Starboard Was Smart to Drop Macy's
Starboard Value LP's Jeffrey Smith conceded last May that his hedge fund had probably invested too early in Macy's Inc., quipping, "sometimes you don't get the timing right."
Turns out, he wasn't just early, he was wrong. The activist has sold the Macy's stake it announced in July 2015, Reuters reported late Wednesday.
It's hard to blame Starboard for trying. In May 2015, CEO Terry Lundgren was telling investors the retailer's issues "were largely behind" it. And Starboard's strategy of persuading the chain to sell off real-estate assets, close under-performing stores and change leadership was smart.
The problem was, Macy's couldn't be bothered to listen.
Department stores are in secular decline: Unlike in other sales downturns, this time it's clear the lost ground will never be regained, as mall traffic continues to fall off and shoppers permanently defect to Amazon.com Inc. and other online sites.
But if any chain could handle these shifts in shopper behavior, it should have been Macy's. It invested early in e-commerce, well before Amazon had meaningfully plowed into selling apparel. Customers had strong emotional ties to the brand. And Macy's brought in more cash each year than any of its peers. It also had a vast array of real-estate and other assets to tap to bankroll a transformation.
I argued last year that it wasn't too late to save Macy's. At the time, shares had dropped around 50 percent since Starboard announced its stake. But a new CEO brought new hope that change might start happening more quickly. It seemed the time was ripe for Macy's to start monetizing its real estate, close stores, and focus its efforts on attracting shoppers.
Unfortunately, that didn't happen. In the past two years, Macy's hasn't fulfilled many of the promises it has made to shareholders about turning itself around.
Macy's pledged last year to close 100 stores, but closed just 66. Meanwhile, it opened 27 other stores (mostly Blue Mercury outposts, but also some traditional department stores) and said it would only get around to the other promised 34 closures "over the next few years."
It made some (very slow) progress on selling off real estate, but trophy assets that could make real money, such as its Manhattan flagship, remained in Macy's control.
Meanwhile, as sales continued to sputter, rumors of a Macy's takeover by Canadian department store chain Hudson's Bay Co. emerged. The problem was, Hudson's Bay couldn't find the financing it needed to fund the purchase the now-toxic target. Hudson's Bay quickly abandoned the idea, setting its sights instead on Neiman Marcus.
Now that Starboard has also withdrawn from Macy's, investors should, too. Why wait on the obstinate department store to change its behavior when even its most ardent believers have moved on?
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