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As shares of Macy's continue to slide on worries about the fate of brick-and-mortar retail, Jim Cramer wondered when the department store chain's stock would finally be too low to ignore.
"That's kind of a loaded question because in reality, Macy's has been a value trap for a long time. Every time it starts to look like a bargain, the earnings estimates get cut again and the stock has another down leg," the "Mad Money" host said. "However, Macy's owns a lot of real estate underneath its stores, and if its stock keeps falling, sooner or later it will end up being cheaper than the company's sum of the parts valuation."
In other words, Macy's still has a lot of quality assets under its belt. It operates over 700 Macy's- and Bloomingdale's-branded stores, as well as 125 specialty shops that include outlets and Bluemercury locations.
Until 2015, Macy's was seen as one of the top department store chains in the country, but the rise of online shopping made Wall Street wary of mall-based stores, Cramer said.
"The downfall of Macy's has been swift and staggering," he said.
Same-store sales, a key metric for the retail sector, bounced back for Macy's after the 2008 recession, but they slowed in 2014 and have been falling ever since, with the first two quarters of 2017 seeing negative 5.2 percent and 2.8 percent same-store sales, respectively.
At the same time, as Amazon's retail takeover forced industry-wide price cuts, Macy's net margin, the percentage of its revenue that it kept as profit, declined dramatically, putting pressure on the chain's earnings results.
Macy's latest earnings report did beat analyst estimates, but investors still weren't convinced. Shares fell 10 percent in a single trading session as management's tepid follow-ups forecast negative same-store sales results next quarter.
But Cramer felt that the quarter still showed signs of improvement. Same-store sales and revenues were still in the red, but not nearly as negative as in the previous quarter. Earnings fell by 11 percent, but not by last quarter's 40 percent. Macy's net margin improved.
And while management cautioned investors not to hold their breath for serious improvements, they did reaffirm their full-year earnings guidance, a good sign in Cramer's eyes.
Plus, the company still has a massive real estate portfolio. Activist fund Starboard Value, which exited its stake in Macy's in May, valued Macy's real estate assets at $21 billion.
So Cramer set up something of an equation: say Macy's real estate is really only worth $10 billion. Take away its $6.3 billion in debt, and you're left with $3.7 billion.
Add in the department store giant's cash hoard, and you have $4.5 billion. Then, consider the $5 billion in merchandise inventories Macy's had at the end of last quarter.
Cramer argued that even if the company sold off those inventories at 20 cents on the dollar, they would still get $1 billion for them.
"So, giving no credit at all to Macy's still-profitable business, if they just shut down and liquidated the company, it would be worth $5.5 billion," Cramer said. "Given that Macy's is currently valued at $6 billion, that means you're getting the whole business, more than 800 department stores, for less than half a billion dollars."
Macy's also offers a 7.7 percent yield, higher than most dividend-happy stocks, and Cramer noted that the retailer has more than enough cash from operations to cover those costs.
"Here's the bottom line: Macy's may be a very high-risk story right here. Owning a department store just stinks in this environment," the "Mad Money" host said. "However, I think we're getting darned close to the point where the stock might be too cheap to ignore. Unless you truly believe the company is going under, with that dividend and all that real estate, Macy's is looking like it could be a bargain, as long as you can stomach the risk."