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In the last 12 months, Macy’s stock has declined more than 52%. This is no surprise, as shopping continues to shift away from big-box stores. Nordstrom, Gap, Target, and Sports Authority, among others, are all struggling with consumers’ shifting their preferences to online shopping. For example, sales at Macy’s were down 5.6% in the first quarter, despite U.S. consumer strength.

This news follows an announcement by Macy’s, in January 2016 that the retailer will close 40 stores by the end of the year and reduce expenses by $400 million. Needless to say, it hasn’t been fun to be a Macy’s shareholder recently. With that in mind, however, the stock may be one of interest here, albeit one with a fair amount of risk. ...

...Entering 2015, Macy’s enjoyed five consecutive years of sales and earnings growth, and the company was firing on all cylinders. From Jan. 30, 2009-Jan. 29, 2016, the stock returned an astounding 412%. Then year-end 2015 sales were down 2.5% in comparison to 2014. Macy’s seemed shocked by this shift and used its 2015 Annual Report to address the struggles while naming the report “The Agility to Adapt.”

Retail, as we know it, is going through a secular change due to the wild success of Amazon and other online retailers. Previously, Macy’s online and in-store was run as separate organizations. This is no longer the case. The key for Macy’s is to allow their brick-and-mortar stores to complement their online presence. Examples of the execution of this strategy would be in-store pickup, ease of online returns, and ability to generate additional purchases from online return in-store traffic. ...

...In 2015, activist investors began prodding Macy’s to explore monetizing their real-estate holdings, including ownership of more than 400 stores, to unlock value. These holdings have been valued as high as $21 billion, including flagship stores in Manhattan and San Francisco. Macy’s rejected any notion that they should form a REIT with these assets, but it is apparent the company is making moves toward more action. …

...So far, Macy’s has announced the sale of a portion of the Seattle store for $65 million for office use development and a $270 million deal with Tishman Speyer to purchase a portion of the Brooklyn store. Both of these deals occurred in 2015 and display Macy’s willingness to capitalize on their real-estate holdings. With a market cap of around $10 billion, successfully monetizing a $21 billion real-estate portfolio could be a major catalyst for the stock. …

...In Macy’s you are acquiring an iconic name, trading for less than 10 times forward earnings, implementing an aggressive turnaround plan, with real-estate holdings potentially worth more than double the current market cap of $10 billion. We like the risk/reward payoff after the recent downturn and look for a significant upside for the stock after management has time to execute its agile turnaround plan.

 

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