Dive Brief:
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Macy’s Inc. investors Barington Capital Group and Thor Equities threw down a gauntlet Monday morning, demanding a series of measures to boost shareholder value, including tamping down expenses and mulling strategic alternatives for Bloomingdale’s and Bluemercury.
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The activist investors, holding up rival Dillard’s as a model, urged Macy’s to cut capital expenditures from 4% of sales to 1.5% to 2%; repurchase at least $2 billion in shares in the next three years; create an “internal real estate subsidiary” to maximize returns for its property holdings; and add Barington and Thor representatives to its board.
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In a statement following the firms’ public demands, Macy’s expressed confidence in its “Bold New Chapter” turnaround, saying it would release details on its progress with its Q3 results, expected some time this week, and that it will work with Barington and Thor. “We have consistently demonstrated open-mindedness, including with respect to regularly reviewing the Company’s strategy and capital allocation framework and exploring all paths to enhance value,” Macy’s said.
Dive Insight:
Macy’s is ending the year much as it began: grappling with investors with something to say about how the business is run. The department store spent the first half of 2024 entertaining a buyout offer that slowly ballooned to nearly $7 billion, also from investors keen on unlocking value from its real estate, which it finally rejected in July.
“Another day, another set of activist investors pushing for changes at Macy's,” GlobalData Managing Director Neil Saunders said in emailed comments.
In a statement, Barington Chairman James Mitarotonda pointed to Dillard’s as the golden child in the department store sector, stipulating that, since 2018, Dillard’s has paid 60% of its cumulative cash to shareholders, compared to Macy’s 25%, and that Dillard’s investors have seen a return of 788%, compared to a 12% decline at Macy’s.
“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,” he said.
Dillard’s has indeed often risen above many of the challenges vexing the department store sector. In the last several months the company has emphasized expense control, and that continued in its most recent quarter as sales fell 3.8%, comps fell 4% and margins contracted.
In a preliminary report last month, Macy’s said Q3 net sales fell 2.4% year over year to $4.7 billion, with comps, including licensed and marketplace sales, down 1.3%. Macy’s net sales fell 3.1%, with overall comps down 2.2% and “first 50” comps up 1.9%; Bloomingdale’s rose 1.4%, with comps up 3.2%; and Bluemercury rose 3.2%, with comps up 3.3%. Macy’s said it would release its full report by Wednesday, having delayed it after the discovery of fraudulent expense accounting by an employee who no longer works there.
The activists’ notion that Dillard’s serves as a model for Macy’s runs counter to their other ideas, however, Saunders said, calling their demands “mostly about playing financial games that extract value from Macy’s over the short term.”
“It is interesting Barington said Macy’s should look to Dillard’s as an example of how to run the business. Dillard’s has a stronger proposition and better stores than Macy’s. It certainly keeps a tight grip on its finances, but it runs itself as a retailer and takes a longer-term view of things,” he said. “Barington’s vision doesn’t turn Macy’s into a Dillard’s. It turns Macy’s into an ATM that will be quickly emptied.”
As it has for years, Macy’s extensive real estate portfolio is a shiny object for certain investors. The company has already moved to monetize its holdings, and its turnaround is based in part on plans to close 150 stores. On Monday, Thor Chairman Joseph Sitt took note of Macy’s “valuable and well-located real estate assets,” estimated their worth at between $5 billion and $9 billion, and highlighted the Herald Square flagship in New York.
One task of a new internal real estate subsidiary as proposed by Barington and Thor would be “to collect market rents from Macy’s retail operations and pursue other asset sale and redevelopment opportunities,” he said. But real estate experts have noted that other retailers taking this route, notably Sears, have invited rent obligations that are equivalent to long-term debt.
Moreover, Macy’s should probably increase its investments in order to see its turnaround through, according to Saunders.
“Indeed, if enacted, their changes would likely leave the core Macy’s fascia in a weakened position,” he said. “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.”
