A new activist shareholder group is asking for changes to Macy's brick-and-mortar portfolio, recommending that the retailer create an internal real estate division to weigh options for its stores and that the company explore "strategic alternatives" for its upscale Bloomingdale's and Bluemercury chains.
Barington Capital Group and Thor Equities issued a statement and posted online their suggestions to New York-based Macy's — parent of its namesake department stores as well as Bloomingdale's and Bluemercury — on Monday. Leaders at the the dissidents estimated the value of Macy's "well-located" properties — including its Manhattan flagship in Herald Square — to be worth between $5 billion and $9 billion.
"In our opinion, Macy’s board should create a separate real estate subsidiary to collect market rents from Macy’s retail operations and pursue other asset sale and redevelopment opportunities," Thor Chairman Joseph Sitt said in the statement. "We believe doing so would greatly maximize the value of these owned assets for the benefit of stockholders.”
The call comes as a number of department store operators — including not only Macy's but Kohl's and Nordstrom — in recent years have hit tough times, with competition from e-commerce, expanding off-price retailers, discounters and the aftermath of the pandemic. Macy's has reacted by not only closing some stores but also rolling out off-mall, small-format namesake and Bloomingdale's stores to fill in its brick-and-mortar footprint. How these chains handle their real estate has been a point of contention for some shareholders and Wall Street.
Barington and Thor praised the turnaround strategy that Macy's CEO Tony Spring has initiated, a plan that entails closing 150 underperforming stores and selling as much as $750 million in real estate. Just last week, Macy's sold its store at 422 Fulton St. in Brooklyn, New York.
Yet the retailer's stock remains undervalued and is "mispriced relative to the upside potential we see in management’s new strategic plan and the compelling value" of its real estate holdings, according to Barington Chairman James Mitarotonda. In response, Macy's needs to cut back its capital expenditures, to be in line with fellow department store chain Dillard's, and should be aggressively buying back its stock, the activists said, as reported earlier by The Wall Street Journal. The dissidents also claim that Bloomingdale’s and Bluemercury's prospects "are being stunted by the Macy’s nameplate turnaround."
Neil Saunders, a retail analyst and managing director at analytics firm GlobalData, cast a skeptical eye at Barington's recommendations.
"Of course, Barington is doing its job in exploring ways to monetize and extract value from the Macy’s business," Saunders said in a note Monday. "There is nothing illegitimate about its suggestions. Indeed, it is possible to have some sympathy as Macy’s is still in the early days of its turnround program and doubts remain over how successful it will be. However, this ultimately comes down to a view on whether retail should be at the heart of a future vision, or just a sideshow to other financial maneuvers."
Barington and Thor didn't respond to an email from CoStar News seeking a comment on Saunders' remarks. But Barington is an activist investor with stakes in retailers such as Victoria’s Secret and Hanesbrands. Thor is a private-equity firm, property owner and developer.
Brooklyn sale
In response to Barington, on Monday Macy's said it has "consistently demonstrated open-mindedness, including with respect to regularly reviewing the company’s strategy and capital allocation framework" and that its fleet optimization continues to gain traction. The company plans to provide more details on its progress when it reports third-quarter earnings, slated for Wednesday.
"We look forward to engaging with our shareholders, including Barington and Thor, as we further advance our initiatives and execute toward our long-term goals," Macy's said in its statement.
Macy's succeeded in fending off another group of activist investors, Arkhouse Management and Brigade Capital Management, earlier this year. Unlike Barington, the prior dissidents wanted to acquire Macy's. But Arkhouse also objected to Macy's real estate approach.
The retailer has already made progress divesting some retail properties. Recently, Macy's sold its store in Brooklyn to an investors group that includes United American Land, led by Albert Laboz, along with his partners Isaac Chera of Crown Acquisitions and the Chehebar family of the Jackson Group. The sale was first reported last week by the New York Post, which on Monday said the price was $23 million.
In 2015, Macy's sold the upper floors and air rights for its Brooklyn store and an area parking garage for $270 million to Tishman Speyer, which added office space to the site.
United American Land didn't return an email and phone call from CoStar News seeking a comment. But Laboz told the Post one of the options he's considering for the Macy's space is entertainment, like a Legoland or a Netflix House. The streaming giant already plans to launch Netflix Houses, its brick-and-mortar entertainment and retail venue, in vacant mall department stores. One will be at a former Lord & Taylor at the King of Prussia mall in Pennsylvania and the other at a former Belk site at Galleria Dallas in Texas.
'Macy's Realty Co.'
In addition, this year Macy's has sold 13 stores for a total of $155.3 million working with broker Atlantic Retail. And at least two potential buyers, TMG Partners and Prado Group, are reportedly interested in Macy's flagship in downtown San Francisco. Barington pegged the value of the Union Square store at $240 million to $298 million, and the value of the Herald Square flagship at $1.64 billion to $2.4 billion.
In their joint statement, Barington and Thor said they were "concerned that Macy’s board lacks the knowledge, vision and desire to extract maximum value from its real estate assets."
A separate internal real estate entity, dubbed "Macy’s Realty Co.," would "best determine market options versus status quo structure" for the retailer's properties, according to Barington and Thor.
The subsidiary would house all of Macy's owned-and-leased real estate, including stores and distribution centers, the activists said. The retail operating company would pay “market rents” to Macy's Realty, and leased properties would be analyzed for any “below-market” terms that have embedded value.
Macy's Realty "would make recommendations to senior leadership on how to optimize asset valuations, including outright sales, sale-leasebacks and redevelopment projects, versus the status quo structure," Barington and Thor said, and it would "serve as a proper check on Macy’s retail operations to ensure that underperforming stores are more regularly identified, and asset values are maximized for the benefit of shareholders."
Macy's has identified 50 stores as "go-forward" or priority locations, and the activists said those sites should be candidates for sale-leaseback deals.
Wall Street reaction
David Swartz, an analyst at Morningstar Research Services, told CoStar News that in some ways the activist recommendations sound like the course that Macy's is already taking.
"I guess in theory what Barington is pushing for is for Macy's to be more aggressive in selling real estate and then using that capital for buybacks and also to fund the store remodeling," he said. "But is that really a lot much different than what they're doing already?"
As for the recommendation that Macy's create a real estate arm, Swartz said, "It's unclear to me what that even means."
How department store chains should optimize their real estate has been debated for some time, according to Swartz.
"This has been an issue for years, that Macy's owns all this real estate, and it's clearly not benefiting the shareholders," he said. "And, you know, Macy's does deserve criticism for not having done something about that after all these years. It's the same situation with Kohl's, and also with Nordstrom, which is trying to go private."
Barington and Thor also recommended that Macy's evaluate strategic alternatives for the company’s higher-growth Bloomingdale’s and Bluemercury luxury operations, and that the retailer add representatives of both firms to its board.
"Barington has expertise in the retail sector with prior publicly disclosed investments in Hanesbrands, L Brands, Chico’s FAS and Dillard’s," the dissidents said in their statement. "Thor has expertise in the real estate markets, especially in developing value-enhancing alternatives for retail real estate."
Saunders expressed doubts about their plans for Macy's.
"In our view, their demands are mostly about playing financial games that extract value from Macy’s over the short term," Saunders said of the latest batch of activists. "Unfortunately, there is nothing in the plans that helps the brand grow over the longer term. Indeed, if enacted, their changes would likely leave the core Macy’s fascia in a weakened position. This is especially so in terms of reducing capital expenditure, which is something Macy’s actually needs to ramp up as it aims to reinvent its stores and proposition."
As for comparing Macy's financials to Dillard's, Dillard's has better stores and takes a longer-term view, according to Saunders.
"Barington’s vision doesn’t turn Macy’s into a Dillard’s," he said. "It turns Macy’s into an ATM that will be quickly emptied."
For the record
Bank of America Securities and Wells Fargo are acting as financial advisers and Wachtell, Lipton, Rosen & Katz is acting as legal adviser to Macy's.