Gilford Says Don't Believe The Real Estate Hype: Slashes Macy's From Buy To Sell

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In a report published Tuesday, Gilford Securities analyst Bernard Sosnick downgraded shares of Macy's, Inc. M to Sell from Buy following the surge in its stock after Starboard Value announced its belief that shares could be worth $125 if the retailer were to monetize its most profitable and productive real estate assets.

Shares of Macy's were down almost 2 percent on Tuesday.

Sosnick noted that Macy's "experienced the damage" done by the "retail real estate mania" in the late 1980s and early 1990s, which resulted in some of its stores declaring bankruptcies. As such, the company learned from its errors in the past and is likely to "rebuff" Starboard Value and any other activist investors urging engagement in "financial legerdemain."

The analyst said that under Starboard Value's scenario, Macy's would be "extracting" cash from real estate occupied by its most productive stores. Some stores may be forced to close under this scenario while other stores would be "saddled" with higher rents.

"Reducing profitability of the best stores would lever the business dangerously, because about half of Macy's stores generate low revenues and their profitability is likely to contract ad digital retailing grows," Sosnick argued. "We believe the quest for a pot of gold in real estate is a fool's errand."

Sosnick also argued that while Macy's has made "wise" merchandising and operating adjustments over the past 10 years, the company is still poised to experience growth. However, the analyst stated that Macy's initiatives "might not be enough" to offset a "likely long-term weakening" of sales in existing stores as consumer buying behaviors continue changing.

Bottom line, the "speculative premium" in Macy's stock is poised to disappear and the recent surge in Macy's stock provides investors with an opportunity to "lighten or eliminate" their positions at "attractive prices."

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Posted In: Analyst ColorDowngradesAnalyst Ratingsactivist investorBernanrd Sosnickgilford securitiesREITretailersStarboard Value
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