Activist Investors Push for Macy’s to Spin Off Bloomingdale’s and Bluemercury: Is It Time for Change?

Macy's Inc. is facing mounting pressure from activist investors who are calling for a significant shift in its business strategy. Despite ongoing restructuring efforts and a new turnaround plan introduced at the end of fiscal 2023, the company continues to struggle. The most recent quarter saw a disappointing 2.4% decline in net sales, amounting to $4.7 billion. This marks a failure to grow since the pandemic-era bounce in 2022, raising doubts about the company’s future. With patience running thin and a recent $151 million bookkeeping scandal, all eyes are now on Macy's to make drastic moves to turn its fortunes around.

One of the most radical proposals comes from Barington Capital in collaboration with Thor Equities, suggesting that Macy's spin off its two best-performing brands: Bloomingdale's and Bluemercury. These segments have shown growth, in contrast to Macy's struggling flagship brand. Bloomingdale's sales grew by 1.4%, and Bluemercury saw a 3.2% increase, bucking the broader trend. While both brands have significant market presence, they cater to a very different audience compared to Macy's mass-market offerings.

Barington Capital, which holds a sizable position in Macy's, argues that Bloomingdale's and Bluemercury are being stifled by the parent company's struggles. Their proposal suggests that these luxury brands could thrive independently, freed from Macy’s larger, less nimble structure. Bloomingdale's, in particular, is said to be operating in a competitive sphere with luxury retailers like Saks and Neiman Marcus, and its potential is constrained by Macy’s standard operating procedures, which may not align with the agility needed in the luxury market.

The case is similar for Bluemercury, a beauty retailer acquired by Macy’s in 2015. While it has carved out a niche in the beauty sector, its growth potential is limited within Macy’s mass-market framework. As a standalone entity, Bluemercury could potentially attract more targeted investment and focus, positioning itself better in the competitive beauty space.

Macy's management has expressed openness to considering alternatives, releasing a statement acknowledging Barington and Thor's proposal and committing to maximizing shareholder value while reviewing its strategy. While the spin-off idea presents an intriguing diversification opportunity, questions remain about the long-term vision for the company. Both Bloomingdale's and Bluemercury are intertwined with Macy’s legacy, making the decision to let them go potentially painful. Bloomingdale's has been part of Macy’s since it was acquired by Federated Department Stores in 1994, and Bluemercury, while a smaller acquisition, has contributed to Macy’s beauty business.

The proposal also suggests aggressive cost-cutting measures, including slashing capital expenditures and introducing a stock buyback program. While these actions could boost Macy's stock price temporarily, their long-term viability remains uncertain. Barington’s plan also includes the creation of a new company, Macy’s Realty Co., aimed at unlocking the value of Macy’s substantial real estate holdings. The assumption is that Macy's stock is undervalued, and separating its real estate assets could help realize shareholder value.

However, the feasibility of this plan is uncertain. Spinning off two leading brands could disrupt Macy’s business structure, and it cannot be guaranteed to result in the desired increase in stock prices. Bloomingdale's, while a successful luxury brand, would face stiff competition in the already crowded luxury market. Bluemercury, though a success story in beauty retail, may not have enough value to stand on its own in the long term.

The decision also hinges on the broader retail environment, where changing consumer behavior and increasing competition from online retailers and other brick-and-mortar chains are major challenges. Macy's, a long-standing American department store institution, is increasingly threatened by these modern retail forces. How the company adapts to these challenges will likely determine the future of Bloomingdale's and Bluemercury within Macy’s.

At this critical juncture, the company faces intense pressure to act. The activist investors pushing for the spin-off of Bloomingdale's and Bluemercury believe these luxury brands could flourish on their own, free from the limitations of Macy’s mass-market operations. Whether this is the right path for Macy’s or if the company can evolve its current strategy to revitalize its flagship brand remains to be seen. Whatever the outcome, it’s clear that Macy's must take action, as the clock is ticking for the company to get it right this time.