The second largest department store in the world is a Macy’s. The first largest (since 2009) is Shinsegae’s flagship store, but that’s all the way in Centum City, Busan, South Korea, and not right here. Also the Shinsegae store is more than twice the size of the Herald Square Macy’s, but whatever. And it has a golf course in it. And a movie theater and a spa. There’s also an ice skating rink, a gym, and an art gallery in there somewhere. Well, Macy’s, if you’re going to lose to something, it might as well be to this little Korean slice of heaven.
That’s not to say that Macy’s hasn’t had much to celebrate since its founding in 1858. During these many long years of life, Macy’s has invented tea bags and was the first retailer to both promote a woman to an executive position and obtain a New York City liquor license. Each of those things would be outstanding achievements individually, but that’s just how Macy’s been doing business for the last 152 years.
Nowadays, Macy’s has just become such a staple of American (or New York, I don’t really go west too often) culture that it no longer registers as extraordinary. You don’t realize how many people walking down the street are carrying those white bags emblazoned with the bold, red star of Macy’s. Kind of like an elephant in your living room, only it’s been so long since it showed up that you don’t really notice it anymore until you need to shop for some new clothes or write a blog entry. Or something. I don’t know, I do most of my shopping online. But not usually from
Now, I’m not really clear on the differences between a ‘department store‘ and a ‘mall‘. Dictionary.com gave me some pretty vague definitions, too. Growing up in New York City, I never really had the opportunity to spend my afternoons wandering around retail complexes with other kids who, like me, had no money and no real interest in buying anything anyway. The South Street Seaport has a pretty mall-ish structure, but whenever I went there I always ended up just chilling in the Sharper Image comparing massage chairs and not really digging into the full mall experience. I guess that’s just one of the downsides of everything being too convenient.
“But enough of this nonsense!” you shout indignantly, “All I want to know is whether or not this iconic American treasure of a company can help me make money so I can feed my kids!” Well, fine. When you put it that way, I apologize for not getting straight to the point. Macy’s, Inc. is the company that operates both the Macy’s and (slightly) higher-end Bloomingdale’s chains; of which there are about 810 and 40 worldwide, respectively. They made $23.5 billion in sales over the course of 2009. That’s as much as you would make if you owned 10,217.4 average McDonald’s.
But how about those stocks, right? Yeah, totally. Eric R. Heyman, Senior Vice President and Director of Research at Olstein Capital Management, was recently interviewed by The Wall Street Transcript. In the interview, Mr. Heyman mentioned Macy’s, their business plan, and what he thought about investing in the department store giant in this kind-of-post-meltdown haze:
“Macy’s has done a terrific job, re-merchandizing, they’re at a normal level of maintenance CAPEX and there is excess depreciation. Again, Macy’s, at the $24 level, the free cash flow yield right now is around 12%.
We’re making a bet that the market will eventually realize that if this company goes back to what they should do normally in their operations, their cash flow yield at these levels makes this a superior investment to a risk-free treasury.
At the same time Macy’s has done a great job. Their same-store sales are starting to turn, they’ve re-strategized to customer tastes in different regions, and they’ve done a remarkable job of controlling their inventories and gross margin.
Right now the company looks like they’re only doing $1.60 to $1.65 of earnings per share but there is excess depreciation in there — depreciation over capital spending, which is a non-cash charge of over $1 per share right now. So you’re buying Macy’s at a 12% free cash flow yield, which is a very compelling investment.”
Macy’s hasn’t done quite as well as Mr. Heyman had expected. Since April 19th, the date of this interview, Macy’s stock price has dropped by about 20% what it was then. I guess this means that people are buying cheaper clothes, which makes sense. Even though Macy’s is actually pretty affordable, and the recession is going to be over, like, any day now, the trend still seems to be “try and not spend money whenever possible”.
In his interview with The Wall Street Transcript, Mr. Heyman goes on to discuss investing in all-cap values and strategic opportunities. If you would like to see the rest of the interview, click here.