Macy’s (M) is dying can Facebook save it?

Macy’s (NYSE: M) hopes Facebook (NASAQDAQ: FB) will save it from the department store death spiral and Amazon (NASDAQ: AMZN).

In particular, Facebook and Macy’s are teaming up to create The [email protected]’s. The Market will reportedly offer 150 e-commerce brands access to Macy’s shoppers through a “pop-up marketplace,” Fortune claims.

The hope is to give startup brands of merchandise like housewares and clothing exposure at Facebook and Macy’s. Ultimately hopes the Market will lure in younger shoppers who prefer social media to department stores.

On balance, the [email protected]’s will be a mixture of Facebook pages and pop-up shops in Macy’s stores. Thus, Macy’s (M) is hoping to use all the extra space in its stores to good effect.

 Macy’s (M) and Facebook offer Shopping as Entertainment

In essence, The [email protected]’s is a new twist on a historic department store marketing stratagem: in-store entertainment. To sum up, the idea is to put on a show to attract shoppers.

Macy’s (M) has long been a master of in-store entertainment. Classic examples of Macy’s in-store entertainment include the parade and Santa Claus, for example.

The [email protected]’s is obviously a new twist on in-store entertainment. The difference is that Facebook rather than a parade is used to lure customers.

Macy’s needs more Customers

Macy’s (M) needs more customers because of stiff competition from Amazon and new brick and mortar competitors.

For example, smaller and more flexible concepts like Nordstrom (NYSE: JWN) Local, Amazon Go, and TJX’s (NYSE: TJX) Home Goods compete directly for Macy’s shoppers. Nordstrom Local, in particular, is a menace because it combines in-store entertainment and convenience.

A Nordstrom Local is a smaller neighborhood local that combines a salon, tailoring, a wine, beer, and juice bar, and a pickup counter for online orders. Moreover, a Home Goods is a small-box discount store for home furnishings.

Such smaller locations allow busy customers to dash in and dash out. For instance, a busy soccer mom does not have to navigate a huge department store to return an item.

Additionally, Nordstrom Local offers several amenities to keep consumers in the store. As an illustration, a customer could drink a beer while his suit is being fitted.

Obviously, a long-term menace will be Amazon Go. Amazon Go combines America’s favorite retail brand with a convenient small-sized neighborhood location. Presently, Amazon is planning to open 3,000 cashier-free Go stores in inner cities by 2021, Phys.Org claims.

The current plan is to focus Amazon Go’s expansion on downtown areas with limited retail options. Specifically such neighborhoods provide a great testing ground for new retail concepts. In particular, Amazon hopes to introduce automated shopping to middle class office workers via downtown locations.

Is Macy’s Making Money

Macy’s (M) needs an upgrade because of falling revenues. For instance, a recent uptick in sales ended during 3rd Quarter 2018.

Macy’s reported a 1.14% drop in revenue growth for 3rd Quarter 2018. Significantly; that reversed a 3.57% increase in revenue growth during the 2nd Quarter, and a 1.77% revenue growth rate in 1st Quarter.

Macy’s 3rd Quarter revenues were $5.572 billion up slightly from $5.41 billion during 2nd Quarter. The revenue increase matters little because Macy’s is not making much money from its department stores.

Macy’s (M) reported a net income of $166 million and an operating income of $67 million for 3rd Quarter 2018. The low income is problematic because Macy’s reported a gross profit of $2.252 billion for 3rd Quarter. Therefore, the expense of operating all those mall stores is eating up Macy’s profits.

Macy’s (M) faces a Classic Retail Dilemma

Macy’s (M) is facing a dilemma common to brick and mortar retailer these days. It competes with online retailers that have far lower operating costs.

For example, Amazon (NASDAQ: AMZN) can build its fulfillment centers in the areas with the lowest labor and real estate costs. Conversely, Macy’s has to lease or buy expense space in malls and operate in suburban and urban areas with high wages.

Obviously, Amazon can pass those savings along to customers while Macy’s cannot. Macy’s offers a higher level of customer service, but a lot of customers do not care about customer service.

Will Pop Stores Save Macy’s (M)?

Small-box concepts like Nordstrom Local and Home Goods also have lower real estate and labor costs. They could easily use such small-box concepts as pickup locations for online orders.

Popup stores; like The [email protected]’s, are a classic solution for this dilemma. For instance, Macy’s could rent or lease space to pop up store operators.

Macy’s (M) might interest electronics, auto and other brands in pop-up stores. For example, Tesla (NASDAQ: TSLA) operates auto showrooms in some Nordstrom locations.

Obvious brands for Macy’s to tap for pop-ups include Apple (NASDAQ: AAPL), Toyota (NYSE: TM), Ford (NYSE: F), General Motors (NYSE: GM), The Walt Disney Company (NYSE: DIS), Amazon, and clothing makers. A fascinating idea for Macy’s to consider is Amazon Go in Macy’s.

Macy’s (M) needs more Cash Flow and Cash

Macy’s (M) is investigating pop up stores because what it really needs is cash flow. For example Macy’s reports a free cash flow of $69 million for 3rd Quarter 2018 down from $155 million in 2nd Quarter.

Macy’s cash flow is bad because it is focused on the holiday season. For instance Macy’s reported a free cash flow of $1.554 billion and an operating cash flow of $1.555 billion during 1st Quarter 2018. In particular, 1st Quarter contains the holiday shopping rush.

The challenge at Macy’s to get high cash flow coming in all year round. Thus the experiments with pop-ups and other in-store entertainment designed to lure customers.

Macy’s is going with pop-ups because of its limited resources For instance, Macy’s reported $1.968 billion in cash and equivalents for 3rd Quarter 2018. Therefore, Macy’s lacks the cash to significantly change its business model.

Why the  Macy’s (M) Dividend is Doomed

An obvious reason for partnerships like The [email protected]’s is to protect Macy’s dividend. Macy’s (M) has delivered seven years of dividend growth that will soon end.

The dividend growth will end because Macy’s will need all the cash it can get to fight Amazon. Thus shareholders will have to say good bye to the 4.35% dividend yield, $1.51 annualized payout and 38.4% payout ratio they enjoyed on 28 September 2018.

Obviously, the 37.7¢ dividend scheduled for payout on October 1, 2018 will also be history. I predict Macy’s dividend will fall dramatically.

Ultimately, Macy’s investors’ investors’ hopes are riding on the [email protected]’s pop up and similar concepts. Despite that, I think Macy’s stock was still a value at $33.91 on 1 October 2018. The low share price makes Macy’s (M) worth the risk.