Macy's is facing significant challenges. It might be sitting on a valuable asset.
The advocacy group, Barington Capital, in collaboration with Thor Equities, voiced their concerns in a proposal on Monday, urging Macy's to make significant changes to boost its stock value. They contend that Macy's is holding onto real estate properties that are worth more than the company itself, causing an unsustainable situation that underestimates Macy's true worth. Due to Macy's financial struggles, its stock has become unappealing, is worth less than the sum of its parts, they argue.
The suggested solution: Divide and conquer.
As per Barington's presentation posted online, Macy's possesses valuable real estate holdings. The market appears to perceive Macy's retail operations as having minimal value.
The investors believe that Macy's real estate assets, such as its Herald Square store in New York City, could be worth up to $9 billion on the open market—nearly twice Macy's closing market value of $4.7 billion on Monday. They propose that Macy's could garner more value by leasing property to a subsidiary that manages the property. Additionally, the company could sell space to property developers for the construction of hotels, apartments, or offices.
Macy's, which operates 720 stores, including Bloomingdale's and Bluemercury, has long been a desirable location for property development. Investors and developers have long sought to build atop the Herald Square location, and Macy's itself has put forth plans, such as constructing an office tower above the store.
In response to the investor proposal, Macy's declared its commitment to "delivering sustainable, profitable growth and driving shareholder value." The company expressed confidence in its strategy, which includes closing underperforming stores and investing in its top 50 stores with enhanced staffing and new merchandise.
Investor groups, including private equity funds and hedge funds, have occasionally taken control of struggling retailers in recent years, with the goal of transforming them and reselling them for a profit. However, these measures have often resulted in store closures rather than salvation for companies like Sears and Toys "R" Us.
Mark Cohen, a former director of retail studies at Columbia Business School, advised Macy's to reject the investor proposal, arguing that the investors were not focused on the long-term viability of the company but rather would seek to strangle it.
Barington and Thor's strategy mirrors the one adopted by hedge fund operator Eddie Lampert after he acquired control of Sears and Kmart. He ultimately sold off or developed the retailers' real estate and several valuable brands, as well as spending over $6 billion repurchasing Sears Holdings shares in an effort to support its plummeting stock price.
The results of this strategy were not favorable; stores were closed due to financial difficulties, sales dropped due to lack of investment, and the company ultimately filed for bankruptcy in 2018. Although it emerged from bankruptcy in 2019, it has continued to struggle and has closed most of its remaining stores.
Sears and Kmart are not the only once-popular retail brands that have succumbed to the control of private equity investors and hedge funds. In the past 10 years, iconic retailers like upscale department store Lord & Taylor, RadioShack, Toys "R" Us, Payless Shoes, and Sports Authority have all closed.
Macy's challenges
Department stores, such as Macy's, Kohl's, Nordstrom, and JCPenney, have lost ground in recent years to online retailers, big box retailers, and discount clothing chains. Consequently, Macy's stock has decreased by approximately 70% over the past decade.
Macy's has faced this pressure twice within a single year. In July, negotiations with private investors aiming to take over the company came to an end. The investors intended to convert Macy's into a private company and consider divesting its real estate assets or separating its online operations from brick-and-mortar stores. Macy's board of directors, however, voted unanimously to halt discussions with Arkhouse Management and Brigade Capital Management over the investors' offers for Macy's acquisition, due to uncertainty regarding the investors' ability to finance a deal and concerns about the best interests of its shareholders.
Moreover, Macy's recently disclosed that an employee had concealed up to $154 million in expenses over a period of nearly three years, requiring the company to delay its quarterly earnings report. Macy's is scheduled to report its quarterly earnings on Wednesday.
The investors suggest that Macy's could boost its value by leveraging its real estate assets, such as the Herald Square store, through leasing or selling to property developers. Macy's, with its valuable real estate holdings, possesses the potential to generate significant income beyond its retail operations.
