Macy’s: Raised Offer Should Be Considered

Key Morningstar Metrics for Macy’s

• Fair Value Estimate: $25.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High

On March 3, Arkhouse Management and Brigade Capital announced that they raised their bid for Macy’s M to $24 per share from $21. In addition, they revealed that Fortress Investment Group and One Investment Management have joined the bid as equity capital partners. After this release, Macy’s issued a press release that confirmed receipt of the revised offer and stated that its board would “review and evaluate” it. Conspicuously, the firm did not commit to engaging with the investors or granting due diligence information, as has been requested.

Over the past several weeks, Macy’s board has argued that the original offer was too low and that the financing was uncertain. Now that the investment group has raised its bid by 14% and announced additional equity partners, these concerns seem unjustified. We think Macy’s should cooperate with the investment group and pursue a possible sale. If it refuses to do so, it runs the risk of a hostile takeover. While we agreed with the board that the original offer was low, the new one is close to our $25 fair value estimate, which we are not changing.

Ultimately, we believe it would be a disservice to shareholders for Macy’s to push away potential buyers. Although the company has a large customer base and other strengths, we do not award it a moat because relentless competition from digital and physical retailers has severely damaged the profitability and growth prospects of traditional department stores. Macy’s management is aware of these industry dynamics; just last week, new CEO Tony Spring announced the “Bold New Chapter” plan, which includes the closure of another 150 stores over the next three years. While the Macy’s board may prefer to remain public and allow this strategy to continue, realistically, its previous downsizing plans failed to create material same-store sales growth or margin improvement.