Macy’s New Money-Making Machine

The Base Code: Retail

I. Overview

This weekend, the lady and I found ourselves strolling through Southcoast Plaza in Costa Mesa, CA. If you’re not familiar with the area or the mall, let me sum it up in one word: luxury.

It houses stores like A. Lange & Söhne, Balenciaga, Baccarat, Berluti, Bulgari, Bottega Veneta, Brioni, Christian Louboutin, Chanel, Cartier, Dior, Hermès. I’m going to stop right there before we go any deeper into the alphabet.

But one store surprisingly suck out at Southcoast Plaza. That store is Macy’s. Below I’ll describe why I think the bellwether retailer is about to be on the verge of a retail shopping resurgence and why the stock is a good investment opportunity.

II. The Base Code

It’s all part of The Base Code’s ongoing pursuit of helping you build your own personal hedge fund with as little as $50 per paycheck. I make every trade and decision completely public. I even open-sourced my valuation model, which you can find at the bottom of this article.

My performance, year-to-date in 2016 is +20%, which is nearly 3x that of the S&P 500 market benchmark. You could have had the exact same peformance by following along and doing exactly what I do.

Below is a screenshot from openfolio showing how my performance compares to other investor benchmarks. You can join The Base Code’s group to track performance of other members in the community by clicking here (you might have to download the Openfolio app first).

Why do I give all of this away for free?

Because I believe everyone should have the knowledge and power to create their own financial future, without the mystery and fees pushed on you by stock brokers, fund managers, and the like. If they charge you a fee, you’ll do better by investing in the S&P500. Don’t believe the BS, folks.

III. Experience: Retail & Finance

Half of investing is knowing what to invest in and at what price. The other half is trusting the person who’s advising you on it. The first half, anyone can do. It just takes time and some study. For the second half, it’s important you understand my background so you can make your own decision on whether I know what I’m talking about or if I’m just a madman.

Having spent more than a decade working in Retail (before my time in tech), I received first-hand knowledge on the entire process. From selling, merchandising, and store management on the operational side with American Eagle, Armani Exchange, and Guess to the Board and Management Consulting side with Wal-Mart and a few others, I built up a pretty good sense of what works and what doesn’t for the American consumer.

The one lesson I learned during this decade is that you have to show the customer what to buy, before he or she will ever buy it. People are busy. They aren’t experts. They’re just trying to make a life for themselves and look ok doing it. You’d be surprised how many people walk into a store and say, “I want that”, pointing to a mannequin who’s been properly outfitted with the clothes and accessories of the season. Show the consumer what they want. Then, and only then, will they want it.

It’s the entire reason Vogue and GQ exist. They are 100% merchandising.

On the more technical side, I received my MBA from Chicago Booth back in 2011. Most people in the tech industry think that’s silly. Until they have to operate a fast-growing global company with thousands of employees.

Booth is the premiere finance institution in the world, with more Nobel Prizes in total and for economics and finance than any other educational institution. Within those walls, the famous Efficient Market Hypothesis was discovered as well as various portfolio theories by the Father of Finance, Eugene Fama. Heck, even the school was named after Mr. Booth who invented, popularized, and profited from mutual funds. He gave the school $300M while I was there.

Hopefully this might make you believe some of the things I’m telling you in this article.

Even if the things I’m telling you don’t seem to make sense based on the propoganda you’ve heard from your 401(k) provider, I would urge you to do the research yourself or dig into my previous articles on the subject.

IV. Why Macy’s

My investment strategy is very similar to Buffett’s. I call it BOSAH, for lack of a better acronymn. It stands for Buy On Sale And Hold. Embedded in that strategy are three technical aspects:

1. Buy
2. On Sale
3. Hold

First things first. Why buy Macy’s (ticker $M)?

Many of the greatest investments come from companies and products you know well. There’s a reason that you buy certain products and it’s often because they do a job for you while making you feel a certain way. It’s why you buy a certain cell phone, car, and even one kind of cereal versus another.

Maybe you only buy Apple products, or fly Delta for work, or that NVIDIA makes the GPUs that power the machine learning training in every major tech company’s cloud.

Much of time it starts with a feeling.

In this case, walking into Macy’s this weekend with my girlfriend and experiencing the “product” completely changed the perspective on the brand and the company. First, they have a number of compelling brands within their walls that most Americans would love. I used to buy luxury items and stopped many years ago because I realized it was mostly about a name and not necessarily about quality. Now that’s not always the case, but when you can get similar quality for a lower price point, it just doesn’t make any sense.

For example, I only buy Levi’s pants and jeans now. I’ve got pairs that cost $35, $69, and fit perfectly. At Macy’s this weekend I also got a new high-end blazer with quality material that should have cost at least $500 but got it for $100.

Macy’s is pretty much always on sale.

30% off normal prices right now (which are already low), and another 20% off if you use a Macy’s credit card. Think about going back to school or setting up a new apartment on the way to college. You grab some coupons, wait for the right sale, open a credit card and instead of spending $3000 to finish your home with linens, mattresses, silverware or whatever else, you only spend $1500.

Getting this 50% off isn’t a joke or some one-time deal. You can get great brands, pay far less than normal, and walk out the front door essentially stealing products, without them calling the cops.

It’s the exact same feeling I had with T-Mobile before I switched to the service and began investing in the company.

Second, is the stock on sale?

So here’s the technical part of the strategy. And that’s where the valuation model comes in. Below is a screenshot of the summary comparison tab (note that Macy’s is the first line item).

As I mentioned in my Delta analysis, the numbers are all wacky. That usually means it’s an opportunity or at least something to pay attention to.

For example, you can see under the Real Assets column that it’s a value stock, not a growth stock. Funny enough, the break-up value of Macy’s is 21% more than the stock price. You could buy every available share in the company to take control, sell the entirety of their retail locations and inventory, making a 20% return.

And because of that, the rest of the numbers are all wacked out. When you look at the price history, you can see why. About a year ago in July 2015, the stock price dropped in half. That’s just due to some financial results, but makes it a prime opportunity for a buy.

Their revenue is consistent year over year, and their Economic Profit is still positive, which is good news for a retailer “buying” their customers.

And third, should you hold it?

Yes, this is just a good place to park some capital if you don’t want to lose it. In fact, it’s better than a savings account because that puppy doesn’t grow with the 3% annual inflation. Retail most definitely does.

Macy’s isn’t going anywhere, they have consistent financials, and they’re employing a similar strategy as T-Mobile: buying their customers by removing any objections you may have to pulling out your pocketbook.

It’s a way to steal market share from competitors and create a habit in the minds of consumers. On a personal level, it affected our shopping experience to the point that when we get a new place to live, we’ll be going back to Macy’s to do our shopping. Ok, and maybe supplement with a bit of Restoration Hardware.

So yes, I think it’s a good place to hold cash. It won’t grow like crazy, but it also won’t lose like crazy. It will tend towards retail in general and the consumer spending market. And when you compare to Amazon’s sky-high $750/share, it’s much easier to get into 1 share of Macy’s when it’s trading under $40/share.

In fact, you’d get almost 19 shares of Macy’s for the same price as 1 share of Amazon. So when consumer spending goes up 1% and retail stocks go up 1%, you’re getting 19x that effect with Macy’s as you would for Amazon. Granted, they’re not 1-for-1 comparisons as one is a department store and the other is more of a technology company, but don’t yet underestimate the power of having physical retail stores as anchors in major malls all over the United States. Nor the power of a Thanksgiving Day Parade.

Finally, don’t forget that Macy’s also owns Bloomingdales. If you live in Chicago, you know all about the Bloomie’s brown bag.

V. Open-Source Valuation Model

As I’ve done in the past, below is the link to the open-source model. You can only view it, not edit it, because it’s a bit fragile based on how it’s built using all open-source software: Google Sheets, Morningstar CSV scraping, Yahoo Finance, etc. So, if you were to accidentally change a cell it could affect the model.

But, if you need a copy of your own, just email me or hit up a comment below.

— Sean