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On Monday, reports circulated that Macy’s has received a $5.8 billion buyout offer. The week prior, Farfetch made headlines after cancelling its earnings call, as CEO José Neves is reportedly in talks to take the company private. Experts say that as Wall Street ravages retail share prices, the move could become more common.
The offer from an investor team made up of real estate investment firm Arkhouse Management and asset management firm Brigade Capital Management values Macy’s at $21 per share. This is low, investment firm TD Cowen said in a note following the news, given the retailer’s substantial real estate value. But Macy’s sales, like most department stores, have slumped over the past year, down 7 per cent in the third quarter. Macy’s revenues declined consistently from the first quarter of 2019, through to the first quarter of 2021. Q2 saw an uptick, then growth slowed until dipping back into decline in Q3 of 2022. Growth has been negative for the five consecutive quarters since. The company’s share price has fluctuated since its 2015 peak at $50.38, and has fallen 34 per cent in the past five years. (Macy’s declined to comment for the article.)
Continued consumer pullback and a volatile macroeconomic environment mean department stores have been through the ringer in 2023. E-tailers haven’t come out unscathed either, impacted by both pullback and dragging discounting on heightened inventories. Multibrand retailers are hit particularly hard because they’re reliant on other brands to drive footfall and sales, says Neil Saunders, managing director and analyst at retail analytics firm Globaldata.
“Unless they are particularly good at curating assortments or have some exclusive elements of the offer, it is difficult to create a compelling reason for consumers to use them over other more focused brands,” he says. This impacts retailers across the board, whether they’re targeting the masses or the one per cent — in both cases, most of their stock is available elsewhere, meaning greater direct price competition.
US retailers are navigating a tired wholesale model and ambivalent consumer demand. To cope, they’re banking on loyalty plays and high-spending consumer retention. Personalisation is key — but is it enough?
Other challenges include more brands going direct themselves, less mall traffic, and the need to make long-term investments — that can be easier to do while private, says Aaron Cheris, head of Bain Company’s Americas retail practice.
The public market hasn’t responded positively to department stores’ woes. “It’s no secret that department stores have not been getting much love from Wall Street,” says luxury retail analyst Robert Burke. It fizzles down to the fact that public markets place pressure on store comps, placing constraints on retailers, Cheris says.
Initial reactions to Macy’s going private were positive: shares were up 20.9 per cent on Monday morning following the news, though by Tuesday morning they were down 4.4 per cent, following a downgrade to sell from Citi, who is sceptical about the sale materialising. Macy’s still has its real estate on its side. “Given that Macy’s still owns a number of their stores including their flagship location, it is obviously a very attractive asset for real estate investors,” Burke says.
Part of the potential buyout will include a deep dive into Macy’s assets, covering real estate across its three brands: Macy’s, Bloomingdale’s and Bluemercury. Investment bank William Blair expects that it is an attempt to separate the value of Macy’s operations “in managed decline” and its real estate portfolio “which has long been viewed to house most of the value of the company”. Farfetch, on the other hand, is a complex operation given that the acquisition deal with Richemont-owned retailer Yoox Net-a-Porter hangs in the balance, as well as the sheer complexity of its own business model. Analysts speculate whether this would mean a full buyout, or if Farfetch might sell off parts of the business such as its New Guards Group — including brands such as Off-White and Palm Angels.
A buyout isn’t a shoo-in for analysts. Despite reports that Neves is considering a similar move at Farfetch, shares fell by up to 50 per cent on the day of the news, and remained down 29 per cent on Monday.
The path to private is reportedly a serious consideration for multibrand retailers across the spectrum. What does this say about the state of the public market for such retailers?
Why go private?
It’s a tough time to be a public company. “Public market valuation has been particularly bearish,” TD Cowen wrote in its Macy’s note. Even outside of multibrand retailers, New York Stock Exchange debuts have proved a tough sell this year. Birkenstock, which analysts across the board had high hopes for, fizzled relative to expectations; shares dropped 11 per cent in the footwear brand’s October debut.
It’s a good move for long-term planning, because a big perk of being private is the freedom for internal change. “Being private could allow for more freedom, faster change, and disassembly of Macy’s as we know it today,” TD Cowen noted. Jessica Ramírez, senior analyst at research firm Jane Hali and Associates, made a similar point about Farfetch, which she says would benefit from pulling back and narrowing its focus. “In the private eye, you’re able to reset your company with your own expectations,” she said.
Often, the goal of going private to manage the business is to sell it again once there’s more upside in the markets, Saunders says. TD Cowen flagged this potential for Macy’s: “A new owner would need to balance short and long-term goals and objectives, which could involve Macy’s coming back to the public markets in a different form.” But for the retailer to adapt to the current retail market, it needs time, Burke says. Going private will enable this longer-term process without public market scrutiny.
By going private, shielded from quarterly earnings analysis, the focus can shift from driving profitable growth from the business to other ways of creating shareholder value — primarily related to the value of real estate, Cheris says.
That more retailers are considering this move is now signalling to a soft public market, Saunders says. “There are some good deals to be had for those looking to buy retailers, including multibrand retailers. That said, there is also a lot of caution in the market and the valuations that retailers once achieved are nowhere near as generous.” TD Cowen’s note reflected this caution, flagging the investment risks associated with department stores. Namely: uncertainties about the global economic environment and consumer spending. “The markets right now are pessimistic so some of the share prices are low, making companies something of a bargain,” Saunders says.
This leaves multibrand retailers (and other businesses weighing similar options) facing a tough choice: stay public at the risk of undervaluation on the public market, go private for a lower price.
There’s merit to public pressure, Saunders says. “The pressure of the public market can be a force for good in that it forces multibrand retailers to be disciplined and have a clear strategy,” he says. “The other downside is that investors taking business private are often focused more on financials and maximising returns than they are on trading. That does not always bode well for the long-term health of a retailer.”
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