Motley Fool Hidden Gems Investing - Would A Macy’s Buyout Be A Miracle On 34th Street?

Episode Date: December 11, 2023

Should investors be excited about a big department store potentially going private? (00:21) Jason Moser and Deidre Woollard discuss: - The potential for Macy’s going private. - If department stores are going the way of the dodo. - What could change the regulatory climate for big deals. (17:06) Ricky Mulvey and Matt Frankel dive into Boston Omaha, a company that could be poised to be the next great conglomerate. Companies discussed: BOC, M, WMT, AMZN Host: Deidre Woollard Guests: Jason Moser, Ricky Mulvey, Matt Frankel Producer: Ricky Mulvey Engineers: Dan Boyd, Annie Pope Learn more about your ad choices. Visit megaphone.fm/adchoices

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analyst, Jason Moser. Jason, how was your weekend? Jason Moser. It was a good weekend, Dieter. How about yours? Pretty good. Every Sunday, though, I start looking at the laptop, I start wondering what the news is. Last few Sundays have been pretty good for me as a news junkie and did not disappoint this weekend. The hot rumor, the rumor that is dominating the stock market today, too, is that Macy's might be acquired and taken private for $5.8 billion. This is with a couple of private equity funds, including Ark House Management and Brigade Capital Management. I mean, the deal would be for around a premium of 32% for shareholders based on when the deal was announced or was brought up at the end of November. The stock has been battered

around for a bit. So that is a premium based on where we were, but not from where the stock has been over time. But then today, the stock has been up practically to the level of $21 a share. Is this a deal that shareholders should want? If I were a shareholder, which I'm not, but if I were, I would think so, yes. We've talked about Macy's, I think, for a number of years on these shows. We've always just come back to the same ultimate conclusion, it's a business that just remains challenged because maybe it's not really necessarily a Macy's world anymore. I think Ron Gross years back asked the question, does the world really need JCPenney? When we were talking about JCPenney's woes,

I feel like that question more or less applies here at least to a degree. Macy's has more or less been treading water here over the last several years, trying to figure out the most sensible path forward. When you look at the metrics, the numbers, it really does tell you tail of a challenged business. You go back to 2014, they chalked up revenue just under $28 billion. Today, that's $23 billion. The margin picture just continues to get incrementally worse. Very concerning to me, cash and short-term investments going back 10 years, it stood at $2.3 billion. Today, $364 million. That is a massive cash burn. The stock is down 60% over that stretch. That's with the share account being down 25% as well. They bought

fact shares brought that share count down. In theory, it's supposed to have the opposite impact, right? But this really goes back to just what we've been talking about Macy's. It's just a business that's living in a different retail world. I'm not necessarily certain the world needs it. Maybe it does. But if I'm a shareholder of Macy's today, I'm feeling pretty good about this offer and hoping that it goes through. Yeah, that is a question I'm asking myself, too, is do we still need department stores? I think we'll get into that in a little bit. it. I wanted to talk first about why this deal. And I feel like part of it is, you know, it's the real estate. And a lot of that is that Herald Square location, you know, the famous Big Macy's.

I mean, you know, everyone knows the Big Macy's. And, you know, in 2021, they announced this plan to redevelop it. They've got a whole website dedicated to it. They're going to put this giant 900-foot office building on top of, you know, and in 2021, the office buildings, huh? But real estate is part of the play here. What do you think? I mean, we saw the Lord and Taylor Building in New York become this beautiful workspace for Amazon, but what do you think the odds are of Macy's eventually becoming a skyscraper here? It reminds me a bit of the Sears thesis back in the day, where Sears was really going through the same process. The general thesis there for investors was the real estate, the

estate to real estate. I think that certainly something that comes into play here. The back of the envelope valuations, you've got Macy's real estate value anywhere from $6 billion to potentially $8 billion or more. There's an asset there that certainly could be exploited. But Macy's is a retailer, they're not a real estate company per se. It's hard to imagine how all of the real estate would be used. I'm sure it ultimately would vary by location. I'm not sure office space is the most obvious option in every case. But depending on certain locations, it absolutely could be a part of it, right? I mean, we are seeing, slowly but surely, offices haven't completely gone the way of the dodo bird yet.

But, I mean, there are other use cases like fulfillment and distribution. I'm talking about converting some of these types of locations into more residential use cases, whether that's schools or apartments or condos or whatever. I think ultimately, that's the attraction with such a real estate portfolio, is there a lot of different ways they could go with it. I think that goes back to the fact that really when we're looking at Macy's as a company, they're not the company. This really isn't the leadership team that would be able to, I think, exploit the value in that real estate portfolio as much as, say, the acquirers that are certainly more real estate focused.

Yeah, absolutely. Interesting that you brought up Sears because thinking about what they tried to do, you know, we had Seritage, the spinoff of all of the properties. They were going to develop that. They got whacked during the pandemic. They couldn't build things fast enough to really satisfy the debt there. And now they're just basically, they're just winding down that wreath. They're just selling everything off. So, I mean, the problem with, you know, having the development be part of the thesis is you just never know what those external factors are going to be. And I think it's interesting you mentioned the leadership because Macy's is right about in the midst of this leadership transition. So, Jeff Jeanette, he's been there as he's been with the

company for over 20 years, I think, but he's been in the CEO seat since 2017. So, you've got this new CEO, Tony Springstepping, and this has been that long transition. We've known about this one for a while. They've talked a lot about the ways that they're pivoting. So, like getting away from being that anchor location, they're trying out smaller stores, and they've been talking on the couple of earnings calls, they're seeing great success with this, better sales per square foot and things like that. If this gets taken over, it sounds like it's going to be a whole different strategy. I mean, it's hard to know because we won't get the earnings calls, we won't be privy to it. But it seems like it would be a strategy shift, right? I think it would have to be, right?

I mean, Macy's was born in a different time when retail was just in a very different place. I mean, Malls aren't necessarily this massive growth opportunity that they once were. Retailers across the board are focusing now more on omnichannel, lighter cost structures, being able to do more with less, as we as consumers just have a number of different ways we can ultimately get our stuff. There's definitely something to the brand. There's some brand equity here that matters. So, ultimately, is this just something where Macy's continues to exist just in a smaller form? I think that's most likely the case. But yeah, new leadership is going to have their work cut out for them. Well, it's interesting, too, because

you talked about JCPenney, and I've been watching the different swings they've been taking. So, first, they thought they were going to really aim at busy suburban moms, so they they came out with this like athleisure line and they sort of, and they, they sort of said, that's our core customer. And now they've sort of gone more back toward their roots and being value and trying to make that work. I think with Macy's, it's interesting because you've got, there's still primarily a department store. I mean, they've got a good online experience. They, but it's not, you know, there's, there's too much, there's so much competition there. You've got the rewards membership. They've got a really good rewards program drives around 72%

their sales at this point. They're doing some store-in-store stuff with Toys R Us. It seems like they're trying a lot of things, but the core question is, do we still need department stores? Yeah. I think that really is the core question. You make a good point there in regard to their Star Wars program. It's somewhere in the neighborhood of 35 or so million members, give or take, today. Like you said, they drive such a majority of sales. That does matter. right? They do have some brand loyalty there, but the department store just doesn't carry the same weight as it once did. I mean, we talk about places like Target and Walmart that are becoming sort of those everything stores. I mean, you've got obviously Amazon, which ultimately is the

everything store. But think about Amazon, Target, and Walmart. What's one thing all three of those concepts have in common that Macy's, to my knowledge, does not. Grocery. You can go get virtually anything you want, including groceries, at all of these different retailers now. For something like a Macy's, you're going there with intent. You may be going there just to shop around and find something, you may not even know what it is, but you're going there was some intent. We've definitely seen concepts like Target and others benefit from the store-without-store concept. Dick's Sporting Goods, same thing, opening those Altas or those Under Armour Nike stores within their stores. JCPenney tried it, I think, to an

extent with Sephora as well. Listen, man, I think the easy solution here, Macy's links up with Trader Joe's, you open up Trader Joe's within the Macy's store, problem solved. I like that. Yeah. JCPenney tried with Sephora and they lost that deal. And now Kohl's has it. And the Sephora stores have been basically holding Kohl's up at this point. I mean, they're putting a Sephora anywhere they can at this point. Cosmetics are just a phenomenal business. I mean, we've seen it with Ulta too. I mean, Ulta has really rebounded from the challenges of the past few years. Cosmetics and beauty, just a resilient, very attractive, pardon the pun, but very attractive market,

very difficult to disrupt, very difficult to disrupt. I want to talk about one more acquisition that wasn't. We were following this last week, potentially a huge mega deal between Cigna and Humana would have been this massive deal in the healthcare space. Went from being a rumor, and then over the weekend, Cigna said, we're doing a buyback of $10 billion instead. So they didn't reference the deal, but definitely the message was like, hey, we have a better place to put our money. So the market was up. Cigna has been up on the news. What killed the deal? Do you think it was the fear of the fact that it never would have gone through? I have to believe that they were batting that around. To me, I mean, this

would have been a field day for regulators, right? I mean, this would have absolutely been put through the ringer. I'm not saying it couldn't have happened, but maybe the line is that it was price. The companies couldn't agree on price, and so we'll just amicably part ways. I'm sure there was something to that as well. But I think that they just ultimately maybe saw the deck stacked against them, all things considered, and said, hey, now is not the time. I will say this, understanding today that they say they couldn't agree on price, I think you and I and probably everybody else under the sun knows that this would have been just a field day for regulators as well. I wouldn't be shocked, okay, and not saying this

will happen, but I wouldn't be shocked to at least see this deal back on the table in some form or another, depending on the outcome of next year's election, right? That's just something to keep in mind. 2024 is going to be probably a crazy year on the political side. Who knows how things are to shake out. But we do know that the current administration is keeping a very close eye on big deals like this. If the White House switches over next year, that perspective could change. If it does, then maybe you see companies feeling like the landscape for consolidation is a little bit more friendly and they start to entertain deals like this. It's just something to keep in in mind. Yeah. And it may not even need to be a shift in leadership. It may just be that the

tide sort of shifts already. I mean, we've already sort of seen some deals that we thought wouldn't go through actually go through. So, I mean, it may end up being that, you know, that you don't need that shift in order for things to change. Yeah, maybe not. I mean, ultimately, you want deals like this to prove value, but you have to be careful. I mean, there are plenty of examples out there where just the big get bigger. And ultimately, they get so big that it really starts to limit the options for consumers. And that's what we don't want. Yeah. And Cigna has talked a little bit too, or there've been stories about potential smaller acquisitions and sort of like little tuck-ins and bolt-ons. So, I mean, you never know what could happen in terms of maybe

Humana spins off something or some part of it ends up being in there. So, it doesn't have to be the full thing in order for these companies to keep talking. Exactly. If Microsoft and Activision Blizzard figured out a way to make it work, I think anything's possible at this point. Well, I kind of want to ask a related question about that. Thinking about stock buybacks, we want to see a stock buyback when shares are cheap. Cigna, so it's $10 billion. They said they're going to buy back $5 billion before the middle of 2024. They put a relatively short timeline on it. It's sort of cheap now, but it's not super, super cheap. And certainly today, it's not as cheap because it's gone up

on the news. But is this buyback a signal that they don't see anything else worth spending capital on? And do you want them to buy back no matter what, even if the shares maybe aren't as cheap as they were? Well, I'm sure employees of the business could probably make a case for some of that capital being diverted to them, right? I mean, I think that's always something that I think is worth entertaining for these businesses, particularly as they get larger. But with that said, to your point on valuation on the shares, they're down around 10% year-to-date, 15X earnings, around 2X book value, 7X free cash flow. It's absolutely not an expensive-looking stock. This is a company with a long history of repurchasing shares. Share count is down over 23% over

last five years alone. They've spent over $22 billion on repurchases since then. This is not their first rodeo, so to speak. I think this is something you get with a business like this. They are looking for ways to return value to shareholders. Share repurchases are one of the ways they can do that. At least the repurchases are having the intended effect. The share count down 23%. That's nothing to sneeze at. Well, we talked about two deals that weren't. Do you think there's going to be one or two more big deals before the year ends? Oh, wow. I mean, honestly, the deal that I'm following, which is just to me a fascinating soap opera, is this entire PGA Live Tour thing, bringing in this new consortium of sports owners

who are trying to figure out their way to participate in this along with PIF and the Saudis and they set the target for December 31st. While that's not something that should have a big impact on public markets, it could have second-order implications on the content that we're getting and whatnot. That's the one I'm really keeping my eye on. Awesome. We'll have to talk to you after the year ends to figure out what happened next with that one. You got it. All right. Thanks for the time today, Jason. Thank you. You just found out that your sales team is at risk of missing quota. Don't panic. Just ask Rippling AI. Since it's built on

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of this conglomerate in the making. So, Matt, Boston Omaha has its arms in a number of different businesses. It can be a little bit of a difficult business to understand. Can you do the quick introduction? Yeah, it's kind of an interesting company because Boston Omaha itself doesn't really do a whole lot. It's a holding company, kind of in the sense that Berkshire Hathaway is a holding company. It doesn't really have much of its own businesses, but owns a lot of other things. There's four main parts of Boston Omaha's business. It has its billboard rental business, which is called Link Media. It's pretty widespread in the Midwest area. If you're

ever driving through Omaha itself, you'll see a bunch of Link billboards. They have an insurance business called General Indemnity, which sells surety bonds. They have a fiber to the home broadband business, which goes under a few different brand names depending on where it's located. And they also have Boston Omaha Asset Management, which is a collection of other assets the company owns. It owns a minority stake in a few businesses. It owns, as the name implies, an asset manager. And it owns a few other little interesting investments that it bundled into one division. Yeah, let's focus on the asset management business. I think that's where at least I have some confusion. It has major projects in build-to-rent housing, broadband,

internet, but it also has a lot of exposure in commercial real estate. I think that may be something that investors are reacting to right now. If you look at the website, it does say it has office investments, but I have trouble finding the story beyond that. So what's the commercial real estate story for Boston Omaha right now? Yeah, well, the commercial real estate story came, they owned a minority stake in an investment manager called 24th Street Asset Management and recently acquired the rest of it. They acquired the whole thing. So now it's included in Boston Omaha Asset Management. So now they had minority exposure. Now they have kind of direct exposure. 24th Street Asset Management operates two closed-end funds today. As you

mentioned, there is some office exposure. It's not a ton. Are the office investments a concern? We don't really know the details. It's been a private business till now, so they don't have to report what the funds are doing to anybody. So, there's a lot that we don't know about it, which I think is, more than the office performance itself, I think the fact that we really don't know a whole lot about their commercial real estate dealings so far is giving investors concern. It goes back to, what's the old saying? I'm not mad because of what you did, I'm mad because you didn't tell me. Right. And there's a lot of that with Boston Omaha. I'm sure we'll talk about this a little more, but they don't communicate

very well with investors. They don't host earnings calls. They don't do things like that. And I think that plays a lot into the stock performance. They're trying to be very Buffett-esque, which I get, but it doesn't seem to be working. We'll get to that. And we're in a little bit of a negative place. And they don't communicate well. They have unknown commercial real estate exposure. But I know you're a Boston Omaha Bull. So what's your long-term thesis then for Boston Omaha? I mean, for me, the asset management business is the big potential area. I like the billboard business. The billboard business and broadband businesses especially have fantastic economics. Their broadband business, they're doing fiber to the home broadband. So it's

essentially a one-time capital outlay. And then it's a great cash flow generator. So that business can have like 90% margins or 90% gross margins over time. So those are three great businesses that they've just been in. The asset management business is really the X factor here. They own a stake in a company called Sky Harbor. That's the biggest investment the company's made to date. But the real potential is what they're trying to do in built-for-rent housing and broadband, which you alluded to earlier, in the sense that they're trying to raise outside capital to invest. This can be a home-run source of revenue if things go correctly. That's a big if. But for example, let's say you raise $100 million from outside investors to invest in

built-for-rent housing, you end up doubling that over a period of five years. If you agree to get, say, 10% of any investment profits, that's a $10 million windfall that you didn't have to put up any of your own capital or assets for. Now imagine if you're doing that over time with $1 billion of investor money or $10 billion of investor money like some of the bigger players do. if you establish a track record in asset management, that's where the real X factor lies, because it's really asset-light capital. And then all the other businesses can generate capital to help grow that side of the business, because they do want to invest alongside all of their

outside investors. Yeah. Right now, the biggest revenue driver is the billboard business. But the key part with asset management that I do give them props for is that they invest a lot of their own money alongside the folks who are in those funds. Yeah. And that's a big part of their thesis, is that they want to benefit when their investors do well, but also to share if their investors go down. A lot of skin in the game, which we really like to see here. So right now, the company is in a little bit of an interesting spot, especially as an asset management business, a collection of businesses, because the price is trading below its book value. which is just the accounting value of its assets minus its liabilities. We'll get back to Boston,

Omaha in a sec, but why is it significant in general for any business, especially one like this, to trade below its book value? Book value doesn't do a great job of valuing a business like this. I mentioned Berkshire. Berkshire has said that book value is garbage right now. It used to base its buyback plan off book value, and it doesn't use that anymore, for example. but it usually underestimates the company's value. For a company like this to be trading below its book value, it's odd. It's close to book value, but Boston Omaha hasn't traded below book value as a public company. Even during the initial COVID crash, it never got below its book value. I'm shaking my head a little bit on this as well. A lot of it's that the market doesn't

know how to value it. A lot of it's because the market doesn't know about its office assets and things like that, like you mentioned. And it's a rare case because the stock's drawn down about 50% this year while the market's done well. So I'm shaking my head a bit as well. Yeah. I mean, and I know you've written about this a couple of times where it's like, there's only two, what is it? There's two Wall Street analysts who follow this company. So maybe it's tough to tell what investors are discounting about it. I have to think there's something beyond just it being in the too hard pile and potentially a little bit of office real estate. Yeah. A lot of people do put it in

the too hard pile. It's a very long-term focused investment, like to an extreme case. A lot of companies are like, I invest in, say, Bank of America, that's definitely a long-term investment. But in the meantime, they pay me a dividend, they hold quarterly earnings calls, they make money, things like that. This is an extreme long-term investment, which a lot of people don't really know how to value. I do think a lot of people put it in the too hard basket. I'm hoping they'll regret being wrong. While the market's been up, this company has taken a downturn in 2023. One move for these capital allocators, and to be transparent, I own some shares in Boston, Omaha, but it also has me shaking my head a bit,

which is that they're issuing shares for cash right now. Um, they're building up their cash reserve. And as the stock has gone down, they're issuing more and more shares to grow that cash pile. What's, what's going on here? What, what, what's the, what's the capital allocation strategy that I, that I don't understand. Well, to be fair, I'll push back a little bit on that. They haven't issued any new shares for the past two quarters. So as the bulk of this, the 2023 drawdown has happened, they've stopped issuing shares. And I spoke to Alex Reese, Alex Rosick, the CEO, recently. He specifically said that that's not a desirable way to raise capital right now. Credit where it's due. I wish they would do a buyback or a tender offer or

something to put investors in the other direction who feel the same way you have. Because you're right, in the past, say, year, they've done a lot more of selling shares for cash than buying back shares without any clear use for the money. Because at the time they sold shares, say, in the first quarter, they already had something like $50 million in the bank, which for a sub-$500 million company is a lot. So, it's like, why? Did they think the stock was too expensive at that point? Which is kind of where investors' heads go. I don't think that was their rationale. And they addressed this at their annual meeting a little bit. But it does kind of make you question why they're selling shares. Especially, I mean, what was it, a year ago,

what was it, the leaders, I think the leaders said this, where it was like, We have simply too many opportunities. That was the whole rationale behind launching Boston on high asset management, the raising outside capital. They mentioned broadband specifically. They see $500 million of opportunities to attack, and they obviously can't do that with their own capital. Instead of raising $500 million by selling shares, raising outside capital to help invest in that is more desirable. Speaking of investor communication, You mentioned you had a conversation with co-CEO Alex Rozak. What'd you learn? Yeah, apparently, instead of having earnings calls, they just talked to me for an hour or so.

No, all jokes aside, I love that they're very approachable CEOs, even at their annual meeting. It's not like the Berkshire annual meeting. Anyone can walk up to the CEOs and just have a conversation. It's really very open communication in that sense. But like you said, the company does not host earnings calls. They generally don't talk to analysts, maybe me, but they really don't talk to analysts. They don't give commentary in their earnings reports. They issue quarterly earnings reports, but there's no management quotes that are usually at the top of earnings reports. Alex even acknowledged to me that they need to do a better job of communication, but he doesn't really know what that should look like. How do you increase communication

while still saying, don't worry about the quarterly numbers and things like that as much. It is a balancing act, but he agrees the market really doesn't know how to value the stock. Just to give you a fun example, I mentioned they own a lot of Sky Harbor. Sky Harbor makes up almost 30% of Boston Omaha's market cap right now. There was a three-day period a couple weeks ago where Sky Harbor went up 40%, and Boston Omaha's stock didn't budge. It should have been up like 15% in that time. Because if Apple went up by 20%, 30%, Berkshire Hathaway's stock would probably go up too because it owns so much of it. So, it's just kind of a head scratcher in a lot of ways because the market really doesn't seem to know what to do here. So, to backtrack just a

sec, Sky Harbor, they basically own private hangars for private jets going in and out of different airports. Yeah. And Sky Harbor, to my knowledge, I don't know if you know any, Ricky, but out of the big SPAC boom, I don't know any SPACs that are trading for more than their $10 initial price other than Sky Harbor. So it's looking like one of the few success stories. I'd have to start Googling and that's terrible podcasting. But yeah, I think I want to leave it kind of with this question. Boston, Omaha, really, I would say there is a welcome comparison to Berkshire Hathaway. They got Omaha in the name. There's the familial connection with Warren Buffett. But I don't know. I mean, do you think it's earned that swagger to not host quarterly

earnings calls, not talk to analysts? Why not pre-announce your earnings date and make it a little bit easier for the investors trying to follow your company? I mean, I would have to say no, they have not earned that type of swagger yet. With Berkshire, it certainly makes sense. You know, Buffett's mentality is, you know, I've doubled the annualized returns of the S&P for over 50 years, shut up and trust the process. He's got to earn the right to say that. But even when the sky is falling, Buffett's out on CNBC calming investors down. So I feel like you need to earn some sort of a track record to get to that point. And it sounds like Alex kind of agrees somewhat. He just doesn't really know what communication should look like at this point. I feel like

trying to be a little too Buffet-esque at times. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Deidre Willard. Thanks for listening. We'll see you tomorrow.