Goldman Sachs Says Sell Macy's On Poor Fundamentals, Limited Real Estate Value

Macy’s Inc M is down nearly 51% year to date, and analysts don’t expect recovery.

The Rating

Goldman Sachs analyst Alexandra Walvis downgraded Macy’s from Neutral to Sell and cut her price target from $19 to $12.

The Thesis

Macy’s has had a tough year, but the challenges aren’t expected to lighten up any time soon.

“We acknowledge significant YTD underperformance and already weak sentiment following the recent deterioration in fundamentals,” Walvis wrote in a report. “However, we see significant additional downside to M’s retail operations, which offset upside from store segmentation and cost savings initiatives.”

According to Goldman Sachs, the Street is underestimating Macy’s negative operating leverage and the extent to which secular headwinds will set back comps and profitability. Walvis sees particular earnings-before-interest-and-tax risk in the retail business, the profitability of which is mostly driven by real estate and credit income.

She identifies 273 stores that could improve productivity by transitioning into neighborhood concepts, although the conversions could be costly.

“We believe that M’s highest value assets also happen to be its most productive stores,” Walvis wrote. “We thus expect limited value creation from real estate sales above and beyond current guidance and potential partial monetization of Herald Square.”

A sale of Herald Square could drive upside, but the analyst considers the pursuit unlikely.