Macy's Ponders Its Biggest Sale Yet -- Its Pricey Real Estate

NEW YORK (TheStreet) -- Following a stretch of sluggish earnings growthMacy's (M) may be feeling as if investors aren't showing it enough love. 

So execs at the department store chain could be nearing a decision, or series of decisions, to extract value from its impressive real estate portfolio. "We are studying various transactions and their pros and cons", said Macy's CFO Karen Hoguet on the company's first quarter call Thursday on the topic of monetizing its real estate holdings.

"We are getting questions also," Hoguet replied in answer to a stock analyst who said he had received inquires from his firm's investors on the issue. According to Hoguet, Macy's is studying "many" opportunities, but noted that so far, nothing has made strategic sense, and any deal of the sort, where real estate is sold, is complicated.

It wouldn't be the first time Macy's generated cash by unloading real estate that equity investors were potentially undervaluing. Last October, Macy's sold its Cupertino, Calif., location to real estate developer Sand Hill Property for an undisclosed amount. Macy's joined fellow mall anchors J.C. Penney (JCP) and Sears Holdings  (SHLD) in selling their Cupertino locations to Sand Hill.

After a wider real estate sale, Macy's could decide to enter into long-term leases to keep some or all of the stores open, but the proceeds could be reinvested into more profitable locations. Macy's execs on Thursday detailed a plan to ramp up their merchandising efforts and other new initiatives at 150 of its top U.S. stores, particularly at 30 locations that it deems "platinum."

Macy's shares have modestly outperformed the S&P 500 over the past year, rising about 8.5%. But several quarters of weak growth may be masking the full value of the company, which, of course, includes its real estate holdings. The retailer's market cap is about $21.8 billion, but the value of its property, plant and equipment is listed at $7.7 billion. Execs could argue the company deserves a higher valuation given its prominent locations such as those in New York's Herald Square and other highly trafficked tourist destinations. 

The latest example of depressed earnings came in the first quarter. Macy's reported EPS of 56 cents a share, falling shy of the 62 cents share analyst consensus. Although Macy's reiterated its full-year sales and earnings outlooks, Hoguet warned earnings would decline year-over-year in the second quarter, and said same-store sales growth would be below 2%.

Shares of the retailer were down about 2% in midday trading on Wednesday.

Macy's would hardly be the only department store chain trying to monetize its real estate holdings. Beleaguered competitor Sears has essentially stayed alive by selling off real estate. In April, Sears formed a real estate investment trust that will acquire about 254 of its properties, a maneuver expected to generate more than $2.5 billion. Sears' total market cap has been whittled away to just $4.4 billion, due to years of mounting losses from its steady market share deterioration.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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