Market Mad House

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

The Death Spiral

Is this the End of Macy’s?

Coronavirus could be the end of Macy’s (NYSE: M). Notably, they will throw Macy’s off the S&P 500, CNBC predicts.

Macy’s share price fell from $12.99 on 2 March 2020 to $4.66 on 2 April 2020 during the coronavirus outbreak. However, Macy’s share price rose back to $5.54 on 6 April 2020.

 Frighteningly, Macy’s Market Capitalization fell from $7.605 billion on 2 April 2019 to $1.488 a year later. Additionally, Macy’s Market Cap fell from $4.022 billion on 2 March to $1.488 billion on 2 April 2020.

Consequently, Standard & Poor’s (S&P) will move Macy’s from the vaunted S&P 500 to its SmallCap 600 Index, Yahoo! Finance reports. In fact, Yahoo! estimates Macy’s lost 70.6% of its share price between 31 March 2019 and 31 March 2020.

Thus, Macy’s lost two-thirds of its value in a month. Moreover, Macy’s was already in big trouble before the Coronavirus outbreak.

How Coronavirus can Kill Macy’s

Thus, a retailer with 871 stores; that reported quarterly revenues of $8.577 billion on 31 January 2020, had a $4.66 share price and a $1.488 billion market cap on 2 April 2020.

Macy’s fate shows how Coronavirus is driving the retail apocalypse to fearsome new heights. One group sharing Macy’s pain is its employees. CBS reports the department store legend will furlough most of its 125,000 employees.

An obvious danger Macy’s faces is that many of its customers will never come back after the pandemic ends. Another problem for Macy’s is that many of its employees will not return.

Hence, Macy’s will face the expenses of reopening, restocking, and restaffing its stores when its locations are generating no revenue. In addition, Macy’s still has to pay rent, utilities, taxes, and other store related expenses.

Macy’s could cut expenses by permanently closing stores. However, Macy’s will still face the expense of emptying and shuttering the closed stores. Plus, there could be no buyers for those empty stores in a depressed real estate market.

Could Macy’s Survive?

There are ways Macy’s could keep selling merchandise, making money, and surviving.

I think Macy’s could sell the merchandise from the shuttered stores on Amazon (NASDAQ: AMZN), eBay (NASDAQ: EBAY), Alibaba (NYSE: BABA), (NASDAQ: OSTK), or its own website. Plus, Macy’s could turn some closed stores into “fulfillment centers.”

To explain, employees could receive online orders, pull merchandise from the shelves, and pack and ship it. Moreover, Macy’s could offer same-day delivery through Shipt, Instacart, Grubhub (NYSE: GRUB), Postmates, Amazon, Lyft (NASDAQ: LYFT), or Uber (NYSE: UBER).

Could Digital Liquidation Sales Save Macy’s?

Hence, Macy’s could hold “digital liquidation sales” and comply with shelter-in-place orders and social distancing. Thus, Macy’s could still make money with all the merchandise siting in those shuttered stores.

Importantly, the digital liquidation sales could keep Macy’s staff working and some revenue coming in. I don’t know if Macy’s could make enough money from digital liquidation sales to survive, but some revenue is better than no revenue.

I suspect there could be one advantage to digital liquidation sales. Macy’s could operate with fewer employers and reduce its employment expenses. Moreover, Macy’s could pay the fewer associates working the sales more money.

Can Macy’s Make Money?

Macy’s was making some money before coronavirus. For instance, Macy’s reported a $3.31 billion gross profit on revenues of $8.577 billion for the quarter ending on 31 January 2020.

Additionally, Macy’s reported a quarterly common net income of $340 million and an operating income of $560 million on the same day. Impressively, Macy’s reported an operating cash flow of $1.436 billion and an ending cash flow $380 for the last quarter.

Unfortunately, I think Macy’s lacks the resources to survive. Notably, Macy’s had just $685 million in cash and short-term investments on 31 January 2020. However, Macy’s reported an inventory of $5.188 billion on the same day. Unfortunately, most of that inventory is gathering dust in locked stores.

Finally, Macy’s reported $21.172 billion in total assets it could borrow against on 31 January 2020. Conversely, Macy’s reported total liabilities of $9.045 billion on the same day.

Who Could Save Macy’s?

One problem, Macy’s faces is borrowing money at a reasonable rate. A greater problem could be finding a lender. I suspect most lenders will refuse to give Macy’s a cent in today’s business environment.

A potential savior is the U.S. Federal Reserve, which could extend interest-free or low-interest loans to ailing retailers. However, I do not know if such lines of credit are legal or if such lending is politically possible.

Another solution is for the US Treasury; or the Federal Reserve, to guarantee Macy’s payroll and pay Macy’s employees until the coronavirus pandemic ends. The Federal Reserve can afford to pay employees because it can create money.

The Federal Reserve creates money every time it prints a dollar or extends credit. Hence, the Federal Reserve could theoretically extend unlimited amounts of credit to companies such as Macy’s.

Dramatically, Her Majesty’s Government will pay 80% of the salaries of British employees coronavirus idles, the BBC reports. Thus, British workers could receive up to £2,160 ($2,672.02) a month. To clarify, the Conservative Government caps the salary payout at £2,700 ($3,340.02) a month.

I suspect we could see a similar program in America if the coronavirus pandemic and stay at home orders continue. I believe such a salary guarantee is necessary to save America’s economy and companies such as Macy’s from oblivion.

What Value Does Macy’s have?

Under present circumstances, I believe it is impossible to determine Macy’s Inc.’s (NYSE: M) value.

Macy’s value is impossible to determine because we do not when the stores will reopen and if customers will return. Remember, Amazon (NASDAQ: AMZN) was killing Macy’s before coronavirus hit. I suspect Macy’s post coronavirus sales could be far lower than the pre-pandemic sales.

There is one certainty; however, I predict we will not see another Macy’s dividend soon. I predict the 33.775₵ a share dividend Macy’s paid on 12 March 2020 will be the last dividend Macy’s pays for a long time.

I think investors need to avoid Macy’s because nobody knows what future this department store legend has in the Coronavirus age. Consequently, I think Macy’s is now a junk stock that only speculators should buy.