What Macy's could learn from JCPenney's woes

Macy's (M) is mulling a $5.8 billion buyout offer from Arkhouse Management and Brigade Capital Management. Department stores have been hit hard as more shoppers turn to buying products online. JCPenney, for example, filed for bankruptcy in 2020. So what can Macy's learn from its rival's woes? Yahoo Finance's Brooke DiPalma explains in the video above.

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Video Transcript

JARED BLIKRE: We got to talk retail because the Macy's board, they're mulling a $5.8 billion buyout offer. Though the retailer beat expectations in its recent quarter, large-scale department stores have had a tough go of it in recent years, struggling to compete as shoppers increasingly buy online.

Another major name in the department store space, JCPenney, made headlines back in 2020 when it filed for bankruptcy and was taken private by a group of lenders. Though the two brands differ immensely, what can JCPenney's woes tell us about the possible path forward for Macy's? Yahoo Finance's Brooke DiPalma joins us with more. Brooke, lay it out.

BROOKE DIPALMA: Good morning, Jared; good morning, Diane. Certainly there's lots to consider. I mean, both companies Macy's and JCPenney's both century-old companies. Macy's 165 years old, JCPenney's 121 years old. Now, both department stores really faced woes during the pandemic when e-commerce began to boom. We saw a tale of two different retailers JCPenney's filing for bankruptcy and going private, while Macy's was approaching bankruptcy, but avoided that after securing $4.5 billion in financing.

Now, since JCPenney's has went private, we know that at the time back in 2020, they had a portfolio, or real estate portfolio, of roughly 846 stores. Now, that stands at roughly 670 stores. And when we spoke to the CEO of JCPenney's, he said that they're comfortable with that store portfolio and the size of their stores, and we know that they've been able to make over $1 billion investment to really remodel these stores as consumers continue to shop in store and online.

Now, what's different here is that Macy's has a very robust real estate portfolio with what one analyst called a trophy asset being Herald Square. What's different there is that real estate value according to JPMorgan is $8.5 billion, that Herald Square flagship could be worth at least $3 billion. And so many really focused on that billion-dollar real estate portfolio that it has, roughly more than 700 locations-- more than 500 Macy's, more than 50 Bloomingdale's, and more than 100 Bluemercury stores, that's their cosmetic store.

And really we're looking forward to 2024. Macy's does have an incoming CEO Tony Spring, who had come from Bloomingdale's and he's really looking at a more profitable, leaner store portfolio. They have been leaning into that smaller footprint.

And so really looking at this real estate portfolio as that prime asset that Macy's has going into this potential deal and/or how it could stand out among other department stores that really haven't seen the current day. We're thinking Sears, Toys R Us inside Macy's. And so as department stores go, you know, behind the rearview mirror, how's Macy's moving into the forward with this robust real estate portfolio in mind?

DIANE KING HALL: They have a robust real estate portfolio. They do also-- I mean, the difference between, say, a JCPenney and Macy's, they've also got Bloomingdale's, right? So they do have--

BROOKE DIPALMA: The luxury retail aspect to it.

DIANE KING HALL: Yes, they have some brand power. But in general, when you think about this, the changes in kind of consumer habits and consumer buying patterns, what does this tell you about where the consumer stands now, this kind of deal?

BROOKE DIPALMA: Yeah. Well, speaking of what Macy's has under its belt, the Bluemercury, we continue to see a consumer that's leaning into beauty despite the pressure that they're up against. And so Macy's said in the last earnings call that they continue to see pressure up against their consumer. We also did hear of credit card rate delinquencies at Macy's rising.

But when you think about JCPenney's, when we spoke to the CEO there, they said they're seeing a healthy customer. They haven't seen a significant change to their customer. But as we look towards 2024, inflation still remains a key focus for consumers.

They're also looking at alternative, payment options we see the increase of buy now pay later, and ultimately e-commerce continues to see a boom. And so really here it's how exactly Macy's will continue to bring customers in store and promotions and value continue to be the name of the game as consumers just can't pay up like they used to.

DIANE KING HALL: Yeah. Interesting stuff here. I mean, I definitely saw JCPenney coming. Macy's, you know, that's been in play before. We'll see what happens now. Brooke DiPalma, thank you.