss of -$21.78 million and a gross profit of $13.07 on 30 September 2020.

I think Seritage shows a Macy’s REIT will lose money. I predict Seritage could soon collapse and get liquidated. Thus, Macy’s greatest asset; its stores, could be worthless.

Welcome to the Future

Macy’s (NYSE: M) could die soon because coronavirus has compressed five or 10 years of history into one year.

To explain, Amazon (AMZN) and Walmart (WMT) have been killing traditional department for some time. However, department store operators thought they had four or five years of profitable business before the retail apocalypse.

Now the retail apocalypse has come in less than a year. Hundreds of stores and tens of thousands of jobs are dying before our eyes.

Worse, the only solution executives; such as Gennette, have is to close underperforming stores and hope coronavirus ends soon. That’s no solution because it cannot address the real problem. Instead, it puts off the reckoning until after Gennette’s retirement.

Why Macy’s could Collapse

I think Macy’s (M) could collapse next year if the coronavirus pandemic continues. Moreover, I do not a think a vaccine will save Macy’s for two reasons.

First, I think it will take several months to manufacture, distribute, and administer a vaccine. Hence, Macy’s stores will be empty and losing money for several more months.

Second, a large percentage of Macy’s shoppers will not come back, even if shopping is safe again. Customers will ask, “why should I spend four hours shopping at the mall when I can stay home and play Fortnite or spend time with my kids? I can do all my shopping in 10 minutes on Amazon.”

How Coronavirus is Killing Macy’s

An even greater problem is that older shoppers who prefer brick and mortar stores are dying off or retiring. To elaborate, the Baby Boomer Death Clock estimates around 5,004 American Baby Boomers die each day. Baby Boomers are people born between 1946 and 1964.

Additionally, Coronavirus is hastening the Baby Boomer die off. The Centers for Disease Control and Prevention (CDC) calculates that most people who die of coronavirus are over 55.

In detail, the CDC estimates that 152,075 Americans over 55 had died of coronavirus before 18 November 2020. In contrast, only 71,909 Americans under 55 died of coronavirus before 18 November 2020. Note the numbers are my calculations.

Macy’s will be a coronavirus casualty

When the Boomers die, America’s Millennials; people born after 1980, and Generation Xers people born after 1964, compose the middle class. Millennials and Generation Xers prefer Amazon to departments.

Another threat to Macy’s is work-from-home. People who work from home do not need high-heels, dresses, ties, and dress shirts. Hence, remote workers have fewer reasons to shop at department stores.

Stanford Economist Nicholas Bloom estimates 42% of Americans were working from home in June 2020. Even if half those people return to the office, that’s 21% of Americans who no longer need to shop at department stores.

I conclude Macy’s future is bleak. It will surprise me if Macy’s survives until 2022. Macy’s will be a coronavirus casualty.