Activist investment firm Barington Capital Group and real estate development company Thor Equities have taken a stake in Macy’s Inc. and are pushing the retailer to make significant changes to its real estate and financial strategy, including considering the spinoff of its higher-performing Bloomingdale’s and Bluemercury banners.
In late November, Macy’s announced that it was delaying reporting of its Q3 2024 earnings to Dec. 11, 2024, after uncovering a financial irregularity in which an employee hid as much as $154 million of expenses. Preliminary results for Q3, which ended Nov. 2, 2024, indicate a smaller-than-expected decline in net sales (down 2.4% YoY to $4.74 billion).
Macy’s Real Estate Worth as Much as $9 Billion
The activist investors charge that Macy’s numerous previous attempts at a turnaround have led to “limited sustainable improvements to the company’s operating results.” Part of the problem, according to Barington and its partners, is that the “Macy’s board lacks the knowledge, vision and desire to extract maximum value from its real estate assets.”
To address this problem, Barington believes Macy’s should form a separate real estate subsidiary to optimize the value of its real estate portfolio as well as significantly reduce capital expenditures, following the example of its department store peer Dillard’s. (In 2017, Dillard’s faced similar activist pressure based on undercapitalization of its real estate assets).
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“Dillard’s has been executing a highly successful strategic plan focused on improving operating margins, prudently managing capital expenditures and aggressively returning capital to stockholders,” said James Mitarotonda, Chairman of Barington in a statement. “Since fiscal year 2018, Dillard’s has paid out 60% of its total cumulative cash sources to stockholders versus Macy’s at 25%. Dillard’s stockholders have benefitted greatly from this plan, seeing a total return in their shares of +788% versus Macy’s of -12%.”
“Macy’s owns valuable and well-located real estate assets — led by its flagship property at Herald Square in New York City — that we believe are worth between $5 to $9 billion,” added Joseph Sitt, Chairman of Thor in a statement. “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. We believe doing so would greatly maximize the value of these owned assets for the benefit of stockholders.”
Latest Activist Push Focuses on Macy’s Capital Expenditures
This is the fourth activist push Macy’s has been through over the last decade. The most recent included a six-month-long long tussle with a group of investors led by Arkhouse Management — which offered to buy out the company and take it private — that Macy’s board rejected earlier this year. Instead, Macy’s said in July that it was turning its full attention to its “Bold New Chapter” strategy, which was initiated by newly appointed CEO Tony Spring in February 2024.
Barington said it sees early promise in the Bold New Chapter efforts, in particular the plan to close a significant number of underperforming stores, but noted that the larger investment community has “failed to embrace the plan,” with Macy’s Inc. shares down 13% since the plan was announced (according to S&P Capital IQ as of Dec. 4, 2024).
“We invested in Macy’s because we believe the shares are mispriced relative to the upside potential we see in management’s new strategic plan and the compelling value of the company’s owned real estate assets,” said Mitarotonda. “However, we are concerned with Macy’s large capital expenditure programs. Since fiscal year 2014, Macy’s has spent $9.7 billion cumulatively on capital expenditures, including $6.7 billion on property and equipment and $3 billion on technology. Over this same period, Macy’s has lost approximately $15 billion in market capitalization. Clearly, shareholders have seen no value creation from these investments.”
Barington, Thor Seek Board Seats
Barington and Thor have made the following recommendations, which they believe will help Macy’s correct the imbalance:
- Reduce capital expenditures to 1.5% to 2% of total sales from ~4% currently;
- Repurchase a minimum of $2 to $3 billion in stock over the next three years;
- Create a separate internal real estate subsidiary to optimize the return potential of Macy’s owned real estate assets;
- Evaluate “strategic alternatives” for Bloomingdale’s and Bluemercury; and
- Add Barington and Thor representatives to the Macy’s board.
“We seek to be value-added stockholders at Macy’s that can bring fresh perspectives to the company, especially in the areas of capital allocation, merchandising and retail, and real estate,” said Mitarotonda and Sitt in their joint statement. “We believe that operating improvements at Macy’s, coupled with our recommendations for aggressive share repurchases and structural changes to the business, could lead to a 150% to 200% total return for Macy’s stockholders over the next three years. In our opinion, Macy’s discounted stock represents the best investment the company can make now.”
