Sean O’Reilly: I do want to look towards
the future for these companies and the shifting consumer spending towards more media, more
electronics, as opposed to spending an afternoon shopping at Macy’s. Apparently these companies
do have value though. Vincent Shen: Oh of course. So there’s two
trends that we’re seeing for these apparel retailers that I also think, that are much
longer term, are something that we’re kind of getting the beginning hints of that investors
will want to keep in mind. And the first is that there is a shift from spending on a lot
of untraditional goods like clothing towards media, and also electronics.
A good example of where we’ve already seen this start to take hold and the companies
are suffering as a result and they’ve had to basically institute major transitions in
their business and their product portfolios, is the toy industry.
So think about like Mattel for example or Hasbro where they had these major brands like
Lego, like Barbie I’m sorry, not Lego — like Barbie or Hot Wheels or the American girl
dolls. Those have all struggled and I see it every time I visit my little cousin for
example. O’Reilly: Why by those when you can give
the kid an iPad? Shen: Exactly and he’s on his iPad most
of the time over playing with the typical action figures or some games along those lines.
So, that’s just something that we’ve seen in general and I think is going to start leaking
into the apparel retailers as well where people are just going to be focused more on getting
the latest iPhone rather than getting a new pair of boots.
O’Reilly: Well not only that but these companies are, and this it is harking back to what we
were talking about earlier with the smaller format stores and having less inventory and
everything. I did want to point out that I love what Macy’s has done.
And I don’t know if you came across this in your research, but they just built a $300
or $400 million distribution facility in Oklahoma of all places that pretty much rivals an Amazon
warehouse. Macy’s is on it with their inventory management and their distribution. And just
with the way the country’s working with getting things in 2 or 3 days buying on Amazon,
you don’t need a huge store. You don’t. Shen: And I’m glad you brought that up because
that’s another big trend that we’re, a big shift that we’re seeing for these companies
is Macy’s is being really proactive about adopting this omni-channel strategy where
they are meeting customer’s needs in the store and online. Because there’s no denying
that ecommerce is obviously been growing as a percentage of total retail sales for a long,
long time now. O’Reilly: Well arguably everybody wins because
if you go into a Macy’s or any one of these stores 20 years ago, they literally had to
have every size of a pair of jeans available pretty much if they wanted that sale that
day. Now they can have 5 of the sizes the person likes it, they can just be like, “Okay
order online, we’ll be at your place in two days.” Boom.
Shen: Or pick it up at the store. O’Reilly: Either way.
Shen: So they really want to provide shoppers with those options. Kohl’s hasn’t been
as strong as some of the other, some of its competitors in adopting that omni-channel
strategy, but it definitely has it in mind and management has cited the fact that they’re
going to be pursuing that much more aggressively. And so the last thing is a bit more of like
financial engineering in my view. But it has to do with REITs, Real Estate Investment Trusts.
We kind of saw this a little bit in the gaming industry with Penn National Gaming.
O’Reilly: A couple years ago, yeah. Shen: Where they basically have these casinos,
they spun off a REIT which basically owned that property and the actual casino operator
would lease that back. The benefit? The investors in the REIT get really stable revenues from
those lease payments, but they also get more favorable tax treatment since it’s not taxed
at that level. O’Reilly: At the corporate level.
Shen: Exactly. O’Reilly: So, a number of retailers are
all of a sudden doing this. The first bull case that referred to any of these comments
was of course Sears. Hasn’t turned out quite as well but a lot of analysts have come out
and said that they think that the real estate at some of these other ones, particularly
the stronger brands like Macy’s, are worth even more than the Sears locations.
Shen: So Jeffery Smith, he’s an activist investor with Starboard Value and this is
a pretty impressive number. He thinks that Macy’s real estate, I just think about its
flagship store for example in New York. O’Reilly: That’s worth a billion dollars
on its own, right? Shen: He thinks that the real estate performance
for Macy’s is worth $21 billion. The company’s mark cap right now is just $15 billion.
O’Reilly: Now did he say what … okay so you can throw that number out. Okay all Macy’s
stores are worth $21 billion for their real estate. However you need to have a use for
it to get the real estate value. To get the value out of real estate, one of the bull
cases I remember, one or two years ago, was Sears. They wanted to chop up the stores and
to make them into tiny little stores. You’d have like a Best Buy mobile and all that stuff.
Is that what he’s thinking with the Macy’s stores?
Shen: Well the thing is overall the company, the management team has already started to
think about the property they own and the ways they can diversify its use. I think at
another location they kind of took the second floor and just started renting that out to
another tenant. O’Reilly: Wow, who was it?
Shen: I don’t recall. But that was just something that I had seen quickly. But it’s
just part, overall I look at it more so as the fact that these companies currently in
their current form, they own a lot of property and a lot of real estate obviously. And whether
something like a REIT can help unlock that value is definitely something investors should