July 16, 2015
Should Macy’s sell its stores and lease them back?
Jeffrey Smith, co-founder and CEO of Starboard Value hedge fund — and the man Fortune labeled as "the investor CEOs fear most" — thinks Macy’s stock is undervalued and he wants to unlock it by selling off the company’s real estate holdings worth billions.
Starboard Value revealed yesterday that it had taken an undisclosed stake in Macy’s, Inc. and that Mr. Smith was pushing for the company to pursue spinning off its property into a real estate investment trust (REIT). According to The Wall Street Journal, Macy’s current market value is $22.5 billion. Mr. Smith estimates its real estate holdings are worth $21 billion, including the department store’s Herald Square flagship in New York that is valued at $4 billion.
To be sure, Starboard is not the first to suggest Macy’s could benefit from the sale of real estate assets. Macy’s CFO, Karen Hoguet, addressed the issue on an earnings call with analysts in May.
Photo: RetailWire
"When it comes to real estate, the first thing I would say is this is far more complicated than what most people think. And some of the estimates of value in our real estate, I think, have been done overly simplistically," said Ms. Hoguet. "Having said that, as you might imagine, we are studying closely with our key banking partners all the various transactions that have happened lately and all the possible strategies, the pros, the cons of how you would do it, et cetera, et cetera, to see what’s right for us. Our objective is always to maximize value. And up until now, we haven’t seen an opportunity that made sense in terms of a global strategy."
If Macy’s were to pursue a REIT spinoff, it would follow Hudson’s Bay Co. and Sears Holdings in doing the same. While a spinoff provides a form of insurance to investors, who know the value of the real estate even if a retailer struggles, it also limits a chain’s ability to close, expand or remodel stores, according to the Journal.
Macy’s share price climbed nearly eight percent yesterday to $72.10 and at one point reached an all-time high of $72.75, according to The Associated Press.
- Activist Knocks on Macy’s Door – The Wall Street Journal (sub. required)
- Starboard Move Could Store Up Trouble for Macy’s – The Wall Street Journal (sub. required)
- Starboard Value suggests real estate transactions for Macy’s – The Associated Press/CNBC
- Big investor advocates splitting Macy’s – The Cincinnati Enquirer
- Macy’s (M) Q1 2015 Results (Earnings Call Transcript) – SeekingAlpha
- Starboard Value’s Jeff Smith: The investor CEOs fear most – Fortune
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Discussion Questions
Do you think spinning off some or all of its real estate assets into a REIT would make Macy’s Inc. a stronger retailer? Should that or another factor be the prime consideration in Macy’s decision whether or not it pursues a spinoff of its real estate holdings?
Poll
Look at the wonderful things a real estate guy has done for Sears.
Maybe spinning off some of the smaller stores in the Midwest might be OK. Not NYC or Minneapolis or the other major cities. Stores in Phoenix and other key cities need refurbs and also to be kept.
Terry and the gang will do the right thing. To heck with some activist dude. Let Macy’s decide what is best for their shoppers.
The fundamental question for every enterprise is: “What business are you in?” A corporate real estate business is entirely a different business model than a retail business — and requires entirely different talent.
What happens if the REIT spinoff has very good talent and raises the rents to a level that jeopardize Macy’s profits?
All I know is when real estate guys get their hands on retail chains, only bad things happen. Starting all the way back from Campeau (anyone else remember him?). They don’t really understand retail or the dynamics of the industry. They just look at real estate CAGRs and think it’s all the same.
Strongly opposed.
Selling physical assets can make sense if and when a retailer has determined its best days are behind it. You can only make that move once and even though the cash-flow and investor benefits can be rewarding in the short term, you are separating a very valuable leverage point from the retail operation. Macy’s may be at that point in its life cycle as a company.
Keep in mind as well that capital investment companies historical display little regard for combined synergy of retailer assets and the value of those assets working together to maintain the retailer’s brand over the long haul. By contrast, they are all about the short term, and the cash. Not surprising that Starboard Value is pushing for a REIT. If this happens, I see no long term benefit for Macy’s as retailer or brand name.
It’s arguable that Starboard drove the share price of Darden Restaurants higher by micromanaging issues like the breadsticks at Olive Garden. But it’s hard to make the same case that they can bring much value to the operation of Macy’s, widely viewed as an industry leader. Macy’s ought to be free to make its own decisions about the value of its real estate assets, instead of reacting to the whims of an “activist” investor.
The history of activists and retailers is not pretty, if William Ackman and Eddie Lampert can be used as examples. (Don’t forget Ackman’s push to “unlock” the real estate value of Target before his misadventure at J.C. Penney.) Successful retailers are about much more than “unlocking assets,” and they really depend for their success upon good merchandising, branding, store operations and omnichannel strategies.
Sounds like a bad idea to me, although I know nothing about real estate management or management of a retail chain.
Why should a retailer be in the real estate business at all? The real estate asset and the retail asset both have to generate a return. If not, then one is subsidizing the other.
This is a typical Wall Street approach — focus on the next quarter, rather than the next decade. Pay no attention to this guy, Terry.
Isn’t the real question, “is this better for the shareowner?” The management does not own the company. So having run this analysis at least fifteen times when I was in the business the answer was always “no.” But never in the history of retailing (at least my 50 years in retailing) has the value of the real estate been higher versus the value of the operating company or interest rates lower or real estate cap rates more favorable.
Department store retailers did not believe that they could get by without controlling their receivables portfolios for most of my career either. But when the receivables became more valuable to the banks than to the retailers the deals happened. It looks like department stores are at the same place regarding their store portfolios.
One other major change to mention is that for the first time in my 50 year career retailers are trying to figure out how to operate with less real estate, not more. Omnichannel retailing has completely changed the need for real estate to support sales growth going forward.
In theory if the underlying real estate assets are fairly valued within the overall valuation of Macy’s then it’s really not going to change much, other than as some have pointed out create a risk of a rental cost misalignment. It’s a pure financing play that may make those assets look more attractive to Wall Street. The assets are worth the value of the stream of income that is coming out of them since they are likely to stay Macy’s stores and have no alternative use or sale possibility. Perhaps a nice game of Monopoly. Get it out of everyone’s systems.
It raises the question, “Are Macy’s best days behind it?” While I’ve struggled with answering that myself, what I know is that the bleeding edge of retail is light years away from a behemoth stalwart like Macy’s so they need viewing in two different lights. Both extremes may have change coming.
So maybe a better question is, “What are retailers like Macy’s and Kohl’s and J.C. Penney’s next moves?”
Whatever Macy’s used to do or be in the industry they aren’t doing it as well as they used to, and while I personally still shop there due to how convenient they’ve made it for me I’m not doing it for the fashion, which is the wrong thing to say when you are talking about a retailer like Macy’s.
It’s too bad, but I’m done speaking to the problem since few listen anymore. Maybe this dude and his REIT have something, but I do think it would spell doom for Macy’s as it currently exists.
In St. Louis our downtown Macy’s disappeared but not because it wasn’t needed, it was merchandised and managed horribly. Before it was all over and done with it was just selling Cardinals t-shirts and the Cardinals themselves were/are doing that better, so hasta luego it was, and the downtown of St. Louis is worse off for it.
People don’t seem to have answers to the current problems of today. Fall backs like a Wall Street sell off of retail are just the easy answer.
That speaks to lack of imagination or expertise more than that it is the next right thing to do.
But the industry has lost the expertise of merchandisers from the ’80s when all of retail was exploding. Tech people, while gifted in one arena, know nothing about retail.
It’s a foolish idea. One that benefits hedge fund managers and no one else. Macy’s does nothing special to distinguish itself from the rest of the retail landscape. They should concentrate on making people want to go out of their way to shop there.
“Why own when you can rent?” has never been a mantra for anyone except landlords … or perhaps in this case “activist” investors. That’s not to say that individual properties might not have more value as something else other than Macy’s, but Ms. Hoguet and her property posse are quite capable of making those decisions themselves. Just this week they “spun off” the landmark Pittsburgh store (nee Kaufmann’s)…and closed the store. So maybe Mr. Smith is really hinting that Macy’s should get out of retail altogether…but that’s a discussion for another day.
It’s been a successful strategy for other retailers looking to increase working capital and therefore agility. The specifics of the arrangement aren’t something we’ll know, but I wouldn’t second guess that investor.
Yes, Paula, I remember Campeau, I was there! The only good thing that came out of that is that in order to save our own shirts, we spun off the Federated Systems Group (then known as Sabre).
Strongly opposed! Terry, you are the man! You know what is best.
And that’s my 2 cents!
One interesting question is why sell and leave the company in a position of weakness as in being subjected to higher rents? I see the spinoff in line for falling values and perhaps a slow but sure death.
Macy’s same-store sales when looked at with removal of vendor sub leasing and support is most telling. The company is in need of a change of address for many, perhaps most, of the mall stores. And some of the stand alone/strip mall units have seen better days as the middle class Americans continue towards increasingly rapid extinction. The problem here is store traffic, receipt size, and cash flow. The solution is to get rid of malignant parts of the business ASAP. But that’s just what I think.
This is not going to be the end of this idea, because, frankly, retailers have trillions of dollars in “parked” capital: unused (by customers) store real estate, and unused (by customers) inventory. Both of these are paid for by third parties—brand suppliers—in order to get some access to shoppers; and to hold off competition that is playing the same losing game, in the face of online onslaughts by capital efficient businesses like Amazon.
Harvesting that existing “parked” capital now, while real estate prices are relatively high, assures someone engineering the deal can recover a bunch of that parked capital as cash, while the retailer has now lost the asset they controlled, in return for long term leases that they do not control. THIS is the death knell for most retailers that go through this transition, even if it takes a decade or two to turn the remainder into a corpse.
Whoever ends up owning the real estate will regret it, as stores move to 1/4 size or less. The parked inventory disaster will do to other retailers what it did to Tesco. Self-service retail has come to the end of the capital boom promoted by the brand suppliers. Those suppliers will be more nimble in dealing with the disaster that retailers welcomed for themselves.
The more capital efficient store is upon us. As I have noted, ALL stores are essentially “convenience stores” with big, floppy, long tails. The “Everything Store,” Amazon, holds all the cards in managing the valuable long tail. Bricks stores NEED that long tail, but can’t compete with their capital wasting historical practices. Change or die! Schumpeter correctly coined “creative destruction” to describe the evolution of retail 100 years ago. It is a new age with new assets, and efficiency will once again prune the losers.
Hopefully YOU will wake up before it is too late: Retail “Spoons“.
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Look at the wonderful things a real estate guy has done for Sears.
Maybe spinning off some of the smaller stores in the Midwest might be OK. Not NYC or Minneapolis or the other major cities. Stores in Phoenix and other key cities need refurbs and also to be kept.
Terry and the gang will do the right thing. To heck with some activist dude. Let Macy’s decide what is best for their shoppers.
The fundamental question for every enterprise is: “What business are you in?” A corporate real estate business is entirely a different business model than a retail business — and requires entirely different talent.
What happens if the REIT spinoff has very good talent and raises the rents to a level that jeopardize Macy’s profits?
All I know is when real estate guys get their hands on retail chains, only bad things happen. Starting all the way back from Campeau (anyone else remember him?). They don’t really understand retail or the dynamics of the industry. They just look at real estate CAGRs and think it’s all the same.
Strongly opposed.
Selling physical assets can make sense if and when a retailer has determined its best days are behind it. You can only make that move once and even though the cash-flow and investor benefits can be rewarding in the short term, you are separating a very valuable leverage point from the retail operation. Macy’s may be at that point in its life cycle as a company.
Keep in mind as well that capital investment companies historical display little regard for combined synergy of retailer assets and the value of those assets working together to maintain the retailer’s brand over the long haul. By contrast, they are all about the short term, and the cash. Not surprising that Starboard Value is pushing for a REIT. If this happens, I see no long term benefit for Macy’s as retailer or brand name.
It’s arguable that Starboard drove the share price of Darden Restaurants higher by micromanaging issues like the breadsticks at Olive Garden. But it’s hard to make the same case that they can bring much value to the operation of Macy’s, widely viewed as an industry leader. Macy’s ought to be free to make its own decisions about the value of its real estate assets, instead of reacting to the whims of an “activist” investor.
The history of activists and retailers is not pretty, if William Ackman and Eddie Lampert can be used as examples. (Don’t forget Ackman’s push to “unlock” the real estate value of Target before his misadventure at J.C. Penney.) Successful retailers are about much more than “unlocking assets,” and they really depend for their success upon good merchandising, branding, store operations and omnichannel strategies.
Sounds like a bad idea to me, although I know nothing about real estate management or management of a retail chain.
Why should a retailer be in the real estate business at all? The real estate asset and the retail asset both have to generate a return. If not, then one is subsidizing the other.
This is a typical Wall Street approach — focus on the next quarter, rather than the next decade. Pay no attention to this guy, Terry.
Isn’t the real question, “is this better for the shareowner?” The management does not own the company. So having run this analysis at least fifteen times when I was in the business the answer was always “no.” But never in the history of retailing (at least my 50 years in retailing) has the value of the real estate been higher versus the value of the operating company or interest rates lower or real estate cap rates more favorable.
Department store retailers did not believe that they could get by without controlling their receivables portfolios for most of my career either. But when the receivables became more valuable to the banks than to the retailers the deals happened. It looks like department stores are at the same place regarding their store portfolios.
One other major change to mention is that for the first time in my 50 year career retailers are trying to figure out how to operate with less real estate, not more. Omnichannel retailing has completely changed the need for real estate to support sales growth going forward.
In theory if the underlying real estate assets are fairly valued within the overall valuation of Macy’s then it’s really not going to change much, other than as some have pointed out create a risk of a rental cost misalignment. It’s a pure financing play that may make those assets look more attractive to Wall Street. The assets are worth the value of the stream of income that is coming out of them since they are likely to stay Macy’s stores and have no alternative use or sale possibility. Perhaps a nice game of Monopoly. Get it out of everyone’s systems.
It raises the question, “Are Macy’s best days behind it?” While I’ve struggled with answering that myself, what I know is that the bleeding edge of retail is light years away from a behemoth stalwart like Macy’s so they need viewing in two different lights. Both extremes may have change coming.
So maybe a better question is, “What are retailers like Macy’s and Kohl’s and J.C. Penney’s next moves?”
Whatever Macy’s used to do or be in the industry they aren’t doing it as well as they used to, and while I personally still shop there due to how convenient they’ve made it for me I’m not doing it for the fashion, which is the wrong thing to say when you are talking about a retailer like Macy’s.
It’s too bad, but I’m done speaking to the problem since few listen anymore. Maybe this dude and his REIT have something, but I do think it would spell doom for Macy’s as it currently exists.
In St. Louis our downtown Macy’s disappeared but not because it wasn’t needed, it was merchandised and managed horribly. Before it was all over and done with it was just selling Cardinals t-shirts and the Cardinals themselves were/are doing that better, so hasta luego it was, and the downtown of St. Louis is worse off for it.
People don’t seem to have answers to the current problems of today. Fall backs like a Wall Street sell off of retail are just the easy answer.
That speaks to lack of imagination or expertise more than that it is the next right thing to do.
But the industry has lost the expertise of merchandisers from the ’80s when all of retail was exploding. Tech people, while gifted in one arena, know nothing about retail.
It’s a foolish idea. One that benefits hedge fund managers and no one else. Macy’s does nothing special to distinguish itself from the rest of the retail landscape. They should concentrate on making people want to go out of their way to shop there.
“Why own when you can rent?” has never been a mantra for anyone except landlords … or perhaps in this case “activist” investors. That’s not to say that individual properties might not have more value as something else other than Macy’s, but Ms. Hoguet and her property posse are quite capable of making those decisions themselves. Just this week they “spun off” the landmark Pittsburgh store (nee Kaufmann’s)…and closed the store. So maybe Mr. Smith is really hinting that Macy’s should get out of retail altogether…but that’s a discussion for another day.
It’s been a successful strategy for other retailers looking to increase working capital and therefore agility. The specifics of the arrangement aren’t something we’ll know, but I wouldn’t second guess that investor.
Yes, Paula, I remember Campeau, I was there! The only good thing that came out of that is that in order to save our own shirts, we spun off the Federated Systems Group (then known as Sabre).
Strongly opposed! Terry, you are the man! You know what is best.
And that’s my 2 cents!
One interesting question is why sell and leave the company in a position of weakness as in being subjected to higher rents? I see the spinoff in line for falling values and perhaps a slow but sure death.
Macy’s same-store sales when looked at with removal of vendor sub leasing and support is most telling. The company is in need of a change of address for many, perhaps most, of the mall stores. And some of the stand alone/strip mall units have seen better days as the middle class Americans continue towards increasingly rapid extinction. The problem here is store traffic, receipt size, and cash flow. The solution is to get rid of malignant parts of the business ASAP. But that’s just what I think.
This is not going to be the end of this idea, because, frankly, retailers have trillions of dollars in “parked” capital: unused (by customers) store real estate, and unused (by customers) inventory. Both of these are paid for by third parties—brand suppliers—in order to get some access to shoppers; and to hold off competition that is playing the same losing game, in the face of online onslaughts by capital efficient businesses like Amazon.
Harvesting that existing “parked” capital now, while real estate prices are relatively high, assures someone engineering the deal can recover a bunch of that parked capital as cash, while the retailer has now lost the asset they controlled, in return for long term leases that they do not control. THIS is the death knell for most retailers that go through this transition, even if it takes a decade or two to turn the remainder into a corpse.
Whoever ends up owning the real estate will regret it, as stores move to 1/4 size or less. The parked inventory disaster will do to other retailers what it did to Tesco. Self-service retail has come to the end of the capital boom promoted by the brand suppliers. Those suppliers will be more nimble in dealing with the disaster that retailers welcomed for themselves.
The more capital efficient store is upon us. As I have noted, ALL stores are essentially “convenience stores” with big, floppy, long tails. The “Everything Store,” Amazon, holds all the cards in managing the valuable long tail. Bricks stores NEED that long tail, but can’t compete with their capital wasting historical practices. Change or die! Schumpeter correctly coined “creative destruction” to describe the evolution of retail 100 years ago. It is a new age with new assets, and efficiency will once again prune the losers.
Hopefully YOU will wake up before it is too late: Retail “Spoons“.