Macy's Remains On Sale After An Upsized Bid Pushes Shares Higher

seekingalpha07-06

Macy's shares surged 12.6% on news of a higher buyout offer from investors at $24.80 per share, indicating commitment to acquiring the company.Despite recent revenue declines, Macy's turnaround plan ...

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(NYSE:M). Shares of the struggling clothing retailer shot up 12.6% to roughly $20.19 per share as of the time I write this. This comes after a third bid to acquire the company by a group of investors that includes Arkhouse Management and Brigade Capital Management. Although the increase is nowhere near as large as the previous one, it does indicate how committed the investor group is to acquiring the enterprise. On an absolute basis, and even relative to some other similar firms, this still prices the company at rather low multiples. But as I detailed in a prior article published in March of this year that talked about the previous bid, this is a rather complex situation. On the one hand, if management does agree to a buyout, it creates a favorable short-term increase in value for investors. It also removes the risk down the road that management's turnaround plans might not work out. On the other hand, in the event that these plans would prove to be successful, it would be tantamount to selling the company at a discount. Naturally, nobody other than management knows what will ultimately be agreed upon. It's possible that the firm could accept this offer, or push for an even higher one. It's also possible that the offer could be rejected entirely. Because of the differences in risk relative to reward, this scenario is not a good fit for every investor. I would argue, however, that nothing good outweighs the bad still. Yes, there is some probability that the deal will not go through, even at a potentially higher price. And in that case, there is some probability that management's turnaround plan will fail. But when you consider the upside that comes with this new offer if accepted, or the probability of a deal failing to materialize but management succeeding in its objectives, I think that the upside is worth the risk. Because of this, I've decided to keep the company rated a 'buy'. Some new developments Even though shares of Macy's shot up on July 5th, news of a higher offer for the company actually came out on July 4th. In short, the investor group that consists of Arkhouse Management and Brigade Capital Management has decided to offer to buy up all of Macy's in exchange for $24.80 per share. That translates to an equity value of about $6.97 billion. This represents an increase over the $24 per share, or $6.74 billion, offered up in March of this year. And it's well above the $21 per share, or $5.90 billion, originally offered in December of 2023. Considering that Macy's saw its share price close on July 3rd at a price of $17.93, accepting this offer would mean significant short-term upside for investors. To be precise, the upside from that point would be 38.3%. Even from the $20.19 that shares are trading at as of this writing, this would translate to a rise of 22.8%. So there is a good deal of money to be made by betting on this transaction going through. As you will see shortly, this transaction does seem to value the company quite cheaply. But as I detailed in my prior article on the business, its fundamental condition in recent years has really suffered. Buying up a beleaguered business and working to turn it around often justifies some sort of discount. Having said that, there are also reasons why management might not accept this higher offer or any offer within this range. I won't go through all of the details of the company's turnaround plan. And that's only because I did cover it in my aforementioned article from March of this year. Instead, I think it would make more sense to focus on signs of the turnaround in play from data that has come out since then. This data covers the first quarter of the 2024 fiscal year. Author - SEC EDGAR Data At first glance, the picture might not seem all that appealing. As you can see in the chart above, for the first quarter of 2024, the overall revenue generated by the company came in at $5 billion. That represents a decline from the $5.17 billion generated one year earlier. Those who followed the company closely know that management has been working on shutting down underperforming stores. The goal is to close around 150 such locations under the Macy's banner. Having said that, the company also suffered from a decline in comparable sales amounting to 1.2%. If we factor in not just owned stores, but also ones that are licensed to third parties, as well as the company's marketplace, the decline is a much more modest 0.3%. But a decline is a decline, nonetheless. Macy's Even though Macy's is a single company, it can best be viewed as a collection of retailers. And each of these has performed differently. While the Macy's brand reported a 1.6% drop in comparable sales, that drop shrinks to only 0.4% when factoring in licensed stores and marketplace activities. Other brands under the Macy's umbrella, however, performed considerably better. Bloomingdale's, for instance, saw an increase of 0.3%, while Bluemercury posted a 4.3% surge in comparable sales. There was even some strength when it came to the Macy's go-forward operations (locations they plan to keep), with a rise of 0.1%. Even under the Macy's brand, however, there were signs of improvement. Management has a collection of locations known as First 50. Through these stores, the company is able to conduct pilots for new products, as well as other various initiatives aimed at transforming the company more broadly. Management claims that these have broad geographic and mall representation so as to be indicative of how the company might perform as a whole if its tests were implemented brand-wide. During the first quarter of 2024, these locations reported a 3.4% improvement in comparable sales. Macy's All of this is great news for shareholders who are focused on the longer-term picture. Even though management is planning to close around 150 Macy's locations between 2024 and the end of 2026, and will focus instead on the remaining 350 that it will keep open, it also has plans for its other brands. From 2024 through 2026, the company hopes to open another 15 Bloomingdale's locations. And over that same window of time, it wants to either open or remodel at least 30 Bluemercury stores. Its collective strategy calls for a 20% growth in luxury store locations during this period of time. Once again, not dwelling too much on my prior article. But these changes will see a shakeup of how the company does things. It plans to sell off between $600 million and $750 million worth of assets as it goes along. This should help to pay down the $2.12 billion in net debt on the company's books. Even though management is planning to close a large number of locations, it actually believes that its turnaround initiatives will allow it to grow EBITDA at a mid-single digit rate starting in 2025. Based on the midpoint of guidance for this year, EBITDA should be around $2.06 billion. That's down from the $2.32 billion reported for 2023. So if the company can achieve this objective of returning to growth, it would be a breath of fresh air. Macy's This puts management in a rather complicated position. In the event that the firm's turnaround plan is successful, the end result for shareholders could be quite positive. But then again, turnaround plans in the clothing retail space have often fallen far short of expectations. I probably don't need to remind you of how Sears Holdings and J.C. Penney ended up. Both of those companies initiated significant changes leading up to their eventual collapse. This was especially true of Sears Holdings, which sold off asset after asset in order to transform the company and extract value from the business as a whole. So banking on management being successful on this front is certainly not without its risks. Author - SEC EDGAR Data Despite the improvements that the company has seen, profitability for the business did take a hit in the latest quarter. Net income fell from $155 million last year to only $62 million this year. But that wasn't the only pain point. It is true that operating cash flow grew from $105 million to $129 million. But once we adjust for changes in working capital, we see a decline from $351 million to $303 million. Meanwhile, EBITDA dropped from $468 million to $364 million. Author - SEC EDGAR Data Whether or not management will accept this offer or any higher offer will be based on what they believe the success rate of their turnaround plan will be and how much value that can add to investors. But if we take the company as it stands today, the buyout offer does seem to be pricing the company a bit on the low end relative to earnings and cash flows. In the chart above, you can see how shares are priced relative to revenue, earnings, and adjusted operating cash flow. You can also see the company's valuation on an EV-to-EBITDA basis. This covers data for 2023 and uses projections for 2024 that have been provided by management or, in the case of adjusted operating cash flow, estimated by me. As a note, the valuation of the company is based on the proposed buyout price, not the price at which shares are currently trading. To put the pricing of the company into perspective, I decided to compare the firm to three other comparable enterprises. These can be seen in the table below. On a price-to-sales basis, two of the three companies ended up being cheaper than Macy's. But on both a price-to-operating cash flow basis and on an EV-to-EBITDA basis, only one of the three was cheaper. Meanwhile, on a price-to-earnings basis, our candidate was the cheapest of the group. Even if we use the forward estimates, the picture does not change all that much. One of the companies does become cheaper than it on a price-to-earnings basis, and another becomes tied with it on an EV-to-EBITDA basis. But that's not a significant change.   Company Price/Sales Price/Earnings Price/Operating Cash Flow EV/EBITDA   Macy's 0.30 7.2 3.6 3.9    Nordstrom, Inc. (JWN)  0.24 12.1 4.9 4.4    Dillard's, Inc. (DDS)  1.07 9.8 8.3 5.7    Kohl's Corporation (KSS)  0.15 9.0 1.8 2.9   Click to enlarge Takeaway  To be perfectly honest with you, I have no idea whether management would decide to accept the current offer or not. What I will say is that, for those who believe that this turnaround play will continue to work, the company offers an appealing risk-to-reward opportunity at this time. On the one hand, there is the opportunity for short-term upside that would be quite significant. On the other hand, if the turnaround is successful and the company stays independent, there would be some upside as well. In the long run, it could potentially be even greater than what the short-term upside from the buyout can provide. Only those who are bearish about the company specifically and who expect management to balk at any reasonable offer will look upon this with trepidation. For those investors, steering clear of the retailer will make the most sense. But considering my own thoughts on the matter, I think that keeping the company rated a 'buy' makes sense.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.28.3","shortVersion":"4.28.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2449421544"}