Has Macy's Lost Its Magic?
Short-term cash drivers do not address long-term competitive problems.
Macy's (M) announced free cash flow drivers, including plans to remove $400 million in costs and to explore various possibilities to monetize real estate, may give investors hope for near-term catalysts and additional upside in the stock price. But although we agree that these measures have the potential to provide near-term upside, we think this upside is much more limited than many investors are estimating, and the long-term implications of both measures could even be negative. More important, neither of these measures addresses the fundamental operational issues plaguing the stock, namely a category in secular decline and a business with few defenses against new competition, the basis for our no-moat rating. Ultimately, we think Macy's is fighting an uphill battle, and even if new operational strategic initiatives are effective, they are likely to be multiyear investments before having a noticeable impact on returns.
Cost cuts include consolidating Macy's stores into five regions from seven, adjusting staffing levels, implementing a "voluntary separation opportunity" for some senior executives, reducing back-office positions, consolidating credit and customer services centers, and decreasing nonpayroll budgets. We fear that such measures could have a negative impact on customer experience by making localization efforts more difficult in a consolidated operating structure, making service and neatness more challenging with decreased staff in stores, and increasing wait times or lowering performance for call service in consolidated customer services centers.
Bridget Weishaar does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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