The landscape of retail has become increasingly treacherous, and department store chains such as Macy’s are facing escalating scrutiny. Activist investors are now stepping into the fray to demand strategic changes that they believe are essential for the survival and growth of the storied retailer. One of the most recent calls for action comes from Barington Capital, which has taken a significant stake in Macy’s and is advocating for a thorough revamping of the company’s financial strategy and asset management.

On Monday, Barington Capital announced its interest in Macy’s, urging the company to reassess its spending habits, evaluate the sale of its luxury brands, and thoroughly analyze its real estate portfolio. This announcement marks the fourth activist engagement with Macy’s over the past decade, highlighting the ongoing turbulence the retailer faces. Following the news, shares of Macy’s increased by approximately 3% during premarket trading, indicating investor optimism surrounding potential changes driven by Barington’s involvement.

Barington has teamed up with Thor Equities, a private equity firm, signaling a significant combined effort to influence Macy’s future. While the exact size of their stake was not disclosed, the partnership aims to create a sturdy front for advocating change. Their presentation illustrates a clear assertion that while Macy’s continues to generate cash flow, its management practices regarding capital expenditure – nearly $10 billion in the past – have been detrimental by neglecting shareholder returns through buybacks or dividends.

A Legacy in Decline

Macy’s has underperformed compared to both the S&P 500 and the Retail Select indexes over the last decade. This performance is alarming, especially when contrasted with other department store operators like Dillard’s, which has received praises for its superior capital allocation strategy. Dillard’s, boasting a market cap exceeding $7 billion, serves as an illustrative model of effective management and operational efficiency, calling into question Macy’s prolonged underperformance.

In response to these pressing criticisms, Macy’s management remains steadfast, repeating its commitment to the “Bold New Chapter” strategy aimed at revitalizing the brand. This strategy includes plans to close approximately 150 of its less profitable stores by early 2027, while focusing resources on its most successful locations and brands, such as Bloomingdale’s and Bluemercury. However, the question remains if this approach is sufficient in reversing the tide of declining sales and foot traffic.

Recent quarters have revealed a concerning trend for Macy’s. In the latest financial report, excluding the holiday season, Macy’s reported a 2.4% drop in sales, plunging to $4.74 billion. Furthermore, comparable sales from owned and licensed brands, along with the online marketplace, fell by 1.3%. The sales disappointment is compounded by financial discrepancies that emerged earlier in November, where it was discovered that an employee had concealed approximately $154 million in delivery costs over several years. This scandal adds an additional layer of complexity to their financial challenges, showcasing the urgent need for a comprehensive and transparent financial strategy.

In this precarious context, Barington Capital’s proposal to sell Macy’s real estate assets holds considerable merit. Currently, many Macy’s locations serve as mall anchors, and with plans to close non-performing stores, divesting these properties could generate the cash needed to support the company through this transformative phase. The gap between asset sale gains—recorded at $66 million recently—and the company’s exorbitant capital expenditures indicates that there is room for improved financial fluidity.

Barington’s specific recommendations highlight the necessity for Macy’s to conduct a thorough assessment of its real estate holdings, potentially establishing a separate subsidiary to maximize asset value. This move could effectively align management’s focus towards strategic brand investment and ultimately, shareholder value enhancement.

The retail horizon looks increasingly challenging as consumer preferences shift, and the conventional department store model is under threat. The changes proposed by activist investors could provide a framework for a much-needed renewal within Macy’s. Nevertheless, the execution of such strategies will significantly determine whether Macy’s navigates its way out of this tumultuous period or remains entrenched in a cycle of decline. As the company braces for potential engagement with its activists, the stakes have never been higher, and the pressure to adopt a transformative approach feels more pressing than ever.

Business

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