Jan. 9 (Bloomberg) -- Macy’s Inc. investors are waiting for the other shoe to drop, and it isn’t a Manolo Blahnik.

The second-largest U.S. department-store company may write down its goodwill by as much as $3 billion after-tax as early as this month, said Dan Poole, who researches stocks for National City Private Client Group, a Cleveland-based firm that manages $26 billion, including Macy’s shares.

The charge, to reduce the value on its 2005 acquisition of May Department Stores Co., would be the biggest hit to financial results in 18 years and wipe out a third of equity. It may also make shareholders more negative about a stock that lost 60 percent last year, and bondholders more skeptical about debt whose ratings are hovering just above non-investment grade.

“There is still a lot of pain to go” for the company, said Bill Dreher, an analyst with Deutsche Bank AG in New York, who recommends holding the stock. A goodwill charge “is going to make some investors nervous.”

Macy’s shares are trading at less than 50 percent of the retailer’s book value, according to data compiled by Bloomberg, signaling that investors already view it as worth less than half what the Cincinnati-based retailer’s books say.

The stock retreated 63 cents, or 5.8 percent, to $10.30 at 4:04 p.m. in New York Stock Exchange composite trading. That’s down from a peak of $46.51 in March 2007.

Overpaid?

Investors may view a writedown as an acknowledgement by Macy’s that it paid too much for May Department Stores, which it acquired for $11 billion, and that future cash flow won’t meet earlier projections, Poole said.

Sales at stores open at least a year declined in 10 of the past 11 months, and Macy’s eroded profits by slashing prices during the worst holiday shopping season in 40 years to try to jumpstart purchases. The company yesterday cut its fourth-quarter profit forecast to as little as 90 cents a share from a previous minimum of $1.10 and said it would close 11 stores. That brings its count to 848, including 40 in the Bloomingdale’s chain.

Macy’s Chief Executive Terry Lundgren pursued the May purchase, which doubled the company’s size, to gain more leverage over vendors and draw customers with exclusive national-brand and store-label merchandise.

‘Destruction of Value’

The plan hasn’t yet worked, Dreher said.

“It will not go down in the annals of Wall Street as the best merger ever,” he said. “There has been a significant destruction of value in the process.”

The upside for Macy’s is that action would put the issue “in the rearview mirror,” said Poole, “Now there will be a lot of questions out there about what the future looks like.”

Macy’s has $9.12 billion of goodwill, representing the premium it paid for purchases over time. About $8.95 billion of that stems from the May acquisition, according to an April 1 regulatory filing.

Speculation about a charge increased after Macy’s said Dec. 17 that it renegotiated its $2 billion credit facility with its banks. It’s paying higher interest rates and fees in exchange for more financial flexibility, including the option of a writedown without defaulting on its credit agreement.

‘A Material Amount’

“Part of the reason they made that change was to potentially increase the goodwill writedown,” which will be “a material amount, a sizeable amount,” in anticipation of further store closings and consolidating divisions, said Charles Grom, an analyst with JPMorgan Chase & Co. in New York. He rates the shares “overweight.”

An announcement could occur this month or next, when Macy’s reports fourth-quarter earnings on Feb. 26, Grom and Poole said. Accountants typically review goodwill at the end of a company’s year. Macy’s ends Jan. 31.

If Macy’s does record the writedown, it would have no impact because it would be non-cash and wouldn’t affect the company’s availability to its amended credit facility, spokesman Jim Sluzewski said in an e-mail.

“We do not know if we will” take the step, Sluzewski said.

Other companies that have reduced the value of assets after acquisitions include Time Warner Inc., the biggest media company. On Jan. 7, it wrote down the value of its cable-system, publishing and Internet assets by about $25 billion in the fourth quarter. Formerly AOL Time Warner, it had two writedowns in 2002.

Macy’s said in a regulatory filing Dec. 8 that an after-tax writedown of more than $3.9 billion, or 43 percent of its goodwill, would have triggered a default of the credit agreement.

With the filing, the company was “warning” investors about further charges, Carol Levenson, an analyst with Gimme Credit LLC in Chicago, wrote in a Dec. 9 report.

“We had our doubts about the May acquisition and have long viewed the company’s credit profile as ‘deteriorating,’” Levenson said, “and now the numbers are beginning to prove us right.”

To contact the reporter on this story: Cotten Timberlake in Washington at ctimberlatke@bloomberg.net.

Last Updated: January 9, 2009 16:05 EST