Barington Capital Group and Thor Equities claim Macy's valuation has significantly declined over the past decade, with its shares dropping by around 70% due to ongoing challenges in the department store industry and previous management errors. 

Despite various strategic initiatives spearheaded by successive leadership teams aimed at rejuvenating Macy's value proposition, the shareholders say the company has consistently relied on substantial capital expenditure projects.  

They argue that these investments, directed towards merchandising, cost-cutting, and store closures, have yielded minimal lasting improvements to Macy's operational performance. 

Barington chairman James Mitarotonda said: "We invested in Macy's because we believe the shares are mispriced relative to the upside potential we see in the management’s new strategic plan and the compelling value of the company’s owned real estate assets. However, we are concerned with Macy's large capital expenditure programmes.  

“Since FY:14, Macy's has spent $9.7bn cumulatively on capital expenditures, including $6.7bn on property and equipment and $3.0bn on technology. Over this same period, Macy's has lost approximately $15bn in market capitalisation. Clearly, shareholders have seen no value creation from these investments." 

The activist investors said that Macy's had boasted about redistributing $8.7bn to its shareholders since FY:14 through share buybacks and dividends. However, a significant portion of these buybacks occurred during FY:14-16 when stock prices were substantially higher than current levels. 

Even worse, Mitarotonda tells Macy’s to learn lessons from its department store peer, Dillard’s, which has “focused on improving operating margins, prudently managing capital expenditures and aggressively returning capital to stockholders”. 

Barington and Thor have raised concerns regarding the potential for Macy's to improperly allocate its financial resources through inefficient and non-productive capital investments. They also express apprehension about the Macy's board's capability, foresight, and willingness to fully capitalise on the company's real estate holdings. 

Joseph Sitt, chairman of Thor, said; “In our opinion, Macy’s board should create a separate real estate subsidiary to collect market rents from Macy’s retail operations and pursue other asset sale and redevelopment opportunities. We believe doing so would greatly maximise the value of these owned assets for the benefit of stockholders.” 

Macy's investor recommendations 

To enhance value for shareholders, Barington and Thor suggest Macy's should consider a series of actions:  

• Lowering capital spending to between 1.5% and 2% of total revenue, down from approximately 4%

• Initiating a share buyback programme valued at $2bn to $3bn over the coming three years

• Establishing an independent subsidiary focused on real estate to maximise returns from Macy's substantial owned property assets

• Assessing strategic options for the company's higher-growth luxury divisions, Bloomingdale's and Bluemercury; and incorporating representatives from Barington and Thor onto the Macy’s board. 

Macy’s response to the backlash 

In response to Barington’s critique, Macy’s board of directors and management team expressed their commitment to sustainable growth and enhancing shareholder value.  

“We have consistently demonstrated open-mindedness, including with respect to regularly reviewing the company’s strategy and capital allocation framework and exploring all paths to enhance value,” Macy’s said in a statement. 

Earlier in the year, under new CEO Tony Spring's direction, Macy's launched "A Bold New Chapter" strategic plan which showed initial promise by proposing closures of underperforming stores and additional cost reductions aimed at fostering a more robust store portfolio capable of consistent revenue growth and profit enhancement. 

Despite these efforts, investor sentiment remains tepid with Macy’s shares declining approximately 13% since the announcement of the plan. Consequently, Macy’s current valuation lingers near historical lows with 3.6x next twelve months (NTM) consensus EBITDA and 6.4x NTM consensus EPS. 

“We remain confident in our Bold New Chapter strategy, which continues to gain traction across all three of its pillars, and we expect to share further details regarding our progress when we report our full third quarter results and provide our fourth quarter and full year outlook,” Macy’s added. 

Macy's Q3 results

In the third quarter (Q3) of fiscal 2024, Macy’s reported a 2.4% dip in net sales with figures falling from $4.86bn the previous year to $4.74bn.  

Macy's net income for Q3 dropped to $28m from $41m year-over-year, with diluted earnings per share decreasing from $0.15 to $0.10. 

The retailer raised its net sales guidance for fiscal 2024 to between $22.3bn and $22.5bn, up from previous estimates of $22.1bn to $22.4bn.  

However, gross margin rates are expected to be between 38.2% and 38.3%, down from the previous guidance of 39% to 39.2%.  

In July this year, Arkhouse and its investment manager partner Brigade Capital Management (Brigade) allegedly raised their buyout offer for US retailer Macy's for a second time.