Barington Capital Group, L.P., Thor Equities LLC, and its respective affiliates, shareholders of Macy’s, Inc., published on Monday, December 9, a recommendation that Macy’s consider changes to its capital allocation strategy and other structural actions to improve shareholder value.
The financial firm said that over the past decade, Macy’s valuation has declined, with shares down approximately 70 percent, partly due to long-term challenges in the department store sector and management missteps.
“Despite Macy’s numerous attempts to implement strategic plans under multiple leadership teams to overhaul its value proposition, the one constant of all these ‘ineffective actions’ has been its reliance on spending enormous amounts of cash on capital expenditures or actions focused on merchandising initiatives, cost reductions and store closures, which have delivered limited sustainable improvements to its operating results,” the company wrote in its recommendation.
Earlier this year, Macy’s announced a new strategic plan called “A Bold New Chapter” under the company’s recently appointed CEO, Tony Spring.
“We see early promise in the new plan, as it calls for the closure of a significant number of very low productivity Macy’s nameplate locations. We believe this action, coupled with further cost reductions the company plans to enact, will result in a healthier store base that can begin to deliver consistent revenue growth and profit improvements,” said Spring
Barington said that investors did not embrace the plan, and Macy’s shares fell approximately 13 percent since the announcement. As a result, Macy’s current valuation multiples of 3.6x NTM consensus EBITDA and 6.4x NTM consensus EPS are near all-time lows.
James Mitarotonda, chairman, Barington Capital Group, L.P., said, “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. However, we are concerned with Macy’s large capital expenditure programs. Since FY:14, Macy’s has spent $9.7 billion cumulatively on capital expenditures, including $6.7 billion on property and equipment and $3.0 billion on technology.3 Over this same period, Macy’s has lost approximately $15 billion in market capitalization. Clearly, shareholders have seen no value creation from these investments.”
Barngton is asserting that while Macy’s has returned $8.7 billion in capital to shareholders since fiscal 2014 consisting of $5.3 billion in cumulative share repurchases and $3.4 billion in cumulative dividends, $4.2 billion of the share repurchases, or approximately 80 percent of the total, occurred in fiscal 2014 to 2016 when Macy’s share price was 3x higher than in is today.
“Macy’s should look to its department store peer Dillard’s for a successful model in capital allocation,” the company stated in a media release.
Mitarotonda continued, “Dillard’s has been executing a highly successful strategic plan focused on improving operating margins, prudently managing capital expenditures and aggressively returning capital to stockholders. Since FY:18, Dillard’s has paid out 60 percent of its total cumulative cash sources to stockholders versus Macy’s at 25 percent. Dillard’s stockholders have benefitted greatly from this plan, seeing a total return in their shares of +788 percent versus Macy’s of -12 percent.”
Joseph Sitt, chairman, Thor Equities LLC, added, “Macy’s owns valuable and well-located real estate assets—led by its flagship property at Herald Square in New York City—that we believe are worth between $5-$9 billion. In our opinion, Macy’s board should create a separate real estate subsidiary to collect market rents from Macy’s retail operations and pursue other asset sale and redevelopment opportunities. We believe doing so would greatly maximize the value of these owned assets for the benefit of stockholders.”
Sitt continued, saying that, “Macy’s is a highly cash-generative business, and we believe it could become even more so if the company’s strategic plan proves successful. Barington and Thor are concerned that Macy’s cash could be misallocated in the future through wasteful and ineffective capital expenditure programs. In addition, we are concerned that Macy’s board lacks the knowledge, vision and desire to extract maximum value from its real estate assets.”
Barington and Thor proposed in their recommendation that Macy’s consider the following recommendations to improve shareholder value:
- Reduce capital expenditures to 1.5 percent to 2 percent of total sales from ~4 percent currently;
- Repurchase a minimum of $2 billion to $3 billion in stock over the next three years;
- Create a separate internal real estate subsidiary to optimize the return potential of the company’s valuable owned real estate assets;
- Evaluate strategic alternatives for the company’s higher growth Bloomingdale’s and Bluemercury luxury operations; and
- Add Barington and Thor representatives to the Macy’s board.
Mitarotonda and Sitt concluded, “We seek to be value-added stockholders at Macy’s that can bring fresh perspectives to the company, especially in the areas of capital allocation, merchandising and retail, and real estate. We believe that operating improvements at Macy’s, coupled with our recommendations for aggressive share repurchases and structural changes to the business, could lead to a 150 percent to 200 percent total return for Macy’s stockholders over the next three years. In our opinion, Macy’s discounted stock represents the best investment the company can make now.”
James Mitarotonda established Barington Capital Group, L.P., in January 2000. The company invests in undervalued publicly traded companies that it believes can significantly appreciate when it makes substantive improvements to operations, corporate strategy, capital allocation, and corporate governance.
Thor Equities LLC operates in urban cities worldwide and develops, leases and manages industrial, laboratory, residential, office, hotel, and mixed-use assets in “premier” urban locations. Its property portfolio totals $20 billion, with a reported development pipeline over 50 million square feet. In addition to its U.S. holdings, the company has assets in London, Paris, Madrid, and Milan, and is the largest developer in Mexico through its Latin American division with a development pipeline of 20 million square feet.
Image courtesy Macy’s, Inc.
