Macy’s, Inc. (NYSE: M) is in trouble. Its stock has been up on numerous private buyout reports in the past. None of those have ever come to fruition. And now Macy’s latest merger talks with Arkhouse Management and Brigade Capital Management have been torpedoed as well. Macy’s stock price fell sharply and with heavy trading volume on the news. So, what the hell are Macy’s shareholders supposed to do now?
Oggonomics reviews some of the recent merger implosions for long-term investors to decide whether or not outsized gains (or alpha) should be expected. This is when investors have to decide if a stock drop of more than 10% is a fair way to value a company just because a buyout is no longer on the table.
There are Oggonomics, and there are chicken bulls… What is Macy’s really isn’t better off standing on its own?
STOCK CRASH OR GARDEN VARIETY PULLBACK?
A 12% drop in the stock to $16.75 sounds fairly extreme. Some other news headlines have been sensationalized to say “crash.” In all sincerity, a 12% drop for a company having the troubles it has might only seem like the same investor response to an earnings disappointment or lower guidance. Macy’s stores still have some issues that need modernizing (see below). Some buyers no longer want to go to their stores to buy clothes and other merchandise. And on a macro-basis, outside of slow or selective consumer spending, mall traffic in general in a post-Covid and omnichannel world just isn’t what it used to be.
Macy’s usually trades 4 million to 5 million shares a day. It traded over 23 million shares on Monday. A volume-spike of 5X usually indicates a big shareholder rotation. Perhaps the biggest surprise of them all was that the stock volume wasn’t even higher considering that this is yet another failed merger for Macy’s shareholders.
MERGER IMPLOSION(S)
Macy’s announced back on April 10, 2024 that it had terminated a proxy contest and that it had begun providing certain confidential due diligence information to Arkhouse and Brigade. And it was on March 3, 2024 that Macy’s announced Arkhouse and Brigade were offering to acquire all outstanding shares of Macy’s at $24.00 per share in an all-cash transaction. And that buyout news was after the company had said it was planning to close another 150 stores through 2026 and prioritize investments in about 350 stores.
And earlier this year, after rebuffing a prior attempt by Arkhouse and Brigade to do due diligence, the stock had been reported to be a buyout candidate of Sycamore Partners. Sycamore’s retail portfolio is made up of stores like Ann Taylor, Loft, and The Limited so it should likely know what it is doing. And the proposed buyout from last December valued Macy’s at what was reported as $21 per share at the time. If this sounds tiring, let’s just all skip all the buyout rumors and stories about other private equity buyers in prior years who were wanting to own Macy’s.
WHY THE MERGER IMPLODED
According to the merger termination corporate press release, Macy’s said that the revised merger proposal lacked certainty of financing. The apparel retailer also said the deal remains non-actionable and does not provide compelling value for the company nor its shareholders. Macy’s also said its board of directors and management are committed to creating shareholder value and that they have confidence in the company’s “A Bold New Chapter” strategy.
The Macy’s release detailed what it disappointingly referred to as a “check-in” letter at the end of June that would boost the deal to $24.80 per share in cash. Monday’s release also detailed a painstaking process of hundreds of hours of related work, providing store-by-store sales trends, and even going through individual leases.
Oggonomics looks at both sides of the coin. It would be foolish to ignore that consumer spending is becoming far more selective when consumers are 1) spending for experiences over things and 2) are reeling from inflation forcing a higher cost of living down their throats. Both of those have to be strong considerations for private equity buyers, even when their financial backers are quite wealthy.
LONG-TERM INVESTOR DISAPPOINTMENT
Regardless of how any investor looks at Macy’s over the long-term, Macy’s stock ended 2023 at $20.12. A $16.75 share price now in July is obviously a disappointment. But, to show both sides of a coin, Macy’s had fallen as low as less than $11.00 briefly last November before buyout news kicked its stock into gear.
Macy’s stock has been in a 52-week range of $10.54 to $22.10 and its market cap is now about $4.6 billion. Outside of what Macy’s is saying, and outside of private equity buyer comments, Oggonomics sees more than one issue here. The problem in mall-based retailers and a need to revamp stores is not going to just go away nor fix itself. Layoffs and store closures are disrupting, and cadaver stores sitting empty for months or years is just not a good marketing billboard to consumers. Consumers are reeling from high prices on groceries, going out, rent and other day-to-day expenses. And most private equity deals are financed by substantial loans, and this is a time when borrowing rates (and merger financing rates) are still higher than they have been in years.
And while Macy’s has lifted its dividend recently, that quarterly dividend payout is still less than half of what it pre-Covid at the old $0.38 per share. The company reinstated paying dividends late in 2021 and it’s now back up to $0.17 per share.
Wall Street isn’t exactly predicting a Macy’s Christmas Parade in July either. The current consensus is for revenues to be down about 1% this year and down about 2% in 2025. Consensus analyst earnings (per share) estimates are $2.78 this year (versus $3.50 last year) $2.73 next year. That looks like a dirt-cheap earnings multiple at 6-times blended earnings. That said, this looks like an example of the classic investor phrases “the stock looks cheap for a reason.” That is a very common theme among companies in troubled industries or which have no solid growth prospects.
Now take a guess where shares were right before the Covid-19 society shutdown — $16.50, in February 2020. Despite a brief recovery and strong stock rally to above $30 in 2021, long-term shareholders in Macy’s almost certainly feel like this has been a round-trip ticket on a theme park carousel.
Strategic BULL TO CHICKEN BULL
It seems that value-oriented strategic investors will want to hope for a pullback in this stock before committing full positions into Macy’s with new funds. That doesn’t mean a pullback will come, but that’s the safer play on the heels of yet more bad news and long-term shareholder disappointment.
If Macy’s management wants to fight the notion that that there has been long-term investor disappointment, numerous buyout and merger attempts all failing to come to fruition is one bit of evidence. If that’s not strong enough evidence, Macy’s was a $40 stock shortly before the global financial crisis — and its stock had soared to over $60 per share in mid-2015.
Remember that investing is a long-term game rather than a day trading and swing trading game. And also remember that there are 500 stocks in the S&P 500, and thousands of other public companies as well, so those who invest in individual stocks can always choose to focus on stocks where the underlying companies are expected to have strong fundamentals years into the future rather.
