Macy’s Long-Term Value Options
Macy’s Inc. still has to prove to Wall Street that its “A Bold New Chapter” strategy can work.
While Wall Street appears to favor the plan, many have maintained what is the equivalent of a “Hold” on the retailer’s shares. The department store retailer met recently with some Wall Street analysts to talk further about its new strategic plan.
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That discussion suggests that Macy’s has a number of options before it to create long-term shareholder value.
Arkhouse Management Co.-Brigade Capital Management offer
Still up in the air is what could happen with the raised Arkhouse-Brigade bid to acquire the retailer. The two last raised their unsolicited offer price to $24 from $21 on March 3, representing a buyout bid valued at $6.6 billion. The retailer at the time reiterated the board and management’s commitment to long-term value creation.
At a Macy’s management meeting with analysts on Wednesday, CEO Tony Spring and chief operating and chief financial officer Adrian Mitchell confirmed that Macy’s had opened its books to Arkhouse and Brigade.
“But, it also emphasized that its messaging on its approach to the bid was unchanged from its prior press releases/public disclosure,” Morgan Stanley equity analyst Alex Straton wrote in a research note.
Straton noted that while a higher offer could suggest that a transaction is potentially more possible, he also viewed the likelihood of a deal as low. The analyst based that on two reasons: limited transaction precedent and the likely difficulty in obtaining financing.
Macy’s projection of positive, low-single digit comp sales growth isn’t expected until 2025, something that the retailer hasn’t achieved since 2018, excluding COVID. That assumption doesn’t rely on improved traffic trends, but does incorporate improved conversion and average unit retail, or the average sale price of an item. But Straton thinks achieving this goal “remains a ‘show-me’ story for now. Morgan Stanley’s 2025 comp growth model forecasts minus 1 percent growth, versus the Wall Street consensus of plus 0.5 percent growth. Moreover, because initial store closures as part of its 150-door closings through 2026 won’t occur until the fourth quarter of 2024, Straton concluded that the impact from the shuttered doors won’t be felt until 2025.
What about the Bluemercury and Bloomingale’s banners?
“We like the Bold New Strategy direction and new management catalyst which center on getting the right product to the right place and at the right time,” TD Cowen luxury and retail analyst Oliver Chen wrote in his research note. “We also highlight our view that Bluemercury could be monetized through a spin-off or sell-off.”
Chen wrote that a valuation of 2 times sales could imply an enterprise value of $1 billion or more, depending on other factors. He also noted that Bloomingdale’s could be another monetization opportunity, given the banner’s position within the resilient luxury category.
He said highlights at the Macy’s management meeting included optimizing the retailer’s real estate portfolio, transforming its private brands, driving consistent positive comps, and investing in infrastructure to realize greater operating efficiency. “The company is in the middle of balancing short-term operating stability, while investing for the long-term against a mixed backdrop,” Chen wrote.
As for store closures, the analyst said that where Macy’s is closing a big box, it has the option to open a smaller format in the same area. Smaller boxes, such as for the Bloomies locations, can range from 22,000 square feet to 40,000 square feet.
Chen wrote that the retailer is open to exploring new formats for its department stores, such as the concession model, as the brand and distributor framework adapts to new consumer tastes. “With many brands too small to own their own distribution given high fixed costs, brands often look for a more hybrid approach with the right partners,” the analyst wrote, concluding that “[c]oncession and marketplace models allow Macy’s to feature more newness and great variety while bringing access to customers looking for brands.”
Chen also noted that management at Macy’s has already shifted and optimized the locations for fulfillment activity, adding that automation has been another major push for the company, an area where Macy’s is “roughly halfway through” the planned investments for automating. “Next steps will be scaling the supply chain automation capabilities over the next couple of years,” he said.
Core leadership team in place that can execute on goals
Tony Spring took over as CEO in February, and joining him are a number of new hires and appointments. They include Max Magni as chief customer and digital officer who began last August; Olivier Bron, who joined in November as CEO of Bloomingdale’s, and Sharon Otterman as chief marketing officer since December. The latest addition is Tracy Preston as chief legal officer, who began in January.
“Overall, as the department store landscape continues to evolve, Macy’s is confident with the senior leadership team it has in place today and will continue executing against its goals,” Telsey Advisory Group’s chief investment officer Dana Telsey concluded.
She said the new plan has the retailer moving quickly “yet methodically,” and that while some components will take time to bear fruit, others are expected to have a more immediate effect. “The company acknowledges some of this will require testing, pivoting and patience,” Telsey wrote in a research note.
“Tony Spring is using his 36 years of experience operating Bloomingdale’s, and close to 9 years with Bluemercury, to inform and guide his next chapter for Macy’s Inc.,” she noted. One example is the retailer’s shift in merchandising strategy to a full category approach instead of siloed teams for the owned and licensed segments, a move that creates more accountability and reduces duplication. Moreover, Bloomingdale’s “successfully adopted this model several years ago” and saw share gains, Telsey pointed out.
She said the private brands transformation has been underway, and that a new men’s wear launch will occur in mid-Fiscal Year 2024, along with a reimagination of its home offerings in mid-Fiscal Year 2025.
Telsey said leveraging insights from pricing patterns and customer data continues to be a key priority for the retailer for it to achieve its goal of having the right product at the right time and price. She noted that the company said it sees an opportunity to “slightly raise price points at Macy’s. Enhanced products and quality support higher prices,” with the opportunity possibly of raising price points $10 to $30 higher on some apparel items. Moreover, a better mix of higher margin categories and increased private brand penetration has the potential to drive higher merchandise margins for the retailer.
