Shares of Macy's (NYSE: M) have lost more than half of their value since mid-2015, as the world's largest department-store company has been hit hard by declining mall traffic. Macy's has been reporting comp-sales declines for two full years. Recently, rumors have been swirling that management may be ready to throw in the towel and sell the company .
It's true that Macy's is facing significant declines in revenue and earnings. It expects comp sales to decline by about 3% in fiscal 2016, while earnings per share will be down by almost a third relative to the peak of $4.40 in fiscal 2014. But as the strongest company in a fragmented industry, Macy's is well-positioned to profit from consolidation and the disappearance of weaker rivals in the coming years.
A surprisingly fragmented industry
Among mall-based department stores, Macy's and J.C. Penney (NYSE: JCP) are the two behemoths. Macy's currently has more than 700 locations in the U.S.; J.C. Penney has more than 1,000. However, they face a wide array of smaller competitors in the mid-price tier. (I am not even counting Sears Holdings for the purposes of this analysis, as it has already retreated from many of the typical department-store merchandise categories.)
To stay solvent, Bon-Ton has cut investments to the bone. This will make it harder to drive a sales recovery in the future.
Finally, Bon-Ton Stores has more than $500 million of debt maturing in December 2018. If mall traffic continues to decline, it's unlikely that the company will be able to refinance that debt. This could set the stage for a bankruptcy filing -- perhaps followed by a sale or liquidation of the entire company.
It's possible that mall traffic will continue to shrink, as the bears expect. But if that's true, it will have an even bigger impact on Macy's competitors. Ultimately, this is likely to force some of the smaller players to merge with rivals in order to keep up. Weaker companies like Bon-Ton could disappear entirely.
This process will lead to a more concentrated and more profitable department store industry. As the largest department-store company in the U.S., Macy's will be a big beneficiary.
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