Macy’s Inc. announced a series of real estate deals on Thursday including the $250 million sale of the Union Square Men’s store in San Francisco, an alliance with Brookfield Asset Management, and the sale of the downtown Portland, Ore. Location, with the store closing in early 2017.
So far, Macy’s M, +5.60% has announced plans or actually shut the doors on eight stores, a portion of the 100 store closures that were announced previously, said Karen Hoguet, Macy’s chief financial officer, on the company’s earnings call earlier Thursday, according to a FactSet transcript.
The sale of the 250,000-square-foot Union Square Men’s store is expected to close in January, with part of the proceeds to be used to consolidate that merchandise into the main Union Square store. Macy’s will lease the men’s building for two to three years while construction is under way. The approximately $235 million gain will be booked in Jan. 2018.
Macy’s announced that five stores have been sold to General Growth Properties Inc. GGP, +1.69% for $46 million last week. The stores are located in Pineville, N.C., Oakwood Mall in Eau Claire, Wis., Quail Springs Mall, in Oklahoma City, Okla. Tysons Galleria in McLean, Va., and Greenwood Mall in Bowling Green Ky. The Quail Springs Mall store closed in the spring, and Macy’s will continue to lease back the Tysons Galleria store while GGP determines how best to use the property. The other three will close in early 2017, Hoguet said.
Macy’s will also close a store in Douglaston, N.Y., and at Lancaster Mall in Salem, Ore. based on the lease terminations and expirations.
Macy’s reported third-quarter sales of $5.63 billion, down from $5.87 billion last year, but in line with the FactSet estimate. Adjusted earnings per share of 17 cents fell well short of the 41-cents FactSet consensus.
Macy’s shares closed up 5.6%.
See also: Macy’s profit falls, signs real estate deal
The retailer has been under pressure from activist investors to realize greater returns from its real estate holdings. The company has divided its real estate strategy into three parts, Hoguet said. The first are its flagship assets, which include the Union Square store, the State Street store in Chicago, the downtown Minneapolis store, and the Herald Square, New York store. The retailer is exploring options for the Minneapolis, Chicago and Herald Square stores.
“Of the three, we expect Herald Square will take the longest to determine the best approach for potentially creating value, given its size and complexity,” Hoguet said.
The second part is the 100 store closures, most of which are underperforming stores. CBRE Group Inc. has been brought on to help with this portion.
And the third is the portion for which Brookfield, an alternative asset manager, is creating “predevelopment plans.” This will include the rest of Macy’s real-estate assets, about 50 locations, for up to 24 months. Additional assets could be tacked on.
“While we might close stores in some of these locations, it is more likely that we will create value with surplus land or through improvements alongside an existing store,” said Hoguet.
These redevelopments could also include moves that are more “modest” Hoguet said, like restaurant additions in two Bloomingdale’s stores that have already taken place.
Macy’s also highlighted strength in some categories like shoes and fragrance, the stabilization of international tourist sales, though “it still represented a headwind for our major international tourist stores for both Bloomingdale’s and Macy’s,” the addition of three new categories. In 13 stores, the company is adding toys, home décor and “queue products,” products seen at checkout.
While Macy’s is showing signs of turnaround, and analysts at Conlumino are “encouraged” by plans to invest in locations with growth potential, analysts there also note that sales performance and profitability “show a company grappling with what looks like terminal decline.”
Net income for the quarter was $15 million, down from $117 million year-over-year.
“It is a telling fact that this quarter Macy’s made just 0.2 cents for every dollar it took in revenue,” said Neil Saunders, chief executive of Conlumino. “This is a weak position that, given the general direction, puts the company on a pathway to long term unprofitability.”
Sears Holdings Corp. SHLD, +3.55% has announced plans to close dozens of Kmart and Sears stores and has spun off about 235 properties into a real-estate investment trust, Seritage Growth Properties, and entered into joint ventures, moves that have yielded billions of dollars.
Conlumino draws a distinction between Sears’ moves and those at Macy’s.
“This is unlike the position of Sears which has used asset monetization to fund the day-to-day operations of the business, something that in our view suggests a company circling the drain,” said Saunders. “As such, Macy’s short-term future is secure, while over the medium to longer term it has the scope and funds to engineer a turnaround.”
Still, it will be difficult because the Macy’s brand could use a refresh with a better experience and more exclusive merchandise.
Macy’s shares are up 16.3% for the year so far while the S&P 500 index SPX, +0.20% is up 6.0% for the same period.