A potential buyout of Macy’s by an investor group revives an old theory: that much of the value in retail lies in real estate.
Macy’s shares surged Monday after a Wall Street Journal report that Arkhouse Management and Brigade Capital Management submitted a buyout proposal Dec. 1 valued at $5.8 billion. The investors proposed to acquire Macy’s stock they didn’t already own for $21 a share, a roughly 32% premium to where shares closed the day before.
The retailer’s stock closed at $20.77, gaining more than $926 million in market value in a single day.
Arkhouse typically focuses on real-estate investments, having bid in the past for office-space developer Columbia Property Trust and Preferred Apartment Communities, which manages multifamily housing. Brigade Capital Management is more retail-focused, with investments that have included J.C. Penney, Sears and Neiman Marcus.
The bidders are almost certainly interested in Macy’s for its real estate, although they haven’t publicly spelled out their intentions.
Macy’s declined to comment.
As of January, Macy’s owned more than 300 of its roughly 783 stores, which include Bloomingdale’s and the Bluemercury beauty chain. It owned an additional 102 locations, but leases the land the stores sit on. Four more locations are partly owned and partly leased, according to securities filings.
Neil Saunders, a managing director with research firm GlobalData, estimates that the real estate that Macy’s owns is worth about $6 billion, more than its market capitalization as of Friday of about $4.8 billion.
“When you look at the value of Macy’s, the real estate is the jewel,” he said.
TD Cowen analyst Oliver Chen noted that some locations might have deed restrictions, which could prohibit the development of the properties. He said that realizing value from the properties could be time-consuming because of unique agreements at most locations.
Macy’s retail business hasn’t held up as well, suffering from “years of chronic underperformance,” Saunders said. Net sales for the first nine months of the year declined 7.7% to $14.97 billion compared with $16.22 billion for the same period in 2019. Profit over that period fell 22% to $175 million.
Department stores have come under increasing pressure as shoppers shift their spending to discount stores, fast-fashion retailers and newer entrants such as Shein. Consumers are also buying more directly from brands, which have opened their own retail stores and websites.
Kohl’s, another publicly traded department-store chain, has faced pressure from activist investors and continues to struggle with sluggish sales. J.C. Penney filed for bankruptcy and was rescued by mall owners. Saks Fifth Avenue and Neiman Marcus have been exploring a merger amid a slump in sales of luxury goods. And Bon-Ton is a shell of its former self. Only Dillard’s, which is run by its founding family, has continued to thrive.
Macy’s executives have said that the retailer is evolving to return to sales growth. Chief Executive Jeff Gennette is set to retire next year and hand the leadership reins to Macy’s President and CEO-elect Tony Spring, who previously ran Bloomingdale’s. Spring will oversee a company with tens of millions of shoppers annually.
It has fended off pressure from activists in the past, who urged it to sell off its real estate and lease it back. Such a move tends to generate profit for investors up front but can saddle the retailer with debtlike rent payments and reduce its ability to adapt to changing market conditions.
The chain instead opted to sell some locations, such as a store in San Francisco, and team with real-estate firms to realize value at other stores. It also has said that it plans to build an office tower atop its flagship New York store in Herald Square. Chen of TD Cowen estimates that Herald Square accounts for about a fifth of the value of Macy’s real-estate portfolio.
Mervyn’s, a defunct department-store chain, offers a cautionary tale of the sale-leaseback approach. The private-equity firms that bought Mervyn’s split it into an operating company and a property company. The latter raised rents just as the economy teetered into recession. The company went out of business in 2008.
Then there is Sears, which limped into bankruptcy in 2018, after its owner, the hedge-fund manager Eddie Lampert, sold off its real estate over a period of years and didn’t reinvest enough of the proceeds in the retail operations. Sears today operates just a handful of stores, down from thousands in its heyday.
Macy’s remains among the world’s largest department-store chains, and any major change to its operations would affect its more than 94,000 employees, countless suppliers and the malls that house its stores.
“As critical as we are of Macy’s current management, they are at least focused on trying to run the business as a retailer,” Saunders said. He added that while selling real estate would generate short-term profit, over the long term it would leave Macy’s in a weakened position that would see the “brand fade further and faster.”
Write to Suzanne Kapner at suzanne.kapner@wsj.com