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Macy’s has faced down its share of activist investors in recent years — from Starboard Value in 2015 to Jana Partners in 2021 and a bid from Arkhouse Management and Brigade Capital Management last year. The latest attempt — courtesy of Barington Capital and private equity firm Thor Equities — should also be viewed with scepticism.
The duo, which has amassed a stake of unknown size in the company, wants Macy’s to develop an internal real estate subsidiary, reduce capital expenditure, explore strategic options for its upmarket Bloomingdale’s and Bluemercury chains and expand share buybacks.
It is not hard to see why Macy’s keeps attracting activists. Department stores are in secular decline, among younger consumers in particular. The sector is being squeezed by luxury retailers on one side and discount chains such as TJ Maxx on the other. Even its highly lucrative credit card business — which according to one analyst estimate accounted for almost half of group operating income in 2022 — is looking wobbly amid rising delinquency.
The trouble is, it is not clear that selling or spinning off the group’s most valuable assets would help.
Take Macy’s real estate, which the activists said could be worth as much as $9bn — or twice the entire company’s current market valuation. Creating an internal real estate subsidiary, as the activists suggest, would allow Macy’s to still own its real estate. But the move could pave the way for the unit to be sold off in the future. That would leave Macy’s exposed to rising rent payments and limit its ability to reinvest in the core retail business. Sears, which filed for bankruptcy in 2018, is a reminder of the strategy’s pitfalls.
Similarly, selling off the better performing Bloomingdale’s and Bluemercury chains — which the activists said could together fetch as much as $3.9bn, would unlock immediate gains. But it would do little to fix the core Macy’s business, which still accounts for more than 80 per cent of total group sales.
A break-up of Macy’s has obvious drawbacks. Still, the group’s ability to face down activists will rest on whether — and how quickly — it can turn its underlying business around.
Under new chief executive Tony Spring, it has embarked on a shrink-to-grow strategy. This is still very much at the work-in-progress stage. Sales are down for the nine months to November 2. Macy’s also has the added problem of a minor accounting scandal that has dented its credibility. Its shares are down 18 per cent this year and are trading on just 7 times forward earnings. That compares with 11 times for rival Nordstrom and 28 times for TJ Maxx owner TJX.
Spring will need to do more, and quickly, if he is to repel the barbarians at the department store gates.