Should Kohl’s go private and Macy’s sell its real estate?
Recent times, it’s been well documented, have been tough for chains in the department store sector. Company boards and activist investors have grown increasingly concerned and are looking for ways to wring returns on investments that have little to nothing to do with improving traffic and driving sales.
The Wall Street Journal recently reported that Kohl’s board is considering taking the company private because its share price has fallen 40 percent from a high established last April. The chain has seen its stock take a hit despite posting recent same-store sale gains.
Back in July, Jeffrey Smith, co-founder and CEO of the Starboard Value hedge fund, proposed that Macy’s sell off real estate holdings worth billions of dollars.
Following a disappointing holiday season, Macy’s announced plans last week to close up to 40 stores and eliminate more than 4,500 positions. While Mr. Smith supported the action, he once again has recommended the retailer pursue real estate joint ventures (JVs) to generate returns for itself and its investors.
“We believe that a JV, or series of JVs, can crystallize the value of Macy’s real estate while bringing in a partner with substantial capital and real estate expertise that will enable the JVs to grow and diversify their real estate holdings,” Mr. Smith wrote in a letter to Macy’s board, according to Reuters.
For its part, Macy’s maintained that Mr. Smith’s recommendation is something the company was already considering, although management has not made a decision on the matter. As far back as last May, Macy’s CFO Karen Hoguet had said the company was researching the merit of pursuing a REIT.
Discussion Questions
Why do you think retailers such as Kohl’s and Macy’s are looking for ways to generate revenue opportunities that have nothing to do with selling more goods in stores and on websites? Do you agree that Kohl’s would benefit from going private? Should Macy’s spin off some or all of its real estate holdings?
Poll
BrainTrust
Max Goldberg
President, Max Goldberg & Associates
Steve Montgomery
President, b2b Solutions, LLC
I agree with Kohl’s and disagree about Macy’s. It may make sense for Kohl’s to go private, reorganize and then go public again. It does not make sense for Macy’s to follow Sears down the path of becoming a real estate play.
Going public is a double-edged sword. It provides needed capital, but it also opens the company to short-term activist investor thinking, which frequently has little or nothing to do with the core business.
First and foremost, key department stores need to get bold. Amazon is a massive e-department store/flea market(they re-sell hoards of junk). For many of today’s shoppers this is cool. Many times the prices are not that much better but sitting on the couch and ordering is so infatuating to some people it is getting to be a joke. They sell everything and their real estate is cheap.
What they cannot ever have or be involved in is a true retail experience — the one-on-one customer/retail floor-person relationship. Macy’s is on the right track, but time is required. While their joint venture efforts get rolling they need to refine their assortment to the SKUs that are hot. Even if it means cutting out the size of kitchen departments, etc. Hard goods can be available online and apparel gets more space in the store. I recently ordered a full set of cookware for my son — Macy’s prices beat Amazon hands down. So Macy’s can smack the ‘Zon in many places but needs to move the mix — some is online and some is in-store.
Kohl’s needs to move in a similar way and consider dropping some of those dead home product areas that are in the store.
Let Wall Street and the rest keep ranting and worrying. Retail is in a major shift and the WOW factor of online is fading fast. The experience factor — being at the store — is coming back. Just label all the GMO content in products sold and the health food nuts will shop at your stores. “This Hanes underwear contains no GMOs.”
TRedd
“Parked Capital,” massive virtually idle real estate and inventory is driving what Joseph Schumpeter called “creative destruction” one-hundred years ago when the present retail model was developed and became embedded in the retail mind.
All that inactive capital (real estate and inventory) MUST go the way of the dodo bird, and if present management doesn’t get it — mostly they don’t — bankruptcy will show them the door. Wake up. Wake UP! WAKE UP!
I am just finishing the second edition of my book which details the solution. Brick-and-mortar retailers will not survive as brain-dead merchant-warehousemen, even if they spread a patina of online on their operations. And smartphones are a COSTLY diversion to what MUST be done with all that parked capital.
For a retailer the options of going private or doing a real-estate play should be included in any strategic discussion as long as the company maintains its focus on the core business of retailing: providing exceptional experiences through goods and services to their customers whenever, wherever and however these may be desired. So these talks and potential actions cannot turn into distractions. As long as they don’t take their eyes off the ball that defines their reason for being, they’ll be OK.
I think it’s important for retailers to maximize the value of their assets. However, there are many, many examples of real estate-driven strategies going awry. Here are a few that come to mind:
Relative to Macy’s, looking to real estate for survival would seem to be a highly negative move and perhaps the first step towards ultimate doom. If you are going to be a retailer then the focus should be on doing that right, not seeking salvation in another type of business. It’s only a distraction. That it comes from a hedge fund likely makes the move even more suspect. In contrast going private, as is proposed by Kohl’s, doesn’t alter focus and may even sharpen the focus.
Kohl’s needs a new board of directors, one that’s able to differentiate between a somewhat vapid “Greatness Agenda” and an agenda that’s genuinely great.
The private route would, I fear, result in even less critical reflection on the part of senior management.
Full disclosure: I lived through the Kohl’s LBO (in 1986) and its IPO (in 1992). Access to public markets helped fuel Kohl’s expansion in the 1990s and early 2000s, but its financial requirements are different during a period of slower store growth. Any company going private might find it liberating to be less focused on quarterly results, in order to concentrate fully on executing its strategy…whether or not the value of its real estate is a relevant issue.
In the eyes of Wall Street, it is all about returns and returns are impacted by the financial model the company is employing. Having run both a public and a private company, I confess I liked private much, much better. Being private allowed for planning for the long term while being public meant your value as a company was heavily impacted by you latest quarter.
Kohl’s going private would give them the breathing room to take steps such as Tom’s suggestion of dropping home products without the Street having a fit because the average investor didn’t understand the rationale.
Macy’s clamor for cash by means of selling real estate is very interesting. If the company can put this to use opening new standalone stores within demographic areas that are rich with qualified “Macy’s” consumers, then this is a good move. If the funds are necessary for operations, then this is no more than a means to stave off an inevitable failure or a merger or acquisition in the near future. As for Kohl’s, the options to make the company reach an acceptable level of profit taking seem to be less than Macy’s.
The core problem within these and other retailers stuck in similar crisis management efforts is sales. The search for profit taking in the existing stores has yielded a collection of plans that that didn’t even break even. Many of our struggling colleagues may have simply made too many assumptions about market conditions and demographics. This neglect will continue to make the best of plans highly speculative at best with a high probability of creating expanded losses in place of profit.
The “FieldsFans” website actually posted a link to the Starboard Report and encouraged people to read along (with the caveat that it might be “too business oriented”). After having gone through (all) the numbers, I was left with the impression that someone was trying to tell me 2+2=7 (or really, 2-7=2) The premise, of course, is that Macy’s has huge value “locked” in its real estate…but how can this be? Either 1) Macy’s generates so little profit as a retailer that its property would be more useful being used as …well, anything else; or 2) the real estate can generate “profit” for a separate owner by having the retail part pay above market rates to lease the properties that they used to own (this was the claim in the Mervyn’s fiasco).
Little wonder Macy’s management is cool to the idea.
I enjoy the irony with Macy’s closing down iconic downtown retail locations like the former Rich’s/Macy’s building here in downtown Atlanta to focus on mall anchors. Now they want to do a real estate play after selling off their true real estate treasures.
All mid-tier department stores are desperate to deliver to its shareholders. But going private or creating a REIT won’t solve their problem in the mid to long terms. That is because middle America no longer shops the way it once did. Short term, maybe. Ask Lampert how its going….
If either of these stores chose to “surprise and delight” its customer base, then it has a might have a chance. This past Holiday, JCP was the only member of the glue factory club to create a store experience that celebrated the gift giving season. It takes more than coupons or data base management. Although JCP has brought back off price promo with a vengeance. AND it was rewarded accordingly.
But make no mistake in assuming JCP has risen from its self created ashes. JCP isn’t close to recouping the lost $7B of the Johnson/Francis Follies. And it won’t as the market has moved.
B,C,D malls are going to struggle from the anchor to the specialist. This isn’t unique to the department store dinos. Plenty of pundits are uncovering the myriad flagging apparel specialists. Come February, we’ll see another 2,000 doors shuttered in the aftermath of fiscal close.
So financial deck chairs will continue to be rearranged on these behemoth Titanics. Or as the Daytons said when Macy’s bought its department stores, “retail ain’t for sissies!”