Speed and agility might be two of the key survival skills during the COVID-19 retail shutdown — but they also might not be enough if they’re not backed up by a big financial cushion.
Count Macy’s Inc. as among the retailers still hustling, pushing hard to secure a reported $5 billion financing package to hold it over. And while the company is moving fast, it also appears to have moved early, putting its Bluemercury business on the block weeks ago, according to three sources.
The department store started shopping the 171-door beauty concept with the help of Goldman Sachs shortly before the outbreak closed retail in mid-March. Private equity firms were among the players to take a look at the chain.
While it’s not known exactly why Macy’s decided to take Bluemercury to market, the threat of the coronavirus was in the air and sources said the sale process continued after stores closed.
A spokeswoman for Macy’s declined to comment on what she described as “rumors or speculation.” A Goldman Sachs spokeswoman also declined to comment.
The Bluemercury sale effort marks a quick turn for Macy’s, which was already working on reinvention and in early February laid out plans to close 125 stores and cut 2,000 positions. At the time, chairman and chief executive officer Jeff Gennette sought to put to rest speculation that divisions could be spun off as the company took a more aggressive stance to change.
“Bluemercury and Bloomingdale’s are important parts of the Macy strategy,” the ceo said at that time.
Clearly, plans changed.
It remains to be seen if the company finds a buyer for Bluemercury, which has grown rapidly since Macy’s bought it from founders Marla and Barry Beck for $210 million in 2015, but now has to demonstrate just how well it is positioned to navigate uncharted waters. Barry Beck left the business in September to take on a new entrepreneurial challenge and Marla Beck was set to stay on as ceo during a transition period.
Most dealmakers have spent the last month shoring up the businesses they already own and while they are starting to look to the future and envision an intense period of rapid-fire consolidation, most are waiting for the inevitable shakeout first to get a clearer look at the landscape.
Neiman Marcus Group is expected to file for bankruptcy any day and J.C. Penney Co. Inc. missed an interest payment last week and is negotiating with lenders.
Macy’s came into the crisis in a position that was seen as stronger than either of those chains, but it’s also suffered a series of setbacks. Standard & Poor’s cut the company’s credit rating to non-investment or “junk” status in February. The stock was also pulled out of the S&P 500 index and earlier this month the company said chief financial officer Paula Price was leaving, a big change during a crunch time for Macy’s.
A spokeswoman for the retailer said Wednesday: “Macy’s Inc. has taken multiple actions to improve our position and improve financial flexibility, including suspending our quarterly dividend, deferring capital spend, drawing on our credit facility, reducing pay at most levels of management and furloughing the majority of our colleagues. The company is also exploring numerous options to strengthen our capital structure.”
Macy’s came into the year with the total value of its outstanding stock, its market capitalization, standing at $5.3 billion. But with the company’s stores closed and most of its revenues choked off, spring inventory backing up and no real sense on how consumers will spend when they can go back to stores, the retailer’s market cap has fallen to $1.5 billion. That’s a tough mismatch with the firm’s total debt load, which S&P Capital IQ sets at $7.5 billion.
But even with workers furloughed and every possible expense deferred, the company is still seen as needing access to more funding even if it means borrowing against real estate and inventory.
Cowen analyst Oliver Chen recently estimated Macy’s had four months’ worth of liquidity and could trip covenants in its debt agreements if its earnings before interest, taxes, depreciation and amortization fall below $380 million in the first quarter.
Chen estimated that Macy’s real estate could be valued at $8 billion, a figure that cuts the pre-COVID-19 estimate of $16 billion in half and is still dependent on the market.
Just how much Macy’s stores — and the inventory locked away inside — are worth today is the question that the company is hashing out with its bankers as it seeks a new funding lifeline.
With consumers stuck at home and a flood of pent-up inventory about to be unleashed on the market, it’s a tough question to answer, involving a fair bit of science and guesswork.
At the root of it, bankers and bondholders are faced with the question of whether or not Macy’s has a reason for being in the post COVID-19 retail world and have to bet accordingly.
According to sources buzzing around the refinancing talks now, the betting seems to be, yes, Macy’s has a place in the future. But getting from here to there could be a tough road and it seems some businesses that had a place in the Macy’s story — like Bluemercury — might fall out along the way as the company cuts down to its core.
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