Macy’s Inc. sees better times ahead — partially because of a new real estate deal.
The department store retailer reported declines in profits and sales for the third quarter but expects business to improve in the fourth quarter. Meanwhile, it aims to boost shareholder value rising long term via a new real estate alliance with Brookfield Asset Management.
Under the alliance disclosed Thursday, Brookfield will have an exclusive right for up to 24 months to create a “pre-development plan” for about 50 Macy’s properties. Macy’s could add assets into the alliance. They primarily include owned and ground-leased stores and associated land, mostly in malls not owned by major mall owners. Macy’s and Brookfield will work together to redevelop the stores as well as properties on land adjacent to stores.
“This is a big thing,” Terry J. Lundgren, Macy’s chairman and chief executive officer, told WWD. “These guys are way bigger than just retail and shopping-center development. They have $250 billion of assets under their management. They have expertise in so many different categories. They are very creative. We’ll look at the land first and imagine what could be there. That’s very different from selling or just renovating. We have a much broader view of the longer term. These 50 locations that we’re looking at is just a goldmine for development.”
Lundgren cited a variety of potential scenarios for the 50 properties, such as adding other stores or restaurants onto exteriors, transforming parking lots or adjacent land into different uses like office parks and hotels, as well as renovations.
Macy’s did not disclose the 50 sites. “We are not prepared to announce any yet. Definitely, there are some very good locations,” said Lundgren.
“This is very different from what Hudson’s Bay Co. and Sears have done. We formed an alliance, not a joint venture,” added Karen Hoguet, Macy’s ceo.
“Macy’s and Brookfield will develop ideas for how to utilize the assets,” she told WWD. “In most cases, it won’t mean closing a store.”
Hypothetically, “We could on an 8-acre property demolish a stand-alone furniture store, create 100,000 square feet of retail, parking garage and possibly a residential tower and move the furniture operation back to a Macy’s mall location,” Hoguet said.
“Step one is to develop the idea to which [Macy’s] can either say we like or we don’t,” she added. “If we don’t like it, we pay [Brookfield] a fee. More likely we will like it, and we’ll move to the next phase, a feasibility study.”
After a property redevelopment, Macy’s could decide to pull out of it and get paid by Brookfield, or could be a partner in the project. Though in a few cases, Macy’s could end up paying rent on a property it didn’t before, Hoguet stressed, “We are not going to add leverage to our company as a result of this. We are not putting properties into a joint venture to leverage. It’s really about partnering up and creating value.”
“We believe that partnering with a leading global real estate investor like Brookfield is the best way to unlock the potential of those assets,” said Lundgren. “The Brookfield alliance strengthens our ability to improve the customer shopping experience by giving us greater flexibility to invest in our most productive and highest-potential locations, and to make the most of our real estate assets, or portions of them.”
Brian Kingston, ceo of Brookfield Property Group, said, “The Macy’s portfolio includes some of the highest-quality real estate in the United States and we look forward to working closely with them to unlock value for their shareholders and enhance the shopping experience for their customers.”
Separately, Macy’s is working on plans for redeveloping its giant flagships in Herald Square, N.Y.; State Street in Chicago; downtown Minneapolis, and Union Square in San Francisco. None are part of Brookfield arrangement. In other real estate maneuvers, Macy’s is downsizing and redeveloping its flagship on Fulton Street in downtown Brooklyn and selling its men’s wear store in San Francisco.
Many of these plans have been hatched in the last 18 months, ever since Macy’s felt pressure from activist shareholders to monetize its real estate assets. The activists wanted the retailer to spin those assets off into a separately listed company, but Macy’s has resisted that idea, saying it would not maximize shareholder value.
Results at the $27 billion department store chain in the third quarter were brought down by store closings, charges and the generally weak retail environment. Net earnings were $17 million in the third quarter ended Oct. 29, compared to $118 million in the year-ago quarter.
Diluted earnings per share were 5 cents last quarter. Excluding noncash retirement plan settlement charges of $62 million, or 12 cents a share, third-quarter earnings were 17 cents.
That compares to the year-ago’s 36 cents a diluted share, or 56 cents a diluted share excluding asset impairment and other charges of $111 million, or 20 cents a diluted share, primarily related to store closings.
Macy’s closed 41 underperforming stores at the end of fiscal 2015, and is on track to close around 100 stores early next year. Streamlinings are affecting results as total sales in the third quarter fell 4.2 percent to $5.63 billion, compared to $5.87 billion a year ago. Comparable sales were down 2.7 percent.
Still, seeing some improving selling trends, the company reaffirmed its earnings guidance and raised sales guidance for full-year 2016. Macy’s expects 2016 comparable sales to decrease in the range of 2.5 to 3 percent, compared with previous guidance of a decrease of 3 to 4 percent. Diluted EPS (excluding asset impairment charges and retirement settlement charges) in fiscal 2016 is expected to be in a range of $3.15 to $3.40.
Last quarter, the business was paced by shoes, soft home, fine jewelry, fragrances as well as women’s, men’s and kids’ apparel, including denim, active and dresses. That helped offset weakness in handbags, cosmetics and fashion watches.
Asked why Macy’s is optimistic about business this quarter, Lundgren pointed to third-quarter trends meeting expectations, and to consumers being in good shape with their savings. He also said that after an extended period of auto sale surges, consumer spending could shift back to fashion and that the unemployment rate has been declining. “All of these reasons point to an opportunity for consumers to spend in our category,” Lundgren said.
Asked if consumers might be more prone to shop now that the next president has been decided, he said, “It’s been a day and a half. It’s too soon to tell.”
“Our third-quarter top-line results were better than the first half of the year and our sales-driving initiatives continue to gain traction,” Lundgren said. “Additionally, the strengthening trend across the apparel businesses, coupled with new initiatives like tech watches from Apple, Michael Kors and others, are good indicators for an improved performance in the fourth quarter. Our customers tell us we are their holiday shopping destination, and we are excited about our gift assortments, marketing strategies and digital enhancements, all of which should set us up for a stronger finish to the year and position us well for an improved performance in 2017 and beyond.”
In other good news, Macy’s executives said the international tourist business stabilized last quarter, but still represented a headwind at Bloomingdale’s and Macy’s stores that are major tourist destinations.
Up against strong competition from Sephora and Ulta, Macy’s is developing plans for enhancing its cosmetic departments. Macy’s has already been rolling out enhanced jewelry and footwear departments, and some of the same concepts could be applied to cosmetics. In shoes, for example, there is greater editing of the assortment, the area is merchandised more by category than vendor, and there’s greater use of technology and staffing in the stockrooms.
In addition, Macy’s is testing Backstage off-price apparel pop-ups in 40 doors, adjacent to Last Act clearance areas. Macy’s operates a handful of Backstage stores, though Backstage inside regular Macy’s stores is the current focus.
Last year, Macy’s formed Macy’s China Ltd., a venture with Fung Retailing Ltd., launching online selling on Alibaba’s Tmall. “We’re developing a potentionally large high-growth business there,” Hoguet said in a conference call with analysts. Through its China venture, Macy’s is also learning how to improve its digital business in the U.S. and how to assort stores to better serve Chinese consumers, Hoguet said.