(Bloomberg) -- Another activist investor group is urging Macy’s Inc. to take drastic steps to boost the stock price of America’s largest department-store chain.
Barington Capital Group and Thor Equities LLC are urging Macy’s to form a separate real estate unit, cut its capital expenditures and consider spinning off its higher-end Bloomingdale’s and Bluemercury chains, according to a presentation that was published on its website.
“The bottom line is there’s so much value to be tapped in the business and you have folks that aren’t thinking about the bigger picture to unlock all the value,” Thor Chairman Joseph Sitt said in an interview.
He said Macy’s executives don’t have enough real estate expertise, adding that it would make more financial sense to rent part of the chain’s flagship store on Herald Square in Manhattan.
If Macy’s had to pay rent on its Herald Square store, Sitt said, executives would be more cognizant of the value of the property. That would create an incentive to rent a portion of the store, he added.
“They don’t need a building that big,” Sitt said. “It’s forcing them to make bad decisions.”
Thor and Barington want seats on Macy’s board and would encourage the retailer to create a subsidiary for its real estate that would include all of the company’s owned and leased properties, including its stores and distribution centers. The retailer would then pay rent to the subsidiary. The investor group estimates Macy’s real estate is worth as much as $9 billion.
Barington didn’t disclose the size of its stake and Sitt declined to comment.
Macy’s said in a statement that its board and management remain confident in its strategy, which “continues to gain traction.” The department store chain looks “forward to engaging” with the investors.
Macy’s has faced numerous proposals from activists over the years, most recently a take-private bid from Arkhouse Management Co. and Brigade Capital Management. Investors have seen a disconnect between the value of Macy’s real estate and its sluggish revenue and falling share price. Macy’s Chief Executive Officer Tony Spring, who took over in February, ended talks with Arkhouse and Brigade in July and said the retailer would focus on implementing its own turnaround strategy, which includes shutting hundreds of poorly performing Macy’s stores across the US, opening more Bloomingdale’s and Bluemercury stores and cutting costs to boost profits.
‘Most Sensible’
Among recent activist proposals, the proposal from Barington and Thor “is the most sensible one,” said Bloomberg Intelligence analyst Mary Ross Gilbert.
The investors’ analysis on Macy’s real estate value is solid and they’re not proposing to saddle the retailer with debt, she added. Bloomingdale’s and Bluemercury have reported stronger sales than the Macy’s nameplate in recent quarters, so the group’s proposal to spin off those units is also logical, Ross Gilbert said.
In their presentation, Barington and Thor said Macy’s should take a page from the success of Dillard’s Inc. in recent years. That’s a challenge, Ross Gilbert said, in part because Dillard’s is a much smaller department store chain and it changed its strategy in recent years to pivot away from discounts.
Macy’s would probably lose a lot of customers if it pivoted away from discounts. “Why customers love them is because of the promotions,” Ross Gilbert said.
Barington also called on Macy’s to cut its spending to between 1.5% and 2% of sales, down from 4% currently, and buy back as much as $3 billion in stock over the next three years.
“Shareholders have seen no value creation from these investments,” Barington Chairman James Mitarotonda said in a statement. He said Macy’s has spent $9.7 billion on capital expenditures since its 2014 fiscal year, a period during which the retailer lost approximately $15 billion in market capitalization.
Macy’s said in its statement that it is “committed to delivering sustainable, profitable growth and driving shareholder value.”
Through Friday, Macy’s shares had fallen nearly 15% since the department store retailer announced its turnaround plan in February. The stock was up 1.3% as of 12:48 p.m. in New York Monday.
The company also disclosed in November that it is investigating a plot in which a worker hid millions in expenses. The discovery led Macy’s to delay reporting its quarterly earnings, which the company says it will announce by Dec. 11.
(Recasts throughout and adds comments from Thor chairman, analyst)
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