2020 was, without doubt, a watershed year for retail. Forced to close virtually everywhere back in March—except, perhaps ironically, virtually—and then left to remain closed sporadically throughout the rest of the year, making a buck by offering people goods and services became a pastiche of difficult propositions. Macy's (NYSE:M) was part of the class of retail exemplifying the struggle, as it recently announced plans to close 45 more stores by the middle of this year.
Cutting Bait While Fishing
While it would be easy to think that this is a response to coronavirus-related shutdowns, the plans to shut down 125 Macy's locations throughout the United States date back to February 2020, so they've been in place since before the coronavirus was really a thing in the US of any serious magnitude.
The move is designed to focus more on “A and B malls,” according to word from Macy's representatives. For those not familiar, shopping malls actually exist within a ranking system, from A to C (some measures include a D-class), that is primarily determined by total quantity of sales per square foot.
A class A mall yields an average of at least $500 per square foot, while a class C is under $300. The quantity and perceived quality of stores tends to factor in as well, though that can be included as part of an overall return-per-square-foot measure. An Apple store, for example, tends to show up in a Class A mall, and considering the cost of Apple (NASDAQ:AAPL) products, sales there help push up the average.
The Analysts Approve
Macy's is in trouble, there's no doubt about that, but the analysts seem fairly happy with what's being done, at least based on our latest research. While Macy's is still considered a “hold” in consensus, the ratios comprising that consensus are closer to a buy today than they've been in the last six months. Six months ago, Macy's had eight “sell” ratings, five “hold” and one “buy”. Today, it's eight “sell”, four “hold” and two “buy.” “Sell” ratings had run as high as nine for the last three months leading to today.
The price target, meanwhile, has improved for the first time in a decline that's been running for the last six months. Six months ago, the target was $9.65 per share. That fell to $8.79 three months ago and then $8.77 a month ago, before improving to $8.95 today. Movement has been comparatively light; the last major analyst figure to emerge was back on December 18, when Jefferies came out with an upgrade from “hold” to “buy”.
A Better Brick-and-Mortar Retail Environment Ahead?
Not surprisingly, some are looking for improvements in physical retail, as lockdowns stop hitting quite so hard. This isn't the case everywhere, but even in places with stronger lockdowns like Michigan, retail has been left out of the equation. With new vaccine candidates coming out, and some—like those from Pfizer (NYSE:PFE) and Moderna (NASDAQ:MRNA)—actually in play, the idea that lockdowns may be off the table is increasingly possible.
This also dovetails with news that the flagship mall of the United States, the Mall of America in Bloomington, Minnesota, managed to renegotiate its mortgage to help it get current. The mall had been missing payments since April, reports note, and the loan was converted to interest-only through its maturity. Apparently, lenders believed sufficiently in the mall's long-term likelihood of success to manifest that belief in a change of loan terms. Given that the Christmas shopping season seems to have brought some new life back to the mall—though there was quite a shift to online shopping—the belief may not be out of line.
How does this hit Macy's? Well, it's actually good news. With Macy's focusing on the A and B-class malls, and mortgage-holders seemingly interested in maintaining A and B-class malls, Macy's is likely to have a viable presence going forward. Naturally, it will be crucial for Macy's to improve its online presence; if 2020 taught us nothing else, it's that the online shopping concept is now more vital than ever to retail operations. With Macy's stepping up its online operations accordingly, and its physical operations becoming more clearly focused, it's a good time to buy in on Macy's.
When the real estate side of things is so clearly willing to work with the retailer, and the retailer is making backup plans to keep things running with or without physical retail operations, the retailer is better protected against failure than ever. That's great news for the retailer...and for its investors.
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