Macy's Sees A Path To Unlock Real Estate Value With Brookfield Partnership

Despite Macy's Inc M delivering a 58.5 percent negative surprise on EPS on November 10, the stock has since gained more than 11 percent. There are two factors behind this. While the first is related to the sales outlook, the second is the unlocking of real estate value granted through the partnership agreement with Brookfield.

Brookfield Partnership

BMO Capital Markets sees the "unlockable" valuation of $9.6 billion in the underlying real estate portfolio. There is also a possibility of an operating company provided through the partnership. Therefore, the analyst prefers to reiterate his Outperform rating while reducing the target price from $51 to $45 to reflect lower estimates.

The brokerage sees EPS of $3.30 on revenue of $26.287 billion for 2016 compared to its earlier expectations of $3.34 on revenue of $26.255 billion. Similarly, same-store sales growth has been slashed from -2.0 percent to -2.9 percent for the same period. For the year 2017, the firm reduced its EPS forecast from $3.68 to $3.56.

Analyst's Summary

Referring to Macy’s forecast, analyst Wayne Hood said, “Management maintained its 2016 annual EPS guidance of $3.15–$3.40 (excluding settlement charges/inclusive of real estate gains), but it reflects lower asset sales gains of $0.12 per share, implying a bump in the guide and more confidence in a turn in the fundamentals.”

As far as EPS miss for the third quarter, the brokerage blamed the increased SG&A on payroll investments apart from investments in other key areas like digital, Bluemercury, China, lower year-over-year credit income and backstage initiatives.

At last check, Macy's shares were up 3.26 percent at $42.71 on the day.