Macy's: Not So Magic

The ravaging of retail continues unabated. Macy's (NYSE: M) is the latest retailer to reflect the woes facing the consumer and the economy; yesterday it outlined a slew of cost-cutting initiatives, including eliminating thousands of jobs.

Macy's said it will slash its quarterly dividend to $0.05 from the previous $0.13, and eliminate a whopping 7,000 jobs, which is about 4% of its workforce. The retailer will axe 40% of its executive positions, with a higher proportion of the cuts coming from central office positions. As part of its cost-cutting measures, Macy's plans to centralize many functions such as buying, merchandise planning, finance, IT, and human resources, where previously these functions were performed by four separate organizations operating on a divisional basis.

The department store retailer will also back away from merit increases this year and reduce how much it matches in employees' 401(K) plans.

These plans are expected to save $400 million next year and $250 million this year. Macy's will take a $400 million charge, mostly this year, connected with severance and relocation costs.

Expect more news like this out of the retail and consumer discretionary sectors. Liz Claiborne (NYSE: LIZ) also announced some job cuts today, although nowhere near as large as Macy's.

Although I don't believe investors should totally ignore cheap retail stocks these days -- a few retailers are doing well and look like solid stock ideas, like The Buckle (NYSE: BKE) -- I believe they should be very careful in when considering where to invest.

Many department stores have been having difficulties as the recession has worsened. In fact, when I recently explored what retail companies might belong on a retail death watch, I called out Bon-Ton (Nasdaq: BONT), Dillards (NYSE: DDS), and Saks (NYSE: SKS), all of which have onerous debt loads in a rapidly slowing economy.

Although Macy's is currently trading at a price-to-earnings ratio of 5, which may sound like a steal, it's also in the precarious position of being a middle-of-the-road retailer that may not be able to attract many shoppers in the near term. Meanwhile, it's also got a lot of debt to contend with, like the troubled retailers I named above. Its long-term debt-to-equity ratio is 101.5% and its quick ratio is 0.1. The company did, however, announce plans to pay down debt to alleviate concerns about its ability to handle that load in the near term, which is a step in the right direction.

While the company's marketing tag line is "The Magic of Macy's," I'm not convinced it's magic for investors' portfolios.

Copyright © 2008 Universal Press Syndicate.