By Jinjoo Lee
Chronically underperforming department stores have been irresistible targets for activist investors. Few have succeeded, but that isn't stopping another pair from taking a shot at Macy's.
On Monday, Barington Capital and property-owner Thor Equities disclosed a position in Macy's, alongside some recommendations to fix the business. Activists have knocked on the iconic department-store chain's door over the years with little success so the company's investors mostly shrugged off the news: After jumping by as much as 5% Monday, Macy's shares ended the day up just 1.8%.
Their first recommendation for Macy's is to reduce capital expenditures in favor of shareholder returns. There is some logic to this: After all, the department-store business isn't exactly growing quickly. Its best use of cash might be to return it to shareholders than to invest.
Dillard's has had a successful record of doing this: Over the past decade, it spent 2.5 times more on shareholder returns than on capital expenditures. Macy's, by contrast, spent just 51% more on shareholder returns. That has paid off for Dillard's, whose stock has appreciated roughly 250% over the last 10 years in contrast to peers, which have all declined.
The size and timing of the cut, though, might have to be thought through more carefully. The activist investors propose reducing capital expenditures to 1.5% to 2% of total sales, in line with Dillard's. Macy's has been spending about 3.8% of revenue on capital expenditures on average over the past five years, in line with Nordstrom and Kohl's. Its return on invested capital has averaged negative 0.5% over the last five years, a poor track record even compared with struggling peer Kohl's.
But investment does seem necessary at Macy's, at least as its new chief executive tries to stabilize the namesake business. There are signs that some of the retailer's sales-boosting initiatives are working. Skimping on necessary upgrades, such as technology, could leave the retailer further behind. Even so, maybe Macy's should give a more detailed disclosure of where capital-expenditure dollars go.
The investors are also proposing to squeeze more value out of Macy's real estate, which activists think is worth between $5 billion and $9 billion -- more than the company's current market capitalization.
They aren't immediately suggesting a sales-leaseback, as activist investor Starboard Value pushed for in 2015. An outright real estate spinoff can generate immediate returns but comes with the risk of burdening the retail business with rent payments. Macy's valuable real estate has come in handy in the past: The company was able to raise a substantial loan backed by its real estate in 2020 when the demand shock of the pandemic hobbled its business.
Instead, they are urging Macy's to create an internal real estate arm staffed by real-estate experts. That entity would collect rents from the retail operating company, partly as a way to help build more operating discipline at the retail company, according to a person familiar with the matter. Both units -- real estate and retail -- would still be owned by Macy's. That structure could help Macy's have a more critical eye toward its existing real estate, though it also looks like an intermediate step before an eventual spinoff.
Meanwhile, the investors' suggestion to evaluate strategic alternatives for its high-performing luxury footprint -- Bloomingdale's and cosmetics seller Bluemercury -- is tempting, but would leave the core Macy's business stranded and undiversified.
Macy's does look frustratingly cheap, both relative to its historical multiples and peers. But with a turnaround plan newly in motion, some patience and gradual tweaks of its cash spending priorities look more sensible than splashy spinoffs.
Write to Jinjoo Lee at jinjoo.lee@wsj.com
(END) Dow Jones Newswires
December 10, 2024 06:00 ET (11:00 GMT)
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