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Macy's Takeover Speculation: Hope For A Beleaguered Retail Sector?

It has been a bumpy few months for the retail sector. Disappointing holiday sales and turmoil at some of the industry's most iconic names have haunted the sector. This has caused many stocks in the group to fall precipitously since early December, with the XRT retail ETF down nearly 9% from its closing price on December 8.

But disappointment and turmoil can be a prelude to opportunity. Just look at Macy's (M).

Macy's could be seen as a symbol for the sector as a whole. The retailer saw an encouraging stretch headed into the holiday season, only to come out of Christmas with investor's hopes crushed. But now, its low stock price is encouraging buyout speculation, which has led to speculation that a huge acquisition premium could be possible.

In November, the company revealed third-quarter earnings that missed expectations, but the company's sales guidance encouraged investors that the worst of the company's problems were behind it. The stock gained for much of the rest of the month, touching a 52-week high of $45.50 in late November. From there the stock drifted lower for the remainder of 2016. The decline accelerated in early January, when the company lowered its full-year forecast and announced a plan to cut more than 10,000 jobs.

The stock again turned around earlier this month on reports that Macy's has been approached by Canada's Hudson's Bay, sending shares dramatically higher. The New York Times revealed that Hudson's Bay had approached Macy's with a proposal, though negotiations were in the early stages. The report cited people briefed on the matter.

Macy's gained on the takeover news, rising from a level below $30 to a closing mark of $32.69 on February 3, its highest finish since before the January warning.

This week, Barron's weighed in on the potential merger. The paper said shares of the retailer could rise by around 50% if an acquisition were to take place. Barron's argued that Macy's stock could fetch $45-$50 in a takeover, especially if it involved a spin-off of its real estate assets.

With the recent takeover speculation, Implied Volatility for Macy's has risen to its highest level in months. After plunging in November in the wake of its last earnings report, IV for Macy's rose sharply in January. It plummeted again after January 4, when the company's restructuring and weak guidance were announced. However, IV has climbed sharply again in the last three weeks, reaching 46.8 on February 13, its highest level since before the November earnings report.

Macy's is expected to release its quarterly results on February 21. This will provide investors a chance to look at the health of the company's fundamentals, while also giving the company a potential opportunity to comment on the takeover discussion.

The ATM Straddle premium for M for the February 17 expiration is currently $1.05, or 3.2%. For the February 24 expiration, which will include the company's next earnings report, the ATM Straddle premium is $2.83, or 8.7%. Looking further out, the January 2018 expiration has a premium of $8.64, or 26.4%. The January 2019 expiration has a premium of $11.84, or 36.3%.

While Macy's benefits from acquisition rumors, there may be signs that the overall retail climate is not as bad as people had feared. The most recent retail sales report came in above expectations. Meanwhile, the latest data also showed that December's sales growth was stronger than originally estimated.

On Wednesday morning, the U.S. Commerce Department revealed that retail sales increased by 0.4% in January. This was a stronger growth than the 0.1% that had been predicted. Meanwhile, December's increase was upwardly revised to a 1.0% advance. The government had previously estimated a 0.6% rise for the final month of 2016.

January's sales growth was held back by a drop in auto sales. Excluding this sector, retail sales climbed by 0.8% in January. This followed a 0.4% increase in December.


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