Personal Finance

Macy's Last Line of Defense: Everyone Else at the Mall

BONT Free Cash Flow (Annual) Chart

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.)

BONT Free Cash Flow (Annual) Chart

Bon-Ton Stores Free Cash Flow (Annual) , data by YCharts .

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.

M Free Cash Flow (TTM) Chart

Macy's Free Cash Flow (TTM) , data by YCharts .

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.

10 stocks we like better than Macy's

When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Macy's wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of February 6, 2017

Adam Levine-Weinberg owns shares of J.C. Penney and Macy's. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story


Other Topics


The Motley Fool

Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

Learn More