Introduction

In my previous article on Macy's published last month, I had recommended a strong BUY with an entry point at around $5, citing it as a floor price given Macy's massive real estate value. I had also highlighted M's likelihood to survive through the coronavirus pandemic when we analyzed the balance sheet strength and debt maturity profile within the department stores' industry in my initial article. Since then, the stock has witnessed a significant jump having shot up about 48% at its peak over the recommended price. We further evaluate the situation based on the company's recent financing transactions as well as the preliminary financial results.

Financing Transactions

The company recently announced a series of transactions to raise about $4.1bn of additional borrowings, the latest retailer to seek financing as Covid-19 smacked industry sales. It included $1.1 bn secured notes due 2025, which was later upsized to $1.3 bn, backed by some of its marquee real estate properties which include its San Francisco, Chicago, and Brooklyn urban iconic locations, 35 mall assets, and 10 distribution centers. It mentioned the estimated value of these properties as $2.2 bn (provided they are open and operational), significantly higher than the company's market capitalization on the day prior to the announcement. The company excluded the iconic Herald Square property from the transaction and expects to have annual rent income of $150M. The net proceeds would be used to repay its existing credit facility. It is also amending its $1.5 billion unsecured revolving credit facility and replacing it with an approximately $3 billion ABL secured by inventory.

The Right Move?

We reckon this is a tactical move from M's senior management as many of the retailers have tried to monetize their real estate value, the latest being JC Penney (JCP) which was looking to create a REIT as part of its bankruptcy plans. Also during the entire Sears episode when Lampert, its Chairman and CEO, spun off much of its real estate into a REIT called Seritage Growth Properties (SRG) that even attracted veteran investor Warren Buffet.

Initial Take

We'd refrain from providing guidance on Macy's stock for now as we await further details on the company's Q1 performance. The company, in its preliminary results, reported an estimated decline of 40% in its revenues, which was unsurprising. It also reported an operating loss range to the tune of ~$1 billion for the quarter with net loss in the range of $700-$800 million. We would be looking for fine print on the numbers and also the traction on the footfalls and the digital sales. Macy reported that it has reopened almost 270 stores at the start of the week and has been experiencing a moderately higher demand even at 60% productive levels, which is encouraging. We remain positive on the company's ability to weather the COVID-19 storm with sufficient liquidity and remain convinced on the retailer's real estate play. However, we remain on the sidelines to watch out as the event unfolds, for now.