If Macy’s is fielding an offer from investors who want to monetize its property, then any transformation that incoming CEO Tony Spring may be plotting is about to get more difficult.
Theoretically, going private could provide Macy’s with some breathing room to undertake reforms without pressure from often short term-oriented investors, according to Jessica Ramírez, a senior research analyst with Jane Hali & Associates. This is what Nordstrom executives (many of them also family members) probably had in mind when they attempted to take the business private several years ago.
“That's a different story — taking it private so that they’re not being scrutinized by Wall Street,” Ramírez said by phone. “The real estate is very interesting because Macy's does own a lot, and they previously have sold, which has helped to some extent. But if they were to be taken private, in the best case scenario, it should be someone who also has an interest in retail, in order to propel forward. It would be a huge overhaul because there are so many problems.”
Macy’s declined to comment for this story.
In recent years, Macy’s sold its San Francisco men’s store for $250 million, its Minneapolis flagship for $59 million, a portion of its Chicago Loop flagship for $27 million and its Pittsburgh flagship for $15 million.
As of January, the company owns 316 stores, another 102 where it owns the buildings but not the land, and four that are part-owned, according to its most recent annual report. All owned properties are held free and clear of mortgages, per that report, which means the company owns more than 58% of its 722 store locations. Various analysts peg the value of Macy’s real estate at $5 billion to $7 billion, with its Herald Square flagship in New York possibly able to fetch over $1 billion.
But once any property is sold, any Macy’s stores that stay open would face rent obligations equivalent to long-term debt, according to Chuck Fancher, principal at Fancher Partners, a retail and mixed-use real estate development and acquisition firm.
“That cash flow obligation is something that they cannot forestall or ignore,” he said by phone. “When the retailer is experiencing variable revenue streams, when their sales are down, when they have inordinate costs, like shipping, shrink and other things, fixed costs like debt or rent makes their cash business harder to manage.”
Similar moves at other companies are casting a shadow over what most analysts see as purely a real estate play, which could even include a sale of the New York City flagship. Conglomerate HBC, which owns Hudson’s Bay Co., Saks Fifth Avenue and Saks Off 5th, has monetized its holdings’ e-commerce as well as their real estate, to the detriment of their retail operations, according to retail consultant Doug Stephens, who said by phone that the setup should serve as a warning to Macy’s.
The story at Sears is even darker. In 2015, after a hedge fund run by Eddie Lampert acquired Sears and Kmart, the retailers spun off their property into a real estate investment trust dubbed Seritage Growth Properties, including 235 Sears and Kmart stores. At least one of Macy’s would-be suitors, Arkhouse Management, specializes in unlocking “unrealized equity value caused by the mispricing of real estate assets in the public market,” per its website.
“This created a long-term rent obligation that, at least at market rates, were not favorable. As volumes declined, costs did not proportionately decline, and it got to the point where it became unsustainable,” Fancher said of Sears. “Converting all of that real estate into debt may have given Eddie or the company a cash reprieve, but it ultimately became too much weight in the long run for the operating company.”
The value of Macy’s real estate sticks out because its retail operations have been in decline for years, according to GlobalData Managing Director Neil Saunders.
“Macy’s struggles with the fundamentals of retailing and its recent sales performance underlines that it continues to lose market share and relevance in an increasingly competitive market,” he said in emailed comments. “Correcting years of missteps will be expensive and risky for anyone acquiring the business at a premium.”
The tension comes as Macy’s faces the need for a turnaround that could mean closing many more mall anchors than envisioned by outgoing CEO Jeff Gennette. In January, he announced that the closures of four full-line Macy’s stores signaled “the final stretch” of a fleet reduction that since 2016 entailed shuttering some 170 locations. But to remain viable, Macy’s will probably need to close hundreds more, according to Nick Egelanian, president of retail development firm SiteWorks.
“Macy’s has a future as a much smaller chain, operating in the 150 malls that survive,” he said by phone. “That could include a flagship store in New York. That means, if they spin the property off, the retail business has to be given enough capital to fix itself. There is a retail play, there is a future for Macy’s. But my guess is that they have not figured that out, and they're just looking at a real estate play. That they're not thinking retail — they’re thinking liquidation.”
