Shopping bags for the Macy's Inc. flagship store. in the Herald Square area of New York, US, on Monday, November 13, 2023. Holiday sales in the US will grow at a slower pace this year due to economic headwinds such as higher interest rates, the National Retail Federation said.
Bing Guan | Bloomberg | Getty Images
Tony Spring was already working against the clock to turn Macy's all around.
Now the CEO will have two new faces on the department store chain's board of directors as it weighs whether to gamble on his vision or sell the nearly 166-year-old retailer to activist investors.
The board appointments, announced this week and ending a proxy fight with activist Arkhouse Management, are the latest development in a broader and so far unsuccessful attempt by Arkhouse and fellow bidder Brigade Capital Management to acquire the iconic but to take over struggling American division. shop retailer.
“It puts the pressure in the here and now,” says Neil Saunders, director of research firm GlobalData. “But in a sense you're letting the wolf into the henhouse.”
Arkhouse first made an offer in December to buy Macy's and take the company private at $21 per share. Macy's rejected the offer, Arkhouse increased its offer, and Macy's rejected that offer as well. Arkhouse then launched its proxy fight, introducing nine nominees to Macy's 15-member board.
For Macy's, this week's settlement — an agreement to appoint two of Arkhouse's nine candidates to its board — could end the distraction and high costs of a protracted campaign for shareholder support. For Arkhouse and Brigade, the move could help hand the keys to investors whose emphasis on real estate, not retail, has fueled fears that their takeover 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 battle at Macy's is not over yet.
Turning the tide
Other department store chains have faced challenges from activists in recent years, and even if those efforts fall short, the pressure could bring about sweeping changes.
At Kohl's, for example, CEO Michelle Gass left the company to lead the denim maker Levi Strauss after a lengthy battle with Kohl's activists. Her predecessor at Levi, Chip Bergh, said at the time that activist investors helped her drive Kohl out the door.
Even before Macy's got activist investors in the neck, Spring faced an uphill battle.
The department store – with its flagship store in the heart of New York City's Herald Square and its Macy's Day parade capturing the attention of millions of families on Thanksgiving morning – has a legendary place in American retail.
But by almost every measure, Macy's has gotten smaller over the past decade. The number of employees, number of stores and stock price have fallen as the company has lost market share to competitors, including discount chains such as TJ Maxx, big box stores such as Target, as well as online retailers and specialty stores.
Shares of Macy's, which hit 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, ending the week with a market value of $5.29 billion.
Macy's said in late February that it expects full-year net sales to decline slightly from the previous year. It expects comparable sales, which remove the impact of store openings and closures, to range from a decline of approximately 1.5% to a gain of 1.5% annually on an ownership plus licensing basis and including marketplace sales from third parties.
Tony Spring attends the unveiling of 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 upmarket Bloomingdale's chain and the man tasked with turning the tide, stepped into the top role in early February, about two weeks after the company announced it would cut more than 2,300 jobs and close five stores.
Spring laid out its vision for the retailer earlier this year, saying it will close many of the company's new namesake stores and instead invest in stores that have performed better. That includes Macy's locations with stronger sales, as well as the two chains that have outperformed its namesake brand: higher-end department store chain Bloomingdale's and beauty chain Bluemercury.
And while the company will move forward with plans to open smaller versions of Macy's stores in malls, the aggressive plan will close more than 150 stores — nearly a third of its namesake stores — by early 2027, leaving the retailer with about 350 Macy's locations .
The number of stores of the other two chains is considerably smaller.
Take private
At the same time, Arkhouse and Brigade's buyout effort threatens to completely change the retailer's course.
In addition to adding new members to Macy's board, Arkhouse and Brigade have begun conducting due diligence, a process that gives the suitors access to the department store operator's books so it can get a clearer picture of its finances and potential liabilities from the company.
That in itself had been a hard-fought battle with the bidders, who wanted more information to secure financing commitments for the proposed acquisition. Arkhouse claims that Macy's refused to go along with it, and Macy's rebuffed Arkhouse, saying it did not have the financing for the acquisition it was proposing.
GlobalData's Saunders said Macy's future as a retailer could be in jeopardy if Arkhouse manages to take the company private. He said the activist investor has a background in real estate, not retail, and that he appears more eager to squeeze the value out of Macy's flagship shopping center and prime locations than investing in his company.
“It's going to be a situation very similar to Sears,” he said. “In fact, a very long liquidation.”
Arkhouse, for its part, 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 wants to run Macy's as a retailer and extract value from its real estate.
“Our plan is not dependent on store closures. It is fundamentally not part of our business plan,” he said. “In fact, we think a large part of the reason the property is so valuable is because it is occupied by Macy's.”
Kahane said the activist investor wants Macy's to become “a stable and growing company that can last for decades, and possibly another 150 years.”
But, he argued, a private company is better placed to achieve that goal than a publicly traded company: “We think this should be done behind the scenes, away from the public markets. We believe that in reality the current management has largely resolved the problems. And when you're so focused on these types of short-term executions, it's almost impossible to ensure your long-term viability.”
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 settlement could buy the retailer time to execute Spring's turnaround strategy and attempt to increase the company's value.
The two new directors joining the Macy's board of directors will bring deep backgrounds in retail and real estate. Richard Clark spent nearly four decades in the real estate industry and was 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 senior positions at Toys R Us and Babies R Us. He currently sits on the board of discount store Five Below.
While the two directors are independent and have no ties to Arkhouse or Brigade, they will join the board's seven-member finance committee charged with evaluating and making recommendations on the takeover bid and other similar offers.
Arkhouse management partners Kahane and Jonathon Blackwell said in a statement this week that the appointment of the two new directors “will ensure that our discussions remain constructive and that our proposal is considered seriously and expeditiously.”
For Macy's, agreeing to two new directors will not tip the balance in the board. That could be seen as a win for the retailer, as it's a far cry from the total number Arkhouse is proposing, said Patrick Gadson, an attorney and co-head of the shareholder activism practice at Vinson & Elkins.
Still, the settlement allows Arkhouse to continue as a critical and persistent activist investor, said Gadson, who represented Preferred Apartment Communities, a real estate investment trust that Arkhouse similarly targeted and bid to acquire. Arkhouse was ultimately outbid by another buyer.
The Macy's agreement lacks a non-disparagement clause, he said, and there are “thin” standstill restrictions, or conditions that could temporarily halt activist activity and prevent the activist from making critical comments. That means Arkhouse and Brigade could still have room for their campaign.
“Shareholder activism is a performance-based skill set,” Gadson said. “If the company is performing well and clearly exceeding expectations, then performance itself would in all likelihood be the answer. If the company can't do that, they can make all the governance changes and all the non-fundamental, non-operational gymnastics they do.” I wish, none of it will save them.”