The retail apocalypse might soon kill another American icon, and it is not Sears (NASDAQ: SHLD). No, it is Macy’s (NYSE: M) the department store brand of Thanksgiving Day Parade and Miracle on 34th Street fame.
Macy’s is still considered the nation’s largest clothing retailer but its sales are falling fast because of intense competition from Amazon (NASDAQ: AMZN), Business Insider reported. Macy’s clothing sales; which account for $22 billion of its $24.39 billion in revenues, are expected to fall by 4% this year.
Amazon’s apparel sales are expected to grow by 30% next year, and Amazon is just one online retailer. The Everything Store’s biggest e-commerce rival, Walmart (NYSE: WMT) is making its’ own aggressive push into the online clothing market. Walmart has gobbled up several online clothing retailers including Bonobos and Modcloth over the last year; and has plans to launch a Lord & Taylor store and app for high-fashion bargains at its website, Quartz reported.
What happens to Macy’s if Walmart’s clothing sales start growing at the same rate as Amazon’s? The death spiral that’s what, because financial numbers show us that Macy’s is already dying fast.
Some Proof that Macy’s is Dying Fast
The latest financial numbers at ycharts, those for 3rd Quarter 2017, show us that Macy’s is already in terminal decline. Revenues at the department-store brand have fallen dramatically in recent years.
Back in October 2014, Macy’s reported revenues of $27.94 billion; that figure fell to $27.57 billion in October 2015, $26.13 billion in October 2016, and $24.69 billion in October 2017. Disturbingly, Macy’s revenue loss is accelerating, revenues fell by $1.44 billion in the 12 months that ended on Halloween Day 2016, and again in the year that ended on 31 October 2017. Yet it only lost $370 million in the 12 months between Halloween 2014 and October 31, 2015.
The truly frightening statistic is that Macy’s has lost $1.09 billion in revenues during the first three quarters of 2017. Macy’s reported $25.78 billion in revenues at the end of January 2017 and $24.69 billion at the end of October. The revenues shrank by $1.09 billion in just nine months.
Is Macy’s the New Sears?
These revenue losses are not as bad as those at Sears where revenues shrank by $2.39 billion between January and July 2017. Sears Holdings; which owns Kmart, reported revenues of $22.14 billion in January and $19.75 billion in July, 2017. The numbers are different, but the pattern is disturbingly familiar.
It is also scary because Macy’s is not Sears; it has not been mismanaged and neglected by an egotistical billionaire. Macy’s stores are still gleaming temples of consumerism with good customer service, great selections, contemporary fashions, and lots of bargains, yet customers are avoiding them like the plague.
A possible cause of this is the presence of retail clunkers like Sears, The Bon-Ton Stores (NYSE: BNT), and JC Penney (NYSE: JCP) at the mall. Those retailers repel customers with their very presence and end up driving down business at good stores like Macy’s.
Are Macy’s Customers dying off or simply walking away?
Another problem is that a large segment of the American population has done the once unthinkable and gone cold turkey on the brick and mortar shopping habit. Lots of people detested shopping in the first place, and many others were ambivalent of it. Now Jeff Bezos has provided them with a painless and fun alternative that can be accessed from the couch.
Every time a soccer mom decides she’d rather spend Saturday afternoon at her son’s game than the mall, Macy’s loses a customer it will probably never get back. Multiply that a few million times and you see Macy’s problem.
To make matters worse, the backbone of the American consumer culture the baby boomers are dying off. Millennials, who hate to shop, overtook Boomers as America’s largest generation last year, Pew Research reported. Boomers (those aged 52 to 71) numbered 74.9 million last year; that number is expected to fall to 65 million within 10 years.
Macy’s is caught in the perfect storm of a growing torrent of online shopping, and the accelerating die-off of the older customers it needs. A related trend is the retirement of Boomers, who will no longer need to dress for work. Hence a smaller market for suits, sports jackets, ties, skirts, purses, and high-heeled shoes.
Is Macy’s Making Money?
The silver lining here is that Macy’s is still making money, unlike Sears, but it is making less money. Back in October 2014, Macy’s reported a net income of $1.544 billion, that fell to $1.321 billion in October 2015, and $688 million in October 2016.
The good news is that Macy’s net income is growing again, it rose to $698 million in October 2017. The bad news is that Macy’s net income is still $846 million lower than it was just three years ago in 2014.
Some other figures at Macy’s are disturbing including a free cash flow of -$325 million and cash short-term investments of $534 million in October 2017. To be fair these numbers are historically higher in January after the holiday season. In January 2017, Macy’s reported $1.297 billion in the bank and a free cash flow of $1.262 billion.
How one Bad Holiday Season can Bankrupt Macy’s
That tells us that just one bad holiday season might send Macy’s into bankruptcy. This might occur because Macy’s cash from operations is falling; it reported $2.571 billion in cash from operations in October 2014, $2.146 billion in cash from operations in October 2015, and $1.882 billion in October 2017. The obvious conclusion is that the cushion of cash which formerly protected Macy’s from a bad holiday season is gone.
Such a bad holiday season is likely because Macy’s revenues fell for the last two holiday seasons. The department store reported $27.57 billion in revenues in October 2015, and $27.08 billion in January 2016, and $26.13 billion in October 2016 that fell to $25.78 billion in January 2017.
Get the pictures, Macy’s can no longer count on the big boost of cash from holiday sales because the holiday sales are disappearing. The company must either change its’ business model or solely wither away.
Why Investors should avoid the Value Trap at Macy’s
The revenue decline makes Macy’s a classic value trap; that is a stock that looks good on paper but is slowly losing its value. Macy’s looks like a great value because it was trading at just $23.80 a share on 30 November but provided a 16.59% return on equity on October 31, 2017.
To add icing to the cake, investors are scheduled to take home a 37.78¢ a share dividend on December 14, 2017. That dividend is at the same level as last year, which should raise a red flag. Investors should ask: where is the money to pay that dividend coming from?
The answer is obvious Macy’s management is taking money that should be spent on things like growing e-commerce, or modernizing stores and spending it on the dividend. They are trying to pump up the stock price with a high dividend; a dividend partially financed by effectively looting the retailer’s assets with moves like closing locations.
Macy’s had assets of $21.27 billion in October 2016 and $20.21 billion in October 2017. It also has an enterprise value that shrank from $20.03 billion on November 29, 2016, to $13.08 billion on 30 November 2017.
The moral of the story for investors is stay away from Macy’s unless management changes. It’s about to shrink big time and lose a lot of money. If these trends continue the only place anybody will be able to see Macy’s would be Christmas time showings of the 1947 version of Miracle on 34th Street.