Activist investor Barington Capital thinks Macy’s (NYSE: M) might be worth more without Macy’s
Activist investor Barington Capital—together with property developer Thor Equities—has taken a stake in Macy’s (NYSE: M) and plans to push for change at the largest department store operator in the US amid a rout that has seen shares plummet over the past decade. While they think the retailer is undervalued and making moves to turn its struggling business around, it’s the company’s real estate holdings that really have their attention.
“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,” Barington CEO James Mitarotonda, who began his career at Macy’s upscale subsidiary Bloomingdale’s, said earlier this week. Unlike most competitors that usually prefer to rent, the department store chain owns many of its flagship locations like the iconic Herald Square property in New York City. Barington wants the retailer to “pursue all alternatives to extract value” from those holdings and then use the cash to fund share repurchases.
Barington argued that Macy’s valuable property holdings—which also include locations in Chicago and San Francisco—are ripe for sales, leasebacks or redevelopment projects; it estimates they’re worth as much as $9 billion, a figure that far exceeds the company’s current market capitalization of $4.6 billion. “The market is implying that Macy’s retail operations are essentially worthless,” the activist said in a presentation. It also wants the department store chain to consider selling its luxury operations and thinks its recommendations could result in a 200% return over the next three years. Barington noted that Dillard’s (NYSE: DDS)—a competing department store chain—has more prudently managed operating performance, capital expenditures, and returned more cash to shareholders.
The activist investor—which likes to focus on micro, small and mid-cap companies it believes are often overlooked—has seen mixed results with a number of recent campaigns. Shares in TriMas Corp (NASDAQ: TRS) have fallen 0.8% since it first started pushing for changes at the manufacturing firm a year ago, while efforts to pressure toymaker Mattel (NASDAQ: MAT) to divest some brands like American Girl and Fisher-Price that began in February have so far been followed by a modest gain of 4.7%. Hanesbrands (NYSE: HBI), a clothing manufacturer, first drew pressure from Barington in August of last year and has since agreed to sell off its Champion brand, with shares rising 116% over the past year.
Macy’s has faced activist pressure before, with Starboard Value unsuccessfully pushing for the department store to unload its real estate assets all the way back in 2015 before ditching its stake in the company two years later; the retailer’s shares have fallen almost 80% since. Earlier this year, Macy’s terminated discussions with Arkhouse Management and Brigade Capital Management about a proposal to buy the company for $24 a share to instead focus on a turnaround strategy it says will unlock shareholder value by closing some locations and focusing on smaller-format stores. Macy’s shares are currently trading at $16.58; the company told Barington that it’s confident in its current revival plan and “committed to delivering sustainable, profitable growth.”
It’s a bitter pill to swallow for any department store struggling with changing consumer preferences and competition from online retailers and off-price outlets, but Barington is essentially saying that Macy’s might be worth more without Macy’s. It’s a message that’s been delivered before, in different variations, with rivals including Saks Fifth Avenue and Neiman Marcus recently merging real estate assets under one roof and partnering with Amazon (NASDAQ: AMZN) to adapt to the changing times. The question now is if Macy’s leadership will finally heed the call.
