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  • Writer's picturePeter Menakis
    • Dec 18, 2023
    • 6 min read

Episode 3: What to Make of Macy's?




What does a leveraged buyout of Macy's mean for the retail veteran?


On Sunday, 12/10, The Wall Street Journal reported that Arkhouse Mgt, a private equity firm had submitted a bid to take Macy’s private. The bid is reported to be $21 per share, resulting in a ~20% premium for shareholders. Arkhouse, a firm with plenty of real estate investment experience is rumored to be most interested in Macy’s valuable land and stores. Over the past week, there have been plenty of articles published about what this means, is this what’s best for Macy’s, and what would a private Macy’s look like.


I’ll do my best to answer 3 questions.

1.      Why is Macy’s being targeted by private equity?

2.      What can we expect from a privately held Macy’s?

3.      Is this a good thing for Macy’s


As always, I’d love to hear from you. Is my assessment of Macy’s fair? How frequently do you shop at Macy’s? What is your experience?


Why is Macy's being targeted by private equity?


Perhaps a good place to start is, what do we know about Macy’s?

If you are a millennial like me, there’s a good chance you spent many Saturdays sitting on the floor of Macy’s, waiting for what was sure to be an eternity while your parents attempted to pay for sweaters, khaki’s, and the tie that would end up being your dad’s Christmas gift. Fond memories of fluorescent lighting, beige walls, and linoleum floors are etched into my brain as synonymous with the big red Macy’s sign that plastered every mall in America. It was not until years later that I ventured in on my own to experience the mediocrity that was and is a Macy’s store.


Fast forward to 2023, and what has changed?


Well, after a post global financial crisis bull run that saw the stock price climb to a $69 peak in 2015, the stock is back down to ~$19 per share- pretty much flat to my first begging fit to avoid joining my mom on her shopping trip to Macy’s. Well, Peter, the stock price is a measure of market value- not necessarily a 1:1 indicator of business fundamentals. Of course, this is true. So, let’s look at sales.  (Hint: it’s not great).





Sales have not been tight, my dude. Store count? Equally unchill. In 2022 Macy’s reported operating 783 stores, down 12% since 2015 in which it operated 868 stores. Again, not really the results we’re looking for.


Despite a boom in consumer spending, and a surging US retail landscape (Annual US Retail sales are up 59% since 2014, $7.1T FY22 vs. $4.5T FY14), Macy’s just has not performed. But it would be wrong of me to suggest that Macy’s is alone in this pain. The traditional department store has had a tough time navigating the influx of new competition driven by changing demands of the US consumer. Long gone are the days of showing up to the mall as the primary avenue for discretionary apparel and home goods. In the past 15 years we’ve seen a rise in Direct-to-Consumer (DTC), Fast Fashion giants (Zara, Shein, Temu), an increasing value proposition by Off-Price Retailers, and an influx of niche, high-end shops. As Nathaniel Meyersohn so thoughtfully writes, Macy's finds itself stuck in the middle, not really known for any one particular thing in a new world full of clearly defined customer offerings. It’s not difficult to see how being an ok option in a shrinking market is a poor position for a business to find itself.


But we can’t let Macy’s off the hook that easily. There is plenty of self-inflicted harm. A trip to Macy’s stores reveals an uninspired assortment, often poor merchandising, and entirely too frequently- disastrous standards. Not necessarily the recipe for winning back customers in a competitive market.


With a deflated stock price, a seemingly stagnant market offering- change is inevitable. Enter Arkhouse Management.

What would a privately held Macy's look like?


What would a privately held Macy’s look like?

Almost certainly this will mean consolidation, unprofitable store closures, and likely the sale of valuable real estate assets. Remember, when PE firms take an organization private, there is almost always a huge debt burden on the incoming management due to borrowed funds to buy the firm. This strains cash flow in the short term, but is hopefully quenched by the sale of assets, and the shedding of unprofitable business segments. As a side note, Macy’s is in a unique position in that it owns most of the land and buildings in which it operates. A 2017 estimate by Hudson Bay estimated that the total value of Macy’s real estate totaled $14B, including an estimated $1B for just the Herald square location. It’s hard to say how close this estimate is to accurate today, but the point is- there is value here.


Among the benefits of a privately held Macy’s is the breathing room to take on longer-term strategic transformation. In a publicly held organization, management is under pressure to deliver short-term good news every quarter. This can hinder the ability for the organization to dig deep and focus on what needs to be corrected, root out the gaps, and start from the ground up. It’s entirely possible (and I’m speculating the Arkhouse team believes they can pull this off), to downsize the brand, shed off the lagging and unprofitable parts of the business, and come back to public markets at a higher valuation when capital markets are less bearish than today with stronger fundamentals. Sounds like a good plan. And there’s quite a few high-profile examples of exactly this roadmap. KKR took Dollar General private in 2007, only for the organization to reemerge as a dominate retail force years later. Petco was taken private in 2015, only to reemerge on the public markets in 2021. Additionally, there are numerous examples of retailers taken private, staved off bankruptcy, and remain private today (Petsmart, Staples, Neiman Marcus, Michaels, Mattress Firm, Claire’s, to name a few).


Is this a good thing for Macy's?


So, the big question- is this a good thing?


It shouldn’t surprise you to hear a consultant say, it depends. Specifically, it depends on which chair you are sitting in. For the current management team, it might not be a good thing. C-suite executives have these high powered positions for a reason. They are the best of the best strategic thinkers, operators, and have generally been around the block a few times. With all this experience comes a well-deserved bravado that they can see the firm through the tough times. Selling out to another management team is often not the preferred route for the existing management team. There’s also a likely compensation drawback related to not hitting share price targets- but again, I’m speculating here.

What about the shareholders? Well, speculating here once more. I do not directly own any Macy’s stock. But if I were a large shareholder and I had an opportunity to liquidate at a share price seen once in the last 18 months, and not again since 2019- I think I’m taking it. The question shareholders need to ask themselves is- do I believe the current management team can reach this valuation on their own? Or can I force a new management team in that can? Both take time, (the latter will take much more time), and are far from certain. Remember the state of department stores right now.


Ok, so we’ve covered the management team and the shareholders. Now let’s talk about the most important group of all- the Customer. Like many of its peers, Macy’s is plagued by slowing sales and no clear-cut way to move the trend line up and to the right. It’s the Chinese water torture, slow death that so many retailers face. Revenue is drying up, making it hard to invest in stores, which in turn creates a worse shopping experience, speeding up the death spiral. The brand is not exciting and hasn’t been for a long time. Arkhouse has not announced its vision for a new Macy’s, but if we can assume that the sale of unprofitable business segments, closing of unprofitable stores, and a real-estate value realization- we can image a scenario in which cash flow starts to look healthier. A stronger cash flow makes investing in stores much easier, which is a net positive for the customer.  


In the end, it’s impossible to know if going private can return the brand to glory. There are plenty of examples of either result (bankruptcy, or a thriving business) in the last 20 years. But I do think it’s safe to say that the current model is not working. Like anyone who’s gone through a breakup and spent the next 6 months getting in the best shape of their lives, maybe maybe some time to focus on itself is exactly what Macy’s needs.

 




Check out some folks who are much better at writing then I am, and some of their work on the Macy’s takeover:

 


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