With investor groups again challenging Macy’s to take the operation in a new direction, the company responded it is willing to engage shareholders, but it is confident in the strategy currently under implementation.
The latest investor move comes after Arkhouse Management Co. and Brigade Capital Management tried to acquire the company in a bid Macy’s rejected as underfunded.
Macy’s shareholders Barington Capital Group and Thor Equities announced they are recommending the company make changes to its capital allocation strategy and consider other structural actions to improve shareholder value, including a possible selloff of luxury brands Bloomingdale’s and Bluemercury.
Macy’s valuation has suffered markedly the past decade because of long-term challenges in the department store sector and previous management missteps, the investors claim. Macy’s most recently devised plan, dubbed “A Bold New Chapter,” being executed under the leadership of the company’s recently appointed CEO, Tony Spring, offers early promise, as it calls for the closure of a significant number of low productivity namesake locations, the investors indicated. But the investors observed although the plan’s implementation and further cost reductions the company plans to enact will result in a healthier store base, shareholders haven’t embraced the plan, with Macy’s shares down approximately 13% since its announcement.
Barington and Thor propose Macy’s consider several recommendations they are making to boost value:
- Reduce capital expenditures to 1.5%-2% of total sales from about 4% now.
- Repurchase a minimum of $2-$3 billion in stock the next three years.
- Create a separate internal dedicated subsidiary to optimize the return potential of the company’s owned real estate assets.
- Evaluate strategic alternatives for the company’s higher growth Bloomingdale’s and Bluemercury luxury businesses.
- Appoint Barington and Thor representatives to the Macy’s board.
Barington Chairman James Mitarotonda said, “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. 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.”
Thor Chairman Joseph Sitt added, “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 billion to $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. We believe doing so would greatly maximize the value of these owned assets for the benefit of stockholders.”
Macy’s, which has been touting store-level capital investments as generating material improvements in results, responded to the proposals announced by Barington and Thor Equities, Macy’s management said its board and management team remain committed to delivering sustainable, profitable growth and driving shareholder value. The company has consistently demonstrated open-mindedness, including with respect to regularly reviewing its strategy and capital allocation framework and exploring all available paths to enhance value, it asserted.
Macy’s added it remains confident in the company’s “A Bold New Chapter” strategy as it has been implemented, one the company said continues to gain traction. Macy’s added it expects to share details regarding the company’s progress as it releases its delayed third-quarter results and provides fourth-quarter and full-year guidance.
Pulse Ratings noted Barington/Thor proposals would cut back capital expenditures and compromise Macy’s most valuable asset, the company’s real estate, diverting cash towards aggressive share repurchases and away from its operational turnaround. A spin-off of the Macy’s Bloomingdale’s and Bluemercury banners would cut a connection to affluent consumers whose spending capacity tends to be less compromised by weaker economies.
