Macy's Stock Upgraded By Citi As It Gains Appeal Post Recent Downturn

Macy's stock (M) has been upgraded from "Sell" to "Neutral" by Citi, positioning it as a more promising investment despite the recent slump in its share price. The 165-year-old department store's shares have, until recently, been downgraded by Citi following the revelation of a proposal to privatize the company at $21 per share, a premium of 32% on the stock’s price.

This proposal sent the share price upwards to over $20, yet the move was met with skepticism from Citi analysts such as Paul Lejuez, who did not envision a positive outcome. Macy's encountered a setback when, in January, it spurned a $5.8 billion buyout offer from Arkhouse and Brigade Capital Management, citing financing concerns and underwhelming value offered.

As a result, Macy's shares' value fell by nearly 13% from its peak in December. Lejuez penned a note to clients mentioning that while he continues to remain “skeptical” about the company's prospects, the recent downturn has tipped the risk-reward ratio in Macy's favor.

Even though its initial bid was rejected, Arkhouse remains interested and has expressed a willingness to reveal more about its financing or enhance its offer, provided Macy's signs a non-disclosure agreement and permits due diligence information access. However, Macy's turned down this proposal as well. Furthermore, another interested party, private equity firm Sycamore Partners, renowned for retail and consumer investments, has been reportedly negotiating to buy the beleaguered retailer. Neither Macy's nor Sycamore Partners have commented on this matter.

Presently, Macy's has prioritized cost-cutting and safeguarding its free cash flow. To this effect, it announced in January its intentions to let go of approximately 13% of its corporate staff and shut down five stores. These tumultuous months have led many to believe that privatization could be in Macy's imminent future.

The appeal of Macy's lies in its extensive portfolio of physical stores, despite a 2.49% reduction in foot traffic in 2023 compared to the previous year, according to data from retail insights firm Pass_by. During peak shopping times like Black Friday week and December, the decrease was even more significant. Veteran executive and retail expert Jan Kniffen estimates the worth of Macy's real estate at $8.5 billion. Some suggest that the value could be considerably higher.

This attention drawn by Arkhouse has highlighted the value of Macy's real estate holdings, prompting speculation about potential other bidders, according to TD Cowen managing director Oliver Chen.

Aron Bohlig, Managing Partner at ComCap, expressed to Yahoo Finance that privatization could aid in expediting Macy's turnaround. In the current digital shopping era, retailers need to be among the top players or risk being left behind. He believes Macy's needs to pivot towards serving a more specific demographic, similar to Nordstrom's approach, instead of remaining "stuck in the middle."

As Macy's continues to navigate through these challenges, investors and retail experts alike will be closely monitoring the company's next moves amidst the evolving retail landscape.