Macy’s Buy-Out Signals Deep Value in the Retail Sector

 | Dec 12, 2023 01:12AM ET

  • Macy's buy-out offer points to deep values in the retail sector.
  • Macy's bid implies a minimum 20% upside and it could be lifted soon.
  • Other stocks in the retail sector offer similar value and high yields for income investors.

    • The retail sector has struggled over the past few years due to the COVID bubble bursting and the shift in consumer habits that have discretionary items out of favor compared to dailies and health and beauty products. Today's takeaway is that the heavily beaten-down sector provides some profound value opportunities that private equity capital has begun to scoop up. Macy’s (NYSE:M) is the first major retailer to get such an offer, but others are waiting in the wings that are incredibly buyable, if not buy-out candidates.

    Macy’s received an offer to take the company private that values it at $21.20 per share or about 22% above Friday’s closing price. The offer comes from a partnership including Arkhouse Management and Brigade Capital Management, which views the company as undervalued. Trading at the bottom of the historical range with a P/E of only 5.8X earnings, this 3.8% yielding stock is certainly attractive. The pair says they are prepared to up their bid provided due diligence suggests the stock is still incredibly undervalued. The board hasn’t issued any statements yet but has the offer under consideration.

    h2 Macy’s has Brand Strength and a Solid Omnichannel Presence/h2

    What does Macy’s have that other retailers don’t? Macy’s is a good example of what it takes for a retailer to succeed in today’s environment because of its solid branding and omnichannel presence.

    Smaller brands like Williams-Sonoma (NYSE:WSM) have been able to sustain business above the pre-pandemic period because of it, providing stable cash flow for capital returns. It trades at a low 14X earnings and pays nearly 2% in yield. Macy’s capital return program is centered on its dividend, only 22% of the earnings outlook, with a positive outlook for distribution growth. At this level, the company has ample cash flow to continue paying and growing the distribution (assuming no takeover) or redirect it into business improvements should the takeover move forward.

    Analysts are likely happy with the news. They have the stock pegged at Reduce with a price target that implied a double-digit downside before the takeover announcement was released. Now, the stock is trading above the analysts’ highest target, providing a significant selling opportunity for them and their following.