Macys: Buy the Rumor (M, AMZN)

by MiltDavis

So, I feel like this is the definition of buy the rumor. Amazon has been hunting off and on for a suitable retail partner since 2017, when rumors first emerged of them buying out Kohl’s; Kohl’s even went so far as to initiate a unique deal with Amazon which allowed customers to conduct exchanges and other Amazon-exclusive transactions within their brick and mortar retail locations. For whatever reason that fell through, but in the same year (2017) Amazon started leasing six floors in Macy’s downtown Seattle building (which I’ve seen, it’s pretty dope); as mild as it may be, a relationship does exist there. The rumors about Macys and Amazon, picked up a little steam last week, and here’s why I think this deal could get done sooner rather than later.

Amazon Needs Real Estate, Which Macy’s Has

More retail real estate is something that been on Amazon’s radar for some time, and is a signifanct need in their battle for supremacy with WalMart, whose locations have given them an edge on both cost overheads and customer satisfaction. Consider this:

The (M) real estate could be a strategic play for Amazon in its battle with Walmart for online dominance. Entrepreneur.com said Walmart Inc (NYSE: WMT) is able to deliver grocery items 20% cheaper than Amazon can because of its physical store locations. Walmart also allows in-store pickup for both grocery and non-grocery online orders, something Amazon can only offer at its Whole Foods and Amazon Go convenience locations.

According to a November 2019 First Insight poll, 55% of people said they prefer to shop at Walmart versus Amazon, an increase of 8% from a similar 2018 poll. Those favoring Amazon dropped from 53% to 45%.

Macy’s own the vast majority of its stores and real estate, including two spaces in the Seattle area that Amazon leases from (they acquired small hub space in Redmond just a couple weeks ago). In order to gain the brick and mortar space they need, the acquisition makes sense. But for this to make sense, Macy’s would have to be put down….

Macy’s was on it’s last leg, reopening pullbacks could be the nail in the coffin

Macy’s—even before Covid–was struggling to compete in the e-commerce space. Once COVID blew through it was hit just as hard as other prominent brick and mortar retailers that have announced bankruptcy or significant financial sustainability issues (JCP, Kohl’s, Pier 1, on and on). For the past quarter it reported an operating loss of $905 million to $1.11 billion, compared with net income of $203 million a year ago. They also announced on Thursday they would be cutting 3,900 corporate positions in a restructuring to survive COVID as a smaller, leaner company.

Their last hope of getting back to where they once were was re-opening, and now that process looks troubled, at best.

Why Macy’s and Not JCP

JC Penney has been rumored to be approaching a buyout from Amazon—even going so far as acknowledging it was having talks with the tech giant. That was in early May, and they have since stalled. Macy’s has the relationship with Amazon expanding via their space leasing, and JC Penney meanwhile has seemed to move on to acquisition talks with Sycamore Partners, and has actively been negotiating with landlords. Talks of acquisition seemed to have cooled down by all available news sources.

Why Macy’s and Not Kohl’s

Though Kohl’s and Macy’s have had a partnership since 2017, it seems to not be working out as planned. Found a few sources like this which intimate that the results have not been to Amazon’s expectations (www.fool.com/investing/2020/01/14/kohls-partnership-with-amazon-really-isnt-working.aspx ) but I will admit that the partnership makes sense–it just hasn’t happened for four years, so I feel it’s less likely to be revived now.

How you can win a couple different ways

  1. Macy’s may beat earnings expectations, anyway– On June 9th Macy’s CEO Gennette stated that they were finding surprising success with reopening. Although it may be short-lived due to re-openings being halted, it could see a nice little bump for earnings on the 1st.
  2. If Amazon doesn’t do it, somebody will- If Amazon rumors heat up, other vultures will begin circling the decimated department store. If Amazon falls through, look for other buyout companies to quickly step in with offers that Macy’s may have to accept since it’s weakness and willingness will be clear
  3. Amazon buys they asses and you print Whole Foods acquisition level tendies

There’s no guarantee that Gennette is ready to sell, but given the current climate for all other major retailers, Amazon’s relationship with the company, and a potential second quasi-lockdown even further hurting their stores, it’d be surprising if Amazon didn’t take a swing at them, and even more surprising if Macy’s didn’t entertain talks in the near future. If not with Amazon, then definitely with somebody else.

M 6.50 7/31c

M 7.50 8/21c

EDIT: 6/28 Added info on Kohl’s partnership

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.