Shopping bags outside the Macy’s Inc. flagship store in the Herald Square district of New York, U.S., on Monday, November 13, 2023. U.S. holiday sales will grow slower this year due to economic headwinds such as higher interest rates, the National said Retail Federation.
Bing Guan | Bloomberg | Getty Images
Tony Spring was already working against the clock to turn things around Macy’s around.
Now the CEO will have two new faces on the department store retailer’s board as it considers whether to pursue his vision or sell the nearly 166-year-old retailer to activist investors.
The board appointments announced this week, ending a proxy dispute with activist Arkhouse Management, are the latest development in a broader and so far unsuccessful attempt by Arkhouse and its fellow bidder, Brigade Capital Management, to acquire the iconic but troubled American company Shop dealer.
“It stops the pressure in the here and now,” said Neil Saunders, managing director of research firm GlobalData. “But in a way you’re letting the wolf into the chicken coop.”
Arkhouse first made an offer to buy Macy’s in December, delisting the company for $21 per share. Macy’s declined the offer. Arkhouse later launched a proxy fight, putting forward nine candidates for Macy’s 15-member board and increasing its bid to take over the company.
“The board of Macy’s, Inc. continues to engage with Arkhouse and Brigade regarding their proposal to acquire the company,” the company said in a statement announcing the new independent directors. “The Board remains open to the best path to creating shareholder value and is committed to continuing to take actions that it believes are in the best interests of the company and all Macy’s, Inc. shareholders.”
For Macy’s, this week’s settlement – an agreement to name two of Arkhouse’s nine board nominees – could end the distraction and high costs of a drawn-out shareholder support campaign. For Arkhouse and Brigade, the move could help hand the keys to investors whose focus on real estate rather than retail has sparked fears that their acquisition could spell the end of Macy’s.
Both Macy’s and Arkhouse struck a conciliatory tone in their statements this week. But one thing is clear: The fight at Macy’s isn’t over yet.
Turn the tide
Other department store chains have been challenged by activists in recent years, and even if those efforts fail, the pressure could lead to sweeping changes.
At Kohl’s, for example, CEO Michelle Gass left the company to run the denim manufacturer Levi Strauss after a long battle with Kohl’s activists. At the time, her predecessor at Levi, Chip Bergh, said activist investors had helped drive her from Kohl’s doors.
Even before Macy’s had activist investors breathing down its neck, Spring faced an uphill battle.
The department store — with its flagship store in the heart of New York’s Herald Square and its Macy’s Day parade that captures the attention of millions of families on Thanksgiving morning — occupies a storied place in American retail.
But in almost every way, Macy’s has gotten smaller over the last decade. Its workforce, store count and stock price have fallen as the company has lost market share to rivals including off-price chains like TJ Maxx, big box stores like Target, and online retailers and specialty stores.
Shares of Macy’s, which reached a 10-year high of $72.80 in July 2015 and fell to a 10-year low of $4.81 in April 2020, closed at 19.30 on Friday US dollars and ended the week with a market value of $5.29 billion.
Macy’s announced in late February that full-year net sales would be slightly below last year’s level. Comparable sales, which exclude the impact of store openings and closings, are expected to range from a year-over-year decline of approximately 1.5% to an increase of 1.5% based on owned plus licensed products and including of market sales by third parties.
Tony Spring attends the unveiling of the Bloomingdale’s Holiday Window at Bloomingdale’s 59th Street store on November 19, 2013 in New York City.
Ben Hider | Getty Images
Spring, the former CEO of Macy’s, the luxury chain Bloomingdale’s, and the man tasked with turning the tide, took the leadership role in early February, about two weeks after the company announced it would cut more than 2,300 jobs and close five stores close.
Spring laid out his vision for the retailer earlier this year, saying he would close many of the company’s fledgling namesake stores and instead invest in stores that were doing better. These include Macy’s locations with stronger sales as well as the two chains that have outperformed the namesake brand, luxury department store chain Bloomingdale’s and cosmetics chain Bluemercury.
And while the company is moving forward with plans to open smaller versions of Macy’s stores in malls, the aggressive plan calls for closing more than 150 stores — nearly a third of its namesake stores — by early 2027, leaving the retailer with about 350 Macy’s -branches.
The number of branches of the other two chains is significantly smaller.
Take private
At the same time, Arkhouse and Brigade’s takeover efforts threaten to completely change the retailer’s direction.
Arkhouse and Brigade have begun conducting due diligence, a process that will give applicants access to the department store operator’s books to give it a clearer view of the company’s finances and potential liabilities.
That alone was a hard-fought battle with bidders wanting more information to secure funding commitments for the proposed acquisition. Arkhouse claims that Macy’s refused to engage in it, and Macy’s rejected Arkhouse on the grounds that it did not have the financing for the proposed acquisition.
GlobalData’s Saunders said Macy’s future as a retailer could be at risk if Arkhouse succeeds in its efforts to take the company private. He said the activist investor had a background in real estate, not retail, and seemed more interested in extracting value from Macy’s prime malls and flagship locations than investing in his business.
“It will be a similar situation to Sears,” he said. “Actually a very long liquidation.”
For its part, Arkhouse has said it plans to keep Macy’s stores open. In an interview with CNBC in March, managing partner Gavriel Kahane said the activist investor wanted to run Macy’s as a retailer while extracting value from its real estate.
“Our plan is not tied to store closures. It’s basically not part of our business plan at all,” he said. “In fact, we believe the property is so valuable primarily because it is occupied by Macy’s.”
Kahane said the activist investor wants Macy’s to be “a stable and growing company that can survive for decades and potentially another 150 years.”
However, he argued that a private company could achieve this goal better than a publicly traded company: “We believe this has to be done behind the scenes, away from the public markets. We believe current management has largely solved the problem this quarter and when you’re so focused on short-term execution, it’s really almost impossible to ensure long-term profitability.”
Arkhouse raised its offer to $24 a share last month and said it had the backing of Fortress Investment Group and One Investment Management.
Saunders noted that the proxy agreement could buy the retailer time to implement Spring’s turnaround strategy and attempt to increase the company’s value.
The two new directors joining Macy’s Board will have extensive retail and real estate experience. Richard Clark has worked in the real estate industry for nearly four decades and is the former chairman and CEO of Brookfield Property Group, Brookfield Property Partners and Brookfield Office Properties. The second director, Richard Markee, was the former CEO of Vitamin Shoppe and held executive positions at Toys R Us and Babies R Us. He currently sits on the board of discount retailer Five Below.
Although the two directors are independent and have no connection to Arkhouse or Brigade, they will join the board’s seven-member Finance Committee, whose role is to evaluate and make recommendations on the tender offer and any other similar offers.
Arkhouse managing partners Kahane and Jonathon Blackwell said in a statement this week that the appointment of the two new directors “will ensure that our discussions continue to be constructive and our proposal is treated seriously and expeditiously.”
For Macy’s, approving two new directors won’t be the deciding factor on the board. That could be seen as a win for the retailer because it’s far from the total suggested by Arkhouse, said Patrick Gadson, attorney and co-head of the shareholder activism practice at Vinson & Elkins.
Still, the deal allows Arkhouse to move forward as a critical and persistent activist investor, said Gadson, who represented Preferred Apartment Communities, a real estate investment trust that Arkhouse had also targeted and made a bid to acquire. Arkhouse was ultimately outbid by another buyer.
The Macy’s agreement lacks a non-disparagement clause, he said, and has “thin” standstill restrictions, or conditions, that could temporarily halt activist activity and prevent the activist from making critical comments. This means that Arkhouse and Brigade could still have room to maneuver in their election campaign.
“Shareholder activism is a performance-based skill,” Gadson said. “If the company is performing well and significantly exceeding expectations, then in all likelihood performance itself would be the cure. If the company can’t do that, it can do whatever governance changes and whatever non-fundamental, non-operational gymnastics it needs.” I want none of this to save them.
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Correction: This story has been updated to correct the timing and nature of Macy’s responses to acquisition offers from Arkhouse Management and Brigade Capital Management.
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2024-04-13 15:33:02
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