This week’s Stock of the Week is a retail giant with a big advantage.

Retail Survivor

Macy’s Inc. (M) operates about 680 Macy’s and Bloomingdale’s department stores plus 190 specialty stores. Its online business, now 18% of total revenue, is growing 12.5% annually and helps to offset an essentially static brick-and-mortar business.

The physical stores have value far beyond what they sell. Macy’s has a market capitalization of about $8 billion, but its real estate alone is worth $20 billion, so in a sense, investors get the operating business for free. Macy’s has improved its inventory management, so it has needed fewer markdowns, and it has paid down $350 million in debt in recent quarters—although its debt load remains around $5.5 billion, and that tends to weigh on the stock price.

Management’s willingness to focus on new, more profitable areas of its retail business was shown when the company recently announced plans for an additional $100 million in cost cuts—including cutting about 100 top-level jobs—even though that created an $80 million charge for 2018. The firm is redoubling its focus on online sales, seeing those, not brick-and-mortar retailing, as the driver of future profits.

A possible US economic slowdown may reduce both earnings and revenue in the 2020 fiscal year. However, investors who see the high quality of Macy’s management can wait for the stock to rise while collecting a dividend of $1.51/share/yr., which recently yielded 6.48% and appears secure. Revenue was $24.8 billion in fiscal 2018 and will likely be $25 billion in fiscal 2019 and $24.75 billion in fiscal 2020.

Fiscal year: January. Earnings per share: 2020 est./$3.30…2019 est./$4…2018/$2.71.

Matt Watson is portfolio manager at James Advantage Funds, Xenia, Ohio, including the $1.3 billion James Balanced: Golden Rainbow Fund (GLRBX) and the $14 million James Mid Cap Fund (JAMDX).

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