1 way Brexit will hurt Macy's -- and 1 surprising way it could help

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Department store giant Macy's(NYSE: M) doesn't operate any stores in the U.K. -- or anywhere else in Europe. That will spare it from any direct damage related to the recent U.K. referendum to leave the EU.

However, this doesn't mean that Brexit will have no impact at all on Macy's. Brexit could weigh on Macy's revenue and earnings by further reducing its sales to international tourists. Yet Brexit could also benefit Macy's by increasing the value of its flagship real estate properties just as the company is gearing up to monetize these key assets.

Sales to tourists on the decline

One cause of Macy's recent sales woes -- though not the only one -- has been a decline in sales to international tourists. Macy's (including its upscale chain Bloomingdale's) has a handful of large stores in major cities that have historically been tourist attractions. In the past year and a half, the strong dollar has cut into international tourists' purchasing power, causing them to spend less at Macy's.

Indeed, last quarter, Macy's reported that spending on international tourists' credit cards was down 20% year over year, on top of a 21% decline in the same quarter a year earlier.

Macy's executives were already losing confidence in their ability to stem these declines before the Brexit referendum. The vote to leave the EU will make things worse through its negative impact on the British pound.

US Dollar to British Pound Exchange Rate Chart

US Dollar to British Pound Exchange Rate data by YCharts.

The weaker pound will give British tourists less purchasing power in the U.S. Furthermore, the International Air Transport Association estimates that Brexit will reduce outbound travel from the U.K. by roughly 10% by 2020, impacting the number of tourists visiting the U.S.

Finally, the weaker pound is expected to stimulate travel to the U.K. For tourists globally, the relative cost of taking a trip to London compared to a trip to New York or San Francisco has now declined. If the U.K. "steals" tourists who might otherwise have traveled to the U.S., that would further dampen Macy's sales to international tourists.

But Macy's could get a real estate boost

On the bright side, Brexit may bolster the value of Macy's real estate portfolio. In recent years, foreign investors have poured tons of money into real estate in key global cities -- including London -- seeing high-quality real estate as a safe store of value.

The current turmoil in the U.K. makes London's real estate market a lot less attractive. This could drive up values for both luxury apartments and commercial real estate in top U.S. markets like New York and San Francisco. If economic risks from Brexit cause the Federal Reserve to keep interest rates low, it would also be a positive for real estate values.

Macy's flagship store in Herald Square:

16 PHOTOS
Macy's flagship Herald Square store
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Macy's flagship Herald Square store
Pedestrians walk through Herald Square past a Macy's Inc. department store in New York, U.S., on Monday, August 10, 2015. Macy's Inc., the largest U.S. department-store company, is scheduled to report second-quarter earnings before the opening of U.S. financial markets on August 12. Photographer: Michael Nagle/Bloomberg via Getty Images
Photograph shows a corner view of the 1924 addition to the Macy's department store building on 34th Street at Herald Square in Manhattan, New York, 1930s. (Photo by FPG/Getty Images)
An exterior view of Macy's Department store July 14, 1994. View is from Herald Square in the busy midtown section of New York City at 34th Street. (AP Photo/Marty Lederhandler)
Shoppers stand outside a packed vestibule entrance to Macy's Herald Square store in New York minutes before the 7 a.m. opening Friday, Dec. 26, 2003. (AP Photo/Tina Fineberg)
397655 01: Shoppers make their way across Herald Square near Macy's department store November 23, 2001 in New York City. The Christmas shopping season started kicked off in the United States the day after Thanksgiving, one of the busiest shopping days of the year. (Photo by Chris Hondros/Getty Images)
NEW YORK - NOVEMBER 22: A holiday scene is depicted in a Macy's at Herald Square department store window during the unveiling of the retailer's holiday windows November 22, 2002 in New York City. (Photo by Matthew Peyton/Getty Images)
NEW YORK - FEBRUARY 28: The Macy's Herald Square entrance is seen February 28, 2005 in New York City. Federated Department Stores Inc. is buying rival May Department Stores Co. for $11 billion in cash and stock in a deal that would enable them to compete against Wal-Mart Stores Inc. as well as upscale retailers. (Photo by Stephen Chernin/Getty Images)
UNITED STATES - AUGUST 15: Pedestrians and shoppers pass by the Macy's flagship store at Herald Square in New York, Wednesday, Aug. 15, 2007. Macy's Inc., the second-largest department-store chain, reported quarterly profit that exceeded analysts' estimates because of reduced advertising and retirement costs. (Photo by Michael Nagle/Bloomberg via Getty Images)
UNITED STATES - AUGUST 15: Pedestrians and shoppers pass by the Macy's flagship store at Herald Square in New York, Wednesday, Aug. 15, 2007. Macy's Inc., the second-largest department-store chain, reported quarterly profit that exceeded analysts' estimates because of reduced advertising and retirement costs. (Photo by Michael Nagle/Bloomberg via Getty Images)
NEW YORK - NOVEMBER 05: The New Year's Eve Ball, which will be seen by millions as it descends above Times Square to ring in 2009, is displayed at the Macy's Store in Herald Square November 5, 2008 in New York City. The Waterford Crystal ball is comprised of 672 crystal triangles and is themed 'Let There Be Light.' (Photo by Jeff Zelevansky/Getty Images)
Shoppers look at shirts at Macy's Herald Square department store in New York, U.S., on Friday, Nov. 27, 2009. Shoppers gathered at Best Buy Co., Target Corp. and Toys 'R' Us Inc. stores from New Jersey to Texas well before midnight yesterday to take advantage of Black Friday deals on televisions, laptops and robot hamsters. Photographer: Jin Lee/Bloomberg via Getty Images ***
Pedestrians walk past Macy's department store at Herald Square in New York, U.S., on Tuesday, April 6, 2010. March sales at U.S. retailers probably jumped almost three times as much as previously anticipated, as the early Easter holiday, warm weather and an improved job market boosted consumer spending. Photographer: Jin Lee/Bloomberg via Getty Images
FILE - In this Thursday, Nov. 28, 2013, photo, a shopper takes a selfie as crowds pour into the Macy's Herald Square flagship store in New York. The government reports on sales at U.S. retailers in November on Thursday, Dec. 12, 2013. (AP Photo/John Minchillo)
A shopper rests in the shoe section of the Macy's Herald Square store, Thursday, Nov. 28, 2013, in New York. Instead of waiting for Black Friday, which is typically the year's biggest shopping day, more than a dozen major retailers opened on Thanksgiving this year. (AP Photo/John Minchillo)
Shoppers carry bags as they cross a pedestrian walkway near Macy's in Herald Square, Friday, Nov. 27, 2015, in New York. The early numbers aren't available yet on how many shoppers headed out to stores on Thanksgiving, instead of waiting until today. But it's expected that more than three times the number who shopped yesterday will be out bargain-hunting today.(AP Photo/Bebeto Matthews)
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Macy's owns a handful of stores in major urban centers, highlighted by flagship stores in New York, Chicago, Minneapolis, and San Francisco. A recent analysis sponsored by hedge fund Starboard Value pegged the combined value of these properties at $7.3 billion. That's very significant compared to Macy's market cap of a little more than $10 billion.

Macy's is actively looking to monetize its most valuable real estate assets. For example, it may downsize some of its flagship stores and then sell off the upper floors to investors or real estate developers or form joint ventures to redevelop the unused space.

If Brexit leads to a surge in demand for high-quality real estate in major U.S. cities -- it's worth noting that not everyone agrees that it will -- Macy's may have picked a great time to market its iconic real estate assets.

Deals take time to develop

In the short term, Brexit is likely to further depress Macy's sales trends as the dollar continues to rise against many foreign currencies. (The uncertainty caused by this tumultuous state of affairs could also weigh on domestic demand.)

By contrast, investors probably won't learn much about Macy's real estate initiatives in the near term. Big real estate deals typically take a year or longer to come together. Macy's is more likely to announce its plans for its most valuable properties in late 2016 or 2017.

Given that real estate now represents far more of Macy's value than its retail operations, Brexit could ultimately have a neutral or positive long-term impact on the company's value. Thus, Macy's shareholders should be patient even if sales trends dip further this summer.

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Adam Levine-Weinberg owns shares of Macy's. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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