Late Friday, department store operator Macy’s Inc. (NYSE: M) issued a statement saying that the company is “exploring numerous options to strengthen our capital structure.” Among those options, according to unnamed sources, is issuing new debt backed by some of Macy’s properties and other assets. The flagship store in New York’s Herald Square is not included in the potential collateral package.

According to Macy’s annual report for fiscal 2019, the company owns 329 Macy’s stores and 13 Bloomingdale’s stores. In all, Macy’s operates 775 store locations in 43 states, the District of Columbia, Puerto Rico and Guam. In the Form 10-K, Macy’s said: “All owned properties are held free and clear of mortgages.”

The question, then, is how much is a closed store worth? When Standard & Poor’s Global Ratings cut Macy’s long-term debt rating from BBB- to BB+ (non-investment grade; i.e., junk), the firm said, “A long history of acquisitions and expansion has saddled it with excess stores as shoppers’ shifting preferences move away from mall-based locations and toward more value-oriented offerings.” In industry parlance, Macy’s was overstored.

Moody’s Investor Service piled on a month later, dropping its rating on Macy’s debt from Baa3 to Ba1, the firm’s first junk-rating level. Moody’s noted that Macy’s had to refocus on preserving liquidity and putting on hold a plan to improve operating performance. In other words, forget about growth and concentrate on survival.

While Macy’s situation is not as dire as that of, say, J.C. Penney Co. Inc. (NYSE: JCP), the similarities are striking. Both companies have shut down their stores to conserve cash. The question then becomes how long the cash they have can last. J.C. Penney missed an interest payment earlier this month, even though the company had the cash to meet the payment. Now the clock has started running on a possible bankruptcy filing.

J.C. Penney previously tried to secure bank financing based on the value of its owned properties but ultimately failed. The value the company put on its unencumbered stores was too rich for a potential lender.

The big uncertainty for both borrowers and lenders is how long it will take for retail store traffic to recover following the COVID-19 lockdowns. Recent surveys indicate that up to 70% of Americans plan to wait until health officials and state governments lift stay-at-home orders before venturing out as they did before the pandemic. That could be months in the future, and even if it happens sooner, the reopening will not switch from fully off to fully on in a day.

The impact of the coronavirus outbreak on the retail sector has been devastating and may get worse. Valuing Macy’s-owned real estate will be tricky. Bond investors will want prime properties at a significant coupon. And there is no guarantee that this will be the only bond issue. If anything, unless Macy’s decides on a large offering, chances are good that the retailer will have to issue more debt later. That pattern cannot go on for very long.

Macy’s stock traded down about 4.4% Monday morning, at $5.66 in a 52-week range of $4.38to $25.76. The 12-month consensus price target on the stock is $8.81.

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