After a weak third quarter and a lackluster Black Friday if early figures are any indication, Macy's (M) may want to reconsider the advice of activist shareholder Jeffrey Smith, of Starboard Value LP.
The shares of the retailer are down 39% for the year, trading around $40. The stock peaked at $72.80 in July, soon after Smith proclaimed, at CNBC's Delivering Alpha conference, that they could nearly double. "Macy's is a stock that currently trades at $66 a share. We think that it's worth in excess of $125 a share," he said at the time.
The key to unlocking Macy's value, according to Smith, is by tapping its real estate assets, most notably its flagship locations in New York City, San Francisco, and Chicago, which are worth $7 billion according to his valuation. He believes the company should spin off its higher-end real estate assets -- its standalone locations and A-mall locations -- into a REIT, which would allow it to generate cash from its real estate.
It is a proposition not without risks, some of which were addressed during the company's third quarter earnings call.
"We realized that its creation would not create nearly as much value for our shareholders as we had hoped," CFO Karen Hoguet said. "We reached this conclusion before taking into consideration the operational and tax risks associated with the creation of a REIT, which also would be relevant."
She pointed out that the retailer's ability to pay rent on its locations would be highly dependent on cyclical factors, at a time when it also needs enough flexibility to navigate the secular changes that are affecting the industry. Generally, too much uncertainty over a company's level of leverage negatively affects its credit rating.
"We've lived through enough downturns and bankruptcies to know that there is a real benefit to the retailer of maintaining the flexibility of an investment grade rating and having access to capital in all markets, particularly when the industry is in flux. In addition, our real estate advisors indicated that the REIT would trade better if the retailer was investment grade, since at least initially it would be a single-tenant REIT," Hoguet added.
Macy's problems -- as well as the broader problem with brick-and-mortar retailers -- may have more to do with a fundamental shift in consumer behavior than simply a "downturn." As customers increasingly become comfortable with shopping online, the allure of old retailers falls -- even if they boost their online presence.
CEO Terry Lundgren sounded optimistic on Black Friday in an interview with Real Money columnist Brian Sozzi and said that company's online business was "strong." The question is whether it is strong enough to withstand the headwinds.
During the third quarter, the company was hurt by falling international tourist sales, warm weather preventing shoppers from buying cold weather gear, and general slowing growth. The company reported a 3.6% decline in comp store sales and an 8% drop in earnings per share.
Preliminary figures from ShopperTrak, released on Saturday, show that Black Friday sales -- across the whole retail industry -- fell 10% to $10.4 billion this year. The retail-analytics firm will release its full assessment of Black Friday sales and traffic on Tuesday.
If it does turn out that Macy's hasn't enjoyed a healthy jump in sales during the traditional shopping bonanza period, the retailer may need to revisit the idea of creating a REIT once again. Who knows, this time it may end up finding it more attractive.