Stay Away From The Real Estate Play In Retail

U.S. retail stocks took another beating on Thursday after the market was unimpressed by the latest numbers from Macy’s Inc M and Kohl’s Corporation KSS as they continue to struggle to adjust to the intense competition from Amazon.com, Inc. AMZN and other online competitors.

Earlier this week, activist investor group Snow Park Capital Partners called for retailer Dillard’s, Inc. DDS to make a dramatic adjustment to its business strategy. Snow Park said that the value of Dillard’s real estate alone is worth about $200 per share, and the company should consider selling or spinning off its valuable real estate properties to unlock that value.

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Dillard’s isn’t the only retailer that is being pressured to monetize its real estate property. Activist hedge fund Starboard Value has been pressuring Macy’s to do the same since 2015.

Unfortunately for Macy’s, Dillard’s and other retailers, spinning off real estate might not e the quick fix that activists claim it is. In fact, Sears Holdings Corp SHLD spun of a large portion of its real estate assets into Seritage Growth Properties SRG in 2015, a move that did very little for long-term Sears shareholders. Sears landed $2.7 billion in cash, but lost its most valuable asset. Since Sears pulled the trigger on the spin-off, the stock is down another 76.2 percent. Ironically, shares of Seritage are up 26.9 percent in that time.

It’s certainly frustrating for retail investors to see their companies’ market caps below the value of their real estate properties. However, unless the companies can use proceeds to make a meaningful change to their declining business models, selling their property wouldn’t do anything but delay their inevitable decline.

Joel Elconin contributed to this story.