I previously wrote an article about Macy’s (NYSE: M) in August 2023. You can see that article here. A lot has been going on at Macy’s since then. A new CEO and Chairman was appointed. A new strategy for the future of the company was laid out. And, a group of potential buyers – Arkhouse Management and Brigade Capital (which may be referred to in this piece as the “investor group”) appeared on the scene, relentlessly pursuing an acquisition of the company. The Wall Street Journal reported in December 2023 that the investor group made an offer to acquire the company for $21.00 a share.
Early in March 2024, the WSJ reported that the investor group upped its bid to $24.00 a share. And most recently, on July 3, 2024 the WSJ reported the investor group increased its proposal once again, this time to $24.80 a share. As a result of what seems to be discontent with the way Macy’s board handled its offer, a proxy battle was threatened. This resulted in an agreement, according to which Macy’s board agreed to add two new directors and the investor group agreed to certain standstill provisions. The last buyout price reported, although reflecting a hefty premium of ~38% to the market at the time it was made known to the public, was welcomed by the market with a rather sluggish reaction, leaving a wide margin between the updated buyout price reported and the company’s stock price in the market.
Now that Macy’s decided to discontinue the discussions with Arkhouse and Brigade, I rate Macy’s a hold. In this article, I will go into detail about the various considerations that led me to downgrade the rating from a buy to a hold.
Recap Of Developments Since December 2023
In December 2023, the WSJ reported that Arkhouse Management and Brigade Capital submitted a proposal to buy Macy’s for $5.8 billion, reflecting a price of $21.00 per share. On the trading day immediately following that report, Macy’s stock went up by almost 20% on heavy volume and closed at $20.77, leaving a rather slim margin to the then-published bid price.
As it seems, the investor group grew increasingly impatient with the way Macy’s board handled their proposal.
On January 21, 2024, about a month and a half after the bid was first revealed, Macy’s acknowledged for the first time receipt of the unsolicited non-binding proposal and updated that the board decided not to pursue it further. In a preliminary Schedule 14A the company filed with the SEC on March 14, 2024 in connection with the annual general meeting of shareholders scheduled for May 17, 2024, it was noted in relation to the board’s determination regarding the bid that:
…the proposal was not actionable, as the Investor Group had failed to provide evidence of a viable financing plan and that the proposal lacked compelling value.
On February 2, 2024, the company announced the appointment of Tony Spring as the company’s CEO effective February 4, 2024 and as the company’s chairman commencing on the company’s next annual general meeting of shareholders.
Disappointed by the lack of collaboration by Macy’s board, so it seems, the investor group decided to launch a proxy fight by providing the company on February 14, 2024 with a list of 9 directors to be up for election in the upcoming annual general meeting of shareholders.
On February 27, 2024, Macy’s announced its new strategy, “A Bold New Chapter”, according to which several initiatives are to be taken through 2026 focusing on putting Macy’s back on track to enterprise growth.
On March 3, 2024, the WSJ reported that the investor group raised its bid to $24.00 a share.
As indicated in the company’s March 14, 2024 preliminary Schedule 14A mentioned above:
On March 11, 2024 the Board sent a response letter to the Investor Group along with a draft confidentiality agreement providing that the Investor Group may only use the Company’s confidential information to pursue an offer for at least $24.00.
On April 10, 2024, an agreement between the parties, which prevented the proxy fight, was reached. According to the agreement, Macy’s board agreed to add two new members to its ranks and the investor group agreed to abide by certain standstill restrictions. The two new members on Macy’s board were also appointed to the finance committee of the board, to which authority was delegated to oversee the evaluation, review, and consideration of the non-binding proposal to acquire the company and to make recommendations to the full board regarding such proposal or any alternatives thereto.
On July 3, 2024, the WSJ reported that the investor group raised its bid once again – this time to $24.80 per share.
Having the updated bid price, while the parties are presumably still in talks, come out through the media, rather than the company, could have hinted to disagreements between the investor group and the company. And, indeed, on July 15, 2024 the company announced that it terminated the discussions with the investor group, which according to the report, failed to lead to an actionable proposal with certainty of financing at a compelling value. As of the time of writing these lines, no response to the company’s announcement has been released by the investor group.
New Strategy
As mentioned above, on February 27 of this year, shortly after the appointment of the company’s new CEO took effect, a new strategy named “A Bold New Chapter” was announced. The main components of this strategy include bolstering the Macy’s nameplate, expediting luxury growth, simplifying and modernizing end-to-end operations, closing approximately 150 underperforming Macy’s locations through 2026 and prioritize Macy’s investment in its remaining ~350 locations (following the ~150 store closures), opening up to 45 new Bloomingdale’s and Bluemercury locations through 2026, and realizing revenues of $600 to $750 million from sale of assets through 2026, primarily related to stores and distribution center closures.
It is hard to predict the chances of success of that turnaround plan as it is composed of multiple layers and depends on many variables, among which are the state of the economy as a whole, the state of the commercial real estate market, consumer ever-evolving trends, ability to make adjustments quickly, and ability to execute the plan swiftly and efficiently. Macy’s benefits from having no significant maturities until 2027. This provides management with a privilege that allows it to focus on execution of the plan, which runs through 2026.
The table below shows incoming cashflows in the last five years from monetization of assets:
Year |
Disposition of P&E (in M$) |
2019 |
185 |
2020 |
113 |
2021 |
164 |
2022 |
137 |
2023 |
86 |
Q1 2024 |
4 |
*P&E means Property & Equipment
An important byproduct of Macy’s closure of underperforming stores is that it could, and should, extract value from sales of closed stores that are owned by it. Since 2019, as shown in the table above, and more particularly since COVID broke out, the company has not been extracting enough value from its vast portfolio of real estate assets. Low monetization of real estate assets during 2022 and 2023 was especially disappointing, as the company suffered throughout this period from dwindling cashflows from operating activities.
It is extremely important to extract significant value from the company’s real estate assets to shore up incoming cashflows while it works on getting the department-store business back to growth mode. Macy’s plan is to extract $600 to $750 million from real estate through 2026. That means $200 to $250 million a year on average for 2024 through 2026. Although the scope of the planned monetization reflects an improvement comparing to any of the last five years, it would be very encouraging to see the company coming up with ways to squeeze out much more value from its real estate, which I believe is doable. I set forth some thoughts in that regard in my previous piece on the company.
Bluemercury – The Silver Lining
The luxury retailer Bluemercury was founded in 1999 and sells make up and skincare products both online and in physical stores, where it also offers in-store facials and spa treatments. Bluemercury was acquired by Macy’s in 2015 for $210 million in cash.
While Macy’s core department-store activity has been in decline for a long time, Bluemercury, which as of the end of Q1, 2024 had 158 locations (as well as an online presence as mentioned above), keeps growing and breaking records. As indicated in the company’s latest 10-Q, Q1 of 2024 was the 13th quarter in a row of comparable sales growth for Bluemercury and the plan is to open at least 30 new Bluemercury stores and remodel ~30 existing Bluemercury stores through 2026.
Referring to the new and remodeled Bluemercury stores, Macy’s management said on the last quarterly call that:
These stores will incorporate learnings from our recent Bronxville and New Canaan remodels to inform our future stores, including an elevated aesthetic, which improves the luxury perception of Bluemercury and expanded assortment and an enhanced selling model, which has had a positive impact on the client experience.
Hence, it seems as though Macy’s management is well aware of the gem it has in hand and rightfully puts an emphasis on nurturing it. Since growing Bluemercury is a cornerstone of the company’s new strategy, I believe the likelihood of spinning off, or soliciting bids to acquire, Bluemercury without pressure from activist investors is rather slim. It is possible, however, that the company will receive a bid specifically directed at acquiring Bluemercury.
Despite high inflation and high-interest rates, Bluemercury has been doing well and kept on growing in a tough macroeconomic environment. The recent acquisition of Neiman Marcus by Saks Fifth Avenue owner, HBC, for $2.65 billion, which was in the making for quite a while, and the attempted acquisition of Capri (owner of Michael Kors, Versace and Jimmy Choo) by Tapestry (owner of Coach and Kate Spade), which will go to court in September further to the FTC’s attempt to block it, show that consolidation in the luxury retailing business is prevalent these days, which may increase the chances of Macy’s getting an offer solely for the acquisition of Bluemercury.
Termination Of Discussions With Arkhouse & Brigade
The stock losing ~12% on extremely high volume during the trading day immediately after the termination notification got out may provide a negative indication about the market’s belief that current management can turn this ship around. The fact that this slump occurred despite the stock closing at a ~23% discount to the updated bid price right before the termination announcement was released may be viewed as further backing to that indication.
The termination announcement may not be the end of this saga. It is interesting to note in that regard, though, that the company’s board voted unanimously to terminate discussions, including the two directors that were added to the board pursuant to the April 10, 2024 agreement that prevented a proxy fight. I wonder whether the investor group would comment on the termination.
Arkhouse and Brigade are subject to standstill provisions, which should likely expire sometime in January 2025. Once they expire, Arkhouse and Brigade could re-launch a proxy fight to try to win the majority of the board at the next annual general meeting of shareholders, or could use that meeting to try to win the required majority for a buyout offer targeted directly at the company’s shareholders.
Having the company’s board support a buyout offer should generally increase its chances, but if understandings with the board are not reached, then the investor group may use the annual meeting of the company’s shareholders to bypass the board and bring the offer directly to a vote by the company’s shareholders.
Expectations for a first interest rate cut in September, which may be followed by additional rate cuts in the months thereafter (if inflation does not get out of hand again), may assist Arkhouse and Brigade (and possibly other potential acquirers) to have better access to loans at favorable terms that would make a buyout of the company more easily achievable and more attractive.
Arkhouse and Brigade could also call for a special meeting of shareholders to be summoned, but for that, they would need 15% of the outstanding voting shares of the company, as required by section 3.(b) of the company’s by-laws. The investor group revealed it has economic exposure of 4.4% to Macy’s. To get to 15% it would need to either purchase many more shares of the company or collaborate with institutions with a significant holding in the company’s stock so that together they would be able to meet the 15% threshold.
Should institutions with a large holding in the company’s stock be convinced that the investor group has the financing to consummate the deal secured, and should the gap between the market price and the updated bid price remain wide, then I think there is a fair chance that it will be able to get such institutions to collaborate, if needed to summon a special meeting.
Even if a special meeting would not be needed, then the investor group would anyway likely seek the cooperation of institutions with a significant holding in the stock to either support its proxy fight should it choose to go along this route or its buyout offer to the shareholders should it decide that is the way to go.
Obviously, I do not know what are the plans now of Arkhouse and Brigade. A response to the termination announcement (should one be issued) would hopefully shed some light about the investor group’s thoughts moving forward.
The last time the company’s stock closed near $24.80 was almost a year and a half ago, and without a catalyst, it seems to me it would take a long time for the stock to get back to this level as it would need to go up by ~45% to reach this height from around $17.00 a share, which is where it stands as I am writing these lines. Therefore, should a path be found for a short-cut to $24.80, I think it is more likely than not that large holders will get on board.
Conclusion
At this point, it is uncertain whether Arkhouse and Brigade still wish to pursue the opportunity, whether they are willing to wait out the standstill period and resume the buyout efforts thereafter, what is their ability to come up with the required financing or whether they have any other plans in connection with the company. A response to the termination of discussions (should one be issued) may provide some clarity on some of these issues. As I mentioned in my previous article on the company, I believe it is worth much more than the current market price and even more than the most recent bid offer, but in the absence of catalysts it seems to me it is unlikely that the stock would go up in the foreseeable future to a level anywhere near what I believe to be the company’s underlying value.
3 years, the period set for the new plan, is a long time to wait for its outcome. The stock may continue to deteriorate should investors lose patience. If, however, the execution of the plan should manage to rather quickly produce meaningful indications that the company is on a clear track to growth, even just moderate but one that is sustainable, the stock could start climbing again. Given the depressed price of the stock in the market, there is also a chance that the company will receive other unsolicited buyout offers or that activist suitors would show up trying to get the board to engage in deals that would potentially unlock value.
Having said all that, it is really hard to tell at this point what’s in the cards for the company. On the one hand, there could be an upside, even a substantial one, but on the other hand the company’s stock may trade sideways for quite a while or even continue to lose ground should signs of improvement not be evident in a timely manner. Therefore, I now rate Macy’s a hold.
Read the full article here