Macy's Isn't Being Bought Out After All, Consider This Play On The Mall Space Instead

For the last several months, Macy's M has been playing a will-they-or-won't-they game with Arkhouse and Brigade, activist investors seeking to take the famed department store private. Now, the answer has landed firmly in the they-won't column. 

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The most recent proposal from Arkhouse and Brigade totaled $6.9 billion, a healthy premium over the company's $4.53 billion market cap. The companies went back and forth over the terms, with the most recent offer at $24.80 a share. Macy's issued a news release saying negotiations have been terminated, partly due to concerns over financing. The release specifically mentioned "highly conditional and unsigned drafts of financing commitment letters, subject to numerous conditions."

With the deal off the table, many analysts wonder what is next for the company. Macy's has said it will renew focus on its ‘A Bold New Strategy playbook,' which will emphasize a variety of omnichannel initiatives and strengthen the Macy's and Bluemercury brands. Speaking on the most recent earnings call, CEO Tony Spring said, "Despite the ongoing pressure on the consumer, we are confident in our ability to return to profitable growth." 

Can This Company Bounce Back On The Public Market?

In a world dominated by e-commerce and boutique stores, some retail watchers wonder if the traditional market of large department stores anchoring malls is still the successful strategy it once was. During the last quarter, net sales were down by 2.7% year over year. However, the first 50 stores associated with the A Bold New Strategy initiative showed more promising results, with sales up 3.3%.

Macy's previously announced plans to close 150 stores by 2026 as it experiments with stores outside of mall locations and with smaller square footage. One question investors will want to consider is whether Macy's will need to expand that plan if sales weaken. Analyst activity on the stock has been relatively muted in the past few months due to the presumption that a deal would take the company off the market. 

Like so many other consumer brands, Macy's is very tied to consumer spending power. Inflation cooling is a positive sign, but if the job market weakens, that could be a concern. Despite higher prices, consumer spending has been unflagging in recent months, but cracks are appearing in a solid foundation. The fact that people have now spent their pandemic savings may signal that people will watch their wallets more closely going forward.

This company currently has a forward dividend yield of 3.64%, although the dividend is a scant $0.69 for the year. Macy's dropped its dividend by over half when the pandemic hit and has been unable to return to the payouts it was previously offering. The stock performance has also been lackluster, down nearly 24% over the past five years. It has rallied since last year, primarily because of the takeover story. With that gone, the stock may fall again. The news has also deleteriously affected Macy's high-yield corporate bonds. Some of those bonds containing language with a payout tied to a potential corporate takeover were trending lower than those without that language. 

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A Smarter Dividend Opportunity In The Retail Space

A better play for income-seeking investors might be one of Macy's landlords, Simon Property Group SPG, a retail REIT that operates top-quality malls. Simon Property Group owns both closed-mall locations and open-air Simon Outlets. 

As of its last earnings report, occupancy was up 1.1% to 95.5% year over year, and the base minimum rent increased by 3%. Simon has a dividend yield of 5.35% and pays a solid $8.00 annual dividend, although it has not returned to its pre-pandemic payouts. 

On the last earnings call, CEO David Simon remained bullish on the future of malls. He did note that there is some pressure on the lower-income consumer, but he is not worried about the incursion from e-commerce. "Physical stores are where it’s happening," said Simon. "We’re seeing a resurgence and reinvigoration of that whole product."

Simon Property Group reports earnings next month, which will provide valuable insight into occupancy and foot traffic. While slowing consumer spending and the overall health of retail clients, including Macy's, are potential headwinds, Simon is a sharp operator with a track record of adapting to retail's significant changes. 

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