News of Macy’s lowball takeover offer of $21 per share offer from Arkhouse Management and Brigade Capital Management was hardly a surprise. I’ve been writing about Macy’s misery for as long as I can recall. The question is, will this be an opening salvo to a massive real estate liquidation or a linchpin to a Macy’s resurgence?
This is not the first time a venture capital group has taken a shine to the “Miracle on 34th Street.” In 2015 Starboard began accumulating shares to sell off its real estate on the pretext of boosting its share price by 70%. Mind you, that was in 2015 when Macy’s stock price was hovering around $71 dollars per share. As I’m writing this, the stock price is just under $20 per share, equating to a $5.4 billion market cap and shy of the Arthouse/Brigade’s $5.8 billion offer.
There has been no shortage of industry insiders and analysts calling the offer an “underbid.” JPMorgan’s Equity Research Analyst Matthew Boss, interviewed Monday on CNBC, suggested the Arthouse/Brigade offer vastly undervalues the stock. Boss believes the real estate value to be $8 to $9 billion, with the Herald Square property worth $3 billion-plus on its own. Then there’s the digital business worth around $7 to $8 billion.
Beyond the digital marketplace, the Macy’s brand includes Bloomindales, and Bluemercury, both of which have been generating greater returns than the mothership. Boss further pointed out that Macy’s digital performance is predicated on the holistic interplay between online and offline, a not so subtle tip of the hat to the power of unified commerce.
Side Stepping the Blame Game
I’ve long been an advocate for taking Macy’s private, as suggested in my January 2019 Forbes.com article “Macy’s Muddle in The Middle”. Macy’s serves two masters, often at loggerheads with one another. As management has one eye on the stock price and quarterly earnings and the other on streamlining the retail operation, their customers are not adequately served, let alone wowed!
I choose to sides-step the “how did Macy’s get here” discussion. I, along with a myriad of retail watchers have pondered this, ad nauseam. Suffice it to say, while the retail ecosystem has rapidly evolved in recent decades, Macy’s value proposition has devolved.
One need only walk into a present-day Target
Not Dead Yet
I also don’t subscribe to the “death of department stores” adage. I believe the merchandising fundamentals that made Macy’s “THE preeminent retailer” in the early and mid-twentieth century are still viable today; perhaps even more than ever.
Consumers still value highly differentiated and unique product offerings paired with exciting merchandising and delivered via exceptional customer service. One only need to visit some of Europe’s and South America’s department stores (where constant discounting is also foreign) to experience this in practice. As my RETHINK Retail colleague Michael Zakkour suggests, in the age of unified commerce these types of immersive experiences are quickly becoming retailing table stakes.
The Arthouse and Brigade Capital offerings may only be the opening salvo to a spate of offers, perhaps by multiple suitors, which Macy’s board will have to consider. JPMorgan’s Matthew Boss suggested Macy’s current value might be closer to $30 per share.
Near Term Returns Versus Long-Term Viability
With all due respect to the Arthouse/Brigade group, investment bankers and VCs generally prioritize maximizing undervalued assets and near-term returns over long-range investments to preserve iconic brands and the thousands of jobs associated.
It will take a massive investment to “reimagine” Macy’s as a viable competitor in tomorrow’s retail arena. If there is a “path to tomorrow” that enables Macy’s to find its new north star without blowing up the galaxy it will require a unique combination of fresh thinking, fresh money, and perhaps even unlikely collaborations.
Monetizing some assets to achieve a Macy’s 2.0 turnaround seems inevitable. Whether this requires selling off select real estate assets, spinning off Bloomingdales and/or Bluemercury, creating a REIT, or some combination of the above.
Polaris: Missile or Submarine?
Macy’s recent off-mall initiative is understandable and one positive offshoot of the Polaris Strategy initiated in 2020. This recognized the need for a downscaled and more “localized” Macy’s, which, in part compensates for their vacating some dying malls in still viable markets.
That said, many of Macy’s (tired) flagship stores still anchor A, A- and B+ malls. These couple hundred top-tier malls, owned and operated by premier developers such as Simon Property Group
Most of these premier properties are undergoing massive redevelopment becoming mixed-use communities that appeal to both NextGen and Millennial consumers. In the process they are replacing tired or moribund anchor tenants with state-of-the-art retailers, offering immersive customer experiences such as Dick’s House of Sport. A reimagined Macy’s could create that same kind of excitement, becoming a highly sought-after destination.
While some may argue the Polaris initiative has made incremental improvements, I would argue that Macy’s survival as a “future relevant” retailer requires nothing less than a radical reimagination of its brand. It needs a triage-like infusion of cash, clear vision and strong leadership to rethink the customer experience, upgrade flagship stores and make them a true target for both NextGen consumers and Boomers alike.
Meeting Its New Maker
To create an “out of the box” outcome that secures Macy’s brand integrity (as opposed to its “parting out”) may require an unconventional consortium of interests with a holistic plan and deep retail industry insights. It will also call for equity or interest sharing, particularly if Macy’s retains significant ownership share.
At this “eleventh hour” juncture Macy’s might even consider such “skin-in-the-game” property owners and developers such as Simon Properties and Brookfield development. Strange bedfellows perhaps, but with the wherewithal to help monetize only what is essential, while investing deeply in the legacy of Macy’s and its longevity.
I see this as very different from the Chapter 11 “life raft” that the Simon-Brookfield consortium threw to JCPenney in 2020, amidst its bankruptcy. That, in my opinion, made JCP not much more than a mall placeholder.
Agreements would need to be ironed out. These would include radical makeovers to top-tier Macy’s anchors, transforming them into true flagship status. Such commitments must also include stepping up Macy’s online-offline synergies though “state-of-art” technology. Most importantly, investments in both upskilling and improving associate compensation to transition from sales person status to highly vested brand ambassadors. Frankly, any reasonable strategy that averts a venture capital “parting out” scenario is worth considering and acting upon.