Markdowns In Store for Macy's Shares
>>>Ahhhh. Finally my ever so toasted shorts might gt some relief. Barrons has an uncanny knack of putting stocks in a tailspin. I am serious. When Barrons cans a stock, it nosedives. They pointed out yesterday all of the insider selling in the burrito factory. Macy's was down today, but just watch tomorrow. I might do a rare thing and double down against what has been for me a loser.<<<
By JOHANNA BENNETT
After a huge share-price gain since early March, the department-store giant has gotten too rich.
RETAIL STOCKS THAT bounce back in a rising economy have become Wall Street's equivalent of "the little black dress" -- a must-have in every closet.
Macy' s (ticker: M) is such a stock, and it's almost doubled in value over the past two months. But at this level, the department-store company seems priced for perfection.
The company's outlook for the current fiscal year scheduled to end on Jan. 31, 2010 remains dismal. It's uncertain if consumers will start spending again late this year, as some hope. And profits, though expected to grow next year for the first time in four years, still look to be 60% below results in 2006.
Plus, Macy's still faces big headwinds, fierce competition and challenges as it reorganizes and cuts costs.
"Investors crowded into the stock so there are expectations built into the price," says David Heupel, a portfolio manager with Thrivent Investment Management. "There's going to be a battle between expectations and reality."
Others seem to agree.
On April 14, Soleil Securities downgraded the stock to Hold from Buy. And last week, J.P. Morgan Securities analyst Charles Grom advised investors "to take profits" when he cut the stock to Neutral from Overweight.
Meanwhile, the stock has fallen 14% since Monday in part because same-store sales for the month of April fell 9.1%, a bigger-than-expected drop that overshadowed today's announcement that the company will post a smaller loss when it reports first-quarter financial results on May. 13.
"We're not out of the woods," says Grom. "The fundamentals still aren't good, and there are some execution risks ahead. It makes sense to take some money off the table."
The company declined to comment for this story.
Formerly known as Federated Department Stores and renamed in 2007, Macy's is the nation's second-largest department-store company with annual sales of $24 billion from 847 stores that operate under the banners Macy's and Bloomingdale's.
The company controls 12% of a $200 billion department-store industry, according to IBISworld, a market research firm. And it owes its dominion to the $11 billion purchase of rival May Co. in 2005.
But talk about bad timing, given the recession that was lurking around the corner.
On March 31, Macy's announced a goodwill write-down totaling $5.4 billion related to the May acquisition.
Like other retailers, the recession has decimated Macy's. Falling home prices and job losses have changed shopping habits.
Now, budget-conscious consumers like Diane Howard spend less, wait for markdowns and favor bargain stores.
"If Macy's isn't having a big sale, then I head over to Kohl's," says the 57-year-old school teacher as she shopped one recent afternoon at the Newport Centre Mall in Jersey City, N.J.
During the fiscal year ending on Jan. 31, 2010, the Street expects profits to drop 55% to 58 cents a share.
The company has almost completed the early retirement of $950 million in bonds due this year. But it still has another $2.6 billion -- or 30% of its long-term debt -- coming due between 2010 and 2012.
In February, Macy's slashed its dividend and capital spending by more than half. It is also cutting 7,000 jobs and plans to centralize operations to reduce expenses and preserve cash.
But funding requirements for Macy's pension plan will offset those savings, compressing free cash flow this year to $760 million, a 20% drop over last year.
Moody's Investors Service and Standard & Poor's, meanwhile, cut Macy's credit rating to junk last month, citing weak consumer spending.
Chief Executive Terry Lundgren is rolling out a national initiative called "My Macy's," that allows stores to tailor merchandise assortment to the local market to boost same-store sales.
But analysts say that even if that all goes smoothly, it could be several quarters, perhaps a year, before the initiative has an impact on sales and profits
Sales at stores open for 12 consecutive months fell 9% last quarter and could fall 6.5% this year, according to Thomson Reuters.
Meanwhile, Macy's has a hefty price tag.
At 22 times projected profits over the next four quarters, the stock trades well above its historical median of 13.7 times forward earnings, according to Thomson Reuters.
In fact, it [t] RECENTLY BOUNCED OFF ITS HIGHEST MULTIPLE SINCE THOMSON STARTED TRACKING THE DATA IN 1995. [/t] (<span style='font-size:11px'>LAST</span>: 0<span style='font-size:11px'> 12:00:00 AM</span>)
Of course, there are bright spots in Macy's story. Twenty-two billion dollars in business is up for grabs thanks to a rash of bankrupt retailers. Earlier worries about Macy's liquidity have eased considerably this year.
The company says profits could beat its guidance if the economy rebounds in the second half of the year.
Yet with consumer credit growing tighter and a pricey valuation, Macy's could fall out of fashion again. |
