Will Macy's finally reconsider activist shareholder Jeffrey Smith of Starboard Value LP's advice after a weak third quarter and uninspiring Black Friday? Real Money reports.
In July, the retailer's stock peaked at $72.80 soon after Smith's proclamation at the CNBC's Delivering Alpha conference that they could hit nearly double. "Macy's is a stock that currently trades at $66 a share. We think that it's worth in excess of $125 a share," he said at the time. However, Macy's shares are down 39% for the year and trading at just around $40.
According to Smith, the key to unlocking Macy's value is by putting its real estate assets on the table, specifically its flagship stores in New York, San Francisco, and Chicago, which he valuates to be around $7 billion. He believes that the retailer could generate cash from its higher-end real estate assets such as its standalone locations and A-mall locations if they are turned into Real Estate Investment Trust (REIT).
But the proposition does come with risks, and these have been addressed during Macy's third quarter earnings call.
"We realized that its creation would not create nearly as much value for our shareholders as we had hoped," CFO Karen Hoguet said. "We reached this conclusion before taking into consideration the operational and tax risks associated with the creation of a REIT, which also would be relevant."
Hoguet recognizes that there are cyclical factors that directly affect the retailer's ability to pay for its rental locations; phases wherein the company needs to be flexible and adapt to the secular changes that affect the industry. In general, there is threat on the credit rating when there is uncertainty over a company's level of leverage.
"We've lived through enough downturns and bankruptcies to know that there is a real benefit to the retailer of maintaining the flexibility of an investment grade rating and having access to capital in all markets, particularly when the industry is in flux. In addition, our real estate advisors indicated that the REIT would trade better if the retailer was investment grade, since at least initially it would be a single-tenant REIT," she added.
A problem that is increasingly becoming significant to Macy's as well as other brick-and-mortar retailers is a shift in consumer behavior, and not just a simple "downturn." Online shopping is becoming a convenient avenue for consumers which pull the allure of old retailers, regardless of their strong online presence.
In the third quarter, Macy's was affected by falling international tourist sales, low cold weather gear sales due to a warming weather, and a general sluggish growth. It recorded a 3.6% decline in comp store sales as well as an 8% drop in earnings per share.
According to ShopperTrak, the whole retail industry fell 10% to $10.4 billion this year in Black Friday sales. In this case, and if the retailer had not profited significantly during the shopping bonanza period, Macy's may very well need to revisit the option of REIT once again.