Macy’s Stock Up 2x, What’s Next?

Macy’s stock (NYSE: M) at around $13 has partially reached the level it was at before the drop in February 2020. During the coronavirus pandemic, the retailer became vulnerable due to its high operating costs, mall-based locations, and nonessential product assortment. While the stock is still down 24% from levels seen since the beginning of 2020, it has moved a strong 2x since November, thanks to the vaccine-related boost. That said, we believe that the stock could decline going forward in the medium to long term. A large debt burden of close to $5.4 billion, declining sales trends in the last few years, and an uncertain future of most of its stores located in malls – will likely add to its difficulty for a recovery back to pre-Covid levels of around $16. Our conclusion is based on our detailed comparison of Macy’s stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid a Saudi-led price war
  • Since 3/24/2020: S&P 500 recovers 55% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

Macy’s Performance During 2020 Coronavirus

Macy’s stock declined from levels of around $16 in mid-February (the pre-crisis peak) to roughly around $5 as of March 23 (as the markets bottomed out) – implying that the stock lost as much as 70% of its value from its approximate pre-crisis level. It then rallied to levels of around $13, rising by around 168% since March 23. However, it is still down 24% from levels of $17 seen in early January 2020.

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S&P 500 Index Performance During 2020 Coronavirus/Oil Price War Crisis

The S&P 500 index declined from levels of around 3,386 in mid-Feb (pre-crisis peak) to levels of around 2,237 as of Mar 23 (as the markets bottomed out), implying the index lost 34% of its value from its approximate pre-crisis peak. It then rallied to levels of about 3,847 currently, rising by 72% since Mar 23. It is also up 19% from levels of 3,231 seen in early January.

2007-08 Financial Crisis

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)

Macy’s Stock Performance Over 2007-08 Financial Crisis

But Macy’s stock fared similarly during the 2008 downturn. Macy’s stock declined from levels of around $33 in October 2007 (the pre-crisis peak) to roughly $8 in March 2009 (as the markets bottomed out) – implying that the stock lost as much as 76% of its value from its approximate pre-crisis peak. However, Macy’s stock recovered post the 2008 crisis, to levels of about $17 in early 2010, rising by 113% between March 2009 and January 2010.

S&P 500 Performance Over The 2007-08 Financial Crisis

S&P 500 Index fell 51% from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied to levels of 1,124 – rising by about 48% between March 2009 and January 2010.

Fundamentals

How Do Macy’s Fundamentals Look In Recent Years?

Macy’s revenues have declined 5% from $25.9 Bil in 2016 to $24.6 Bil in 2019. In addition, earnings growth, on a per-share basis, was also lower by 10% from $2.03 in 2016 to $1.82 in 2019.

Survival Check

Does Macy’s Have A Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

Macy’s had exhausted its $1.5 billion credit facility by the spring, leading to questions about whether it could meet its obligations through the pandemic. To sustain itself, it sold $1.3 billion in senior secured notes backed by real estate assets. It also arranged an additional $3.15 billion in an asset-based credit agreement. However, this has left the company with almost $5.4 billion in combined short and long-term debt (as of Q3 2020). This is a heavy burden for a company reporting a $4.1 billion net loss in the three quarters of its fiscal 2020.

CONCLUSION

Phases of Covid-19 crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with the gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • July-November 2020: Weak Q2 and Q3 results, but continued improvement in demand and progress with vaccine development buoy market sentiment

While Macy’s stock may have moved, 2020 has created many pricing discontinuities that can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Amazon vs Etsy.

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