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Goodwill charge would wipe out third of equity
By Cotten Timberlake
Bloomberg News
Published on Saturday, Jan 10, 2009
Macy's Inc. investors are waiting for the other shoe to drop, and it isn't a Manolo Blahnik.
The second-largest U.S. department store company might write down its goodwill by as much as $3 billion after-tax as early as this month, said Dan Poole, who researches stocks for National City Private Client Group, a Cleveland-based firm that manages $26 billion, including Macy's shares.
The charge, to reduce the value on its 2005 acquisition of May Department Stores Co., would be the biggest hit to financial results in 18 years and wipe out a third of equity. It might also make shareholders more negative about a stock that lost 60 percent last year, and bondholders more skeptical about debt whose ratings are hovering Please see Macy's, D7
Continued from Page D1
just above non-investment grade.
''There is still a lot of pain to go'' for the company, said Bill Dreher, an analyst with Deutsche Bank AG in New York, who recommends holding the stock. A goodwill charge ''is going to make some investors nervous.''
Macy's shares are trading at less than 50 percent of the retailer's book value, according to data compiled by Bloomberg News, signaling that investors already view it as worth less than half what the Cincinnati-based retailer's books say.
The stock retreated 63 cents, or 5.8 percent, to $10.30 on Friday. That's down from a peak of $46.51 in March 2007.
Investors could view a write-down as an acknowledgement by Macy's that it paid too much for May Department Stores, which it acquired for $11 billion, and that future cash flow won't meet earlier projections, Poole said.
Sales at stores open at least a year declined in 10 of the past 11 months, and Macy's eroded profits by slashing prices during the worst holiday shopping season in 40 years to try to jump-start purchases. The company on Thursday cut its fourth-quarter profit forecast to as little as 90 cents a share from a previous minimum of $1.10 and said it would close 11 stores. That brings its count to 848, including 40 in the Bloomingdale's chain.
Macy's Chief Executive Terry Lundgren pursued the May purchase, which doubled the company's size, to gain more leverage over vendors and draw customers with exclusive national-brand and store-label merchandise.
The upside for Macy's is that action would put the issue ''in the rearview mirror,'' said Poole, ''Now there will be a lot of questions out there about what the future looks like.''
Macy's has $9.12 billion of goodwill, representing the premium it paid for purchases over time. About $8.95 billion of that stems from the May acquisition, according to an April 1 regulatory filing.
Speculation about a charge increased after Macy's said Dec. 17 that it renegotiated its $2 billion credit facility with its banks. It's paying higher interest rates and fees in exchange for more financial flexibility, including the option of a write-down without defaulting on its credit agreement.
Macy's Inc. investors are waiting for the other shoe to drop, and it isn't a Manolo Blahnik.
Get the full article here.
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