With Stores Shut, Does Macy’s Have Enough Cushion To Survive The Demand Slump?

Like many other retail companies, Macy’s Inc’s (NYSE:M) problems have shifted from ‘how to grow’ to ‘how to survive.’ Consumer demand is down, stores are shut, and the stock has dropped a massive 70% this year. Are we looking at a liquidity crisis? How vulnerable is Macy’s Inc right now? Our dashboard Does Macy’s Inc Have Enough Liquidity To Survive Covid-19 Demand Shock examines the company’s cash flow generation ability, resilience of cost structure and operational runway, and compares it to that of its peers. It is interesting to note that Macy’s Inc does not have a lot of operational flexibility, and a revenue drop greater than -11% could push it into the operating loss zone. Further, if the revenue fall 30% for the entire year, which is likely given the current scenario,  Macy’s will lose more than $800 million in cash outflow. Where will this money come from? The company is leveraging its real-estate holdings to secure a $1.1 billion bond sale, and is looking to raise an additional $3 billion backed by its existing inventory. Much of this will go to refinancing its existing debt, and the rest to strengthen the liquidity position. It is critical for the company to raise additional financing because we estimate that Macy’s Inc has just a little over 1 month’s runway if revenues remain zero.

How Much Demand Shock Can Macy’s Take Before Posting Losses? 

In 2019, Macy’s Inc’s variable operating expenses, such as cost of merchandise, freight and shipping charges, handling costs etc, accounted for 70% of total operating expenses and 67% of revenues. Based on this, we determine that operating income will decline to the break-even point (no profit no loss) if 2020 revenue falls by -11% vs 2019. In comparison, the break-even revenue decline % figure for its peers Kohl’s Corporation and Dillard’s stand at -13.6% and -8.9%. One of its peers, JC Penney, has already announced bankruptcy, underscoring the vulnerable position of retail chains. It must be noted that even at break-even operating income, Macy’s Inc will post losses because of additional interest expense. As of the beginning of Feb 2020, Macy’s Inc had outstanding debt of of $4.2 billion.

Likely Scenario: Macy’s Survival Test If Demand Recovers By Q4 And Revenue Fall 30%

Let’s assume that Macy’s gets the debt financing it needs and rides the demand slump. As it does so, we expect it to permanently closes some under-performing stores, and re-open others in a phased manner as consumer spending starts returning to a decent fraction of pre-pandemic levels. In this scenario, we assume an annual drop of 30% in revenue, and 50% capital expenditure cut reflecting reduced maintenance capex due to store closures, and no growth capex. We also assume that Macy’s Inc will not spend any cash on share repurchases. In this case, the company can report annual losses of roughly $ -1.3 billion with revenue of $17 billion. In addition, it could face cash outflow of $ -831 billion after covering capital expenditures. How will it fund it?

As of the beginning of February, Macy’s had a cash balance of $685 million, which was not enough. This is why it is considering multiple debt financing options secured by its real estate holdings and inventory.

Extreme Stress Test: Macy’s Inc Has Just 1.2 Months Of Runway In Case Of Zero Revenue And No Additional Financing 

Here is another way to understand Macy’s Inc’s financial position. How much operational runway does the company have if there is no demand and revenue remains zero? As it turns out, it has just 1.2 months of runway based on its balance sheet at the beginning of Feb 2020. This does not include the additional debt it expects to raise. On the plus side, recent bankruptcies have opened up a huge market for surviving retail companies to grab. That’s something that potential lenders should look at as Macy’s floats debt options.

The general retail industry is not the only one feeling the pressure. Fashion brands aren’t any better. See how well Gap Inc is prepared to survive demand slump.

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