The Coming Wave Of Activists Invest In Retail

After a holiday season rife with underperformance and a year where stock prices steadily trended down, analysts are looking at retail to be the likely magnet for activist investors and retail across categories. Especially attractive? Firms that are sales and revenue poor, leading to depressed valuations that have real estate holdings of particular value.

“For quite a long time, I would say that the apparel and the department stores specifically have been left alone by the activists,” Farla Efros, president of HRC Advisory, told CNBC. “Now, when you’ve seen the last quarter results across the board were not very encouraging, that typically is what kicks them into high gear.”

“Every board is trying to figure out, ‘Are we going to get picked on?'” noted Colin Welch, president and chief operating officer of Financo advisory firm.

Macy’s is the best known target in the market and is facing tough pressure from activists to crack into its $19 billion real estate portfolio. Though the board agrees those holdings need to do more to support the bottom line, management has also confirmed it will not pursue an REIT. The short-term gains of such an arrangement would erode Macy’s value in the long term, as rent prices ate at store profits and its credit took a hit.

Welch notes that the best defense against activists in healthy share price and valuation — something we are sure retail execs nationwide are shocked to find out is a goal of theirs — but it does not look like either is in the immediate cards for the nation’s retailers. Retail Metrics’ latest forecast calls for a 0.7 decline in growth, a big miss on the early November forecast of 3.5 percent growth at the beginning of November.

According to Retail Metrics’ President Ken Perkins, footwear, home furnishings, department stores and teen apparel retails are facing particularly tough double-digit declines.

Which means that Macy’s will likely be one of many retailers fending off activists in coming months. Sears and Ethan Allen are both reporting interest from activist groups.

Which might not be a wholly terribly thing, PwC’s Steve Barr notes. Restoration Hardware strongly benefited by being taken private in 2008. Additionally, going private can allow some businesses to fix internal issues without the stress of the market’s day in and day out weighing down on them, HRC’s Efros said. This may position them for a better re-emergence as a public firm down the line.

“You’re stronger, you’re leaner, you’re firmer and you’re focused on the right things,” she said.