Macy’s announced Thursday a strategic alliance with Brookfield Asset Management to unlock value in its real estate portfolio, giving the real estate investment firm exclusive rights for up to two years to create a “pre-development plan” for at least 50 Macy’s property assets — primarily owned and ground-leased stores and associated land, mostly in malls not owned by major mall owners, the retailer said.
Macy’s shares edged down 0.7% and then recovered in premarket trading Thursday after its third quarter 2016 earnings and sales report missed expectations.
Adjusted earnings were 17 cents per share, missing the 41-cent per share expectation from Retail Metrics, and revenue slipped to $5.63 billion, down from $5.87 billion last year and shy of the Retail Metrics forecast for $5.66 billion.
The smile Wall Street managed for Macy’s Thursday morning didn’t really come from its strengths as a retailer so much as its prospects for cost cutting and real estate profit-taking.
“Its inability to get the retail side of its business to work is one of the reasons Macy’s is looking to monetize its assets,” Neil Saunders, CEO of retail research agency and consulting firm Conlumino, wrote in a note emailed to Retail Dive. “The partnership with Brookfield Asset Management, which was announced this morning, will help with this — as will the ongoing sale of underperforming stores. In our view this route is prudent, not least because Macy’s does have a strong asset base which can yield significant capital — as the sale of the Union Square, San Francisco store for $250 million has proved.”
Macy's announced the deal for the 248,000-square-foot San Francisco location Thursday morning, explaining it would take some of the proceeds of the sale to move its menswear business into its flagship Union Square location, and will lease the men's store until that process is done. All told, Macy’s expects the sale to close in January 2017, and to generate proceeds of $235 million a year later.
Macy's, which has said it plans to close 100 stores by early next year, said Thursday it’s also exploring options for its downtown Minneapolis, State Street (Chicago) and Herald Square (New York City) stores.
Activist investor Starboard Value has been pressuring the retailer to do something about its massive real estate holdings for a couple of years and recently expressed impatience. But Nick Egelanian, president of retail development consultants SiteWorks International, told Retail Dive recently that Macy's wind-down of its real estate holdings is likely to be methodical, though it may also end up shuttering many more than the 100 sites now slated for closure.
While Saunders noted that Macy’s approach to leveraging its assets is superior to Sears, which has been selling off stores and land to fund its retail operations, Macy’s is nevertheless showing some severe stress. Macy’s Q3 operating income totaled $107 million or 1.9% of sales; excluding non-cash settlement charges related to the company’s retirement plans of $62 million, Q3 operating income fell to $169 million or 3% of sales, compared to operating income of $258 million or 4.4% in Q3 2015 or $369 million or 6.3% of sales excluding asset impairment and other charges of $111 million.
Retail Metrics expected operating income in the quarter to decline 28%. “Macy’s has not turned in [year-over-year] operating income growth since the second quarter of 2014 and is about to make it nine straight quarters of declining income growth and 10 in the last 11," the firm's retail analyst Ken Perkins noted. "Perhaps more disconcerting is that the declines have been growing larger.”
Macy's same-store sales for locations on an owned-plus-license basis fell 2.7% in Q3, and same-store sales for stores on an owned basis were down 3.3%. Retail Metrics anticipated a decline of 2.8%. The retailer also reaffirmed its fiscal guidance for annual diluted earnings per share between a range of $3.15 to $3.40.
Shopping trends “are firmly against Macy’s,” according to Saunders. “[A]nd its brand, while not completely diminished, is most certainly tarnished. In our view, it needs to completely overhaul the experience to make stores easier to shop, more interesting to browse, and more relevant to today’s shopper. It also needs to develop a much more fulsome exclusive or own label offer to differentiate it from rivals. We have seen some signs of this activity in its partnership with Brookstone, which will bring a range of exclusive gifts to stores this holiday season.”
In fact, the holidays could turn out okay for Macy’s this year. “[W]e see some upside for Macy’s, if only because of soft comparatives as a result of last year’s very weak trading, high discounting, and excess inventory,” Saunders said. “This should allow Macy’s to pull out a much better performance this year, potentially breaking the trend of long term profit and sales declines."