Four Things Macy's New CEO Should Do To Save The Department Store

(Bloomberg) -- It wasn't Brexit, but something else happened on June 23 that may have broad repercussions for the retail world: Macy's said longtime CEO Terry Lundgren will step down.

Lundgren embodies the industry's old guard. Running America's largest department store for more than a dozen years, he tried to uphold a relic of retailing that has now fallen out of step with the way many of today's consumers want to shop. His successor, Jeff Gennette, isn't exactly new blood -- he joined Macy's in 1983 and was groomed for decades -- but the handover does present an opportunity for him to make bolder moves to save the struggling retailer and provide a guidepost for the rest of the industry to follow. 

Gennette hasn't tipped his hand on strategy so far. The few interviews he's given in recent weeks have mostly been limited to details on his penchant for Scrabble and vague proclamations for change. 

Perhaps we'll hear more when the retailer reports earnings next month. In the meantime, here's some friendly advice to help get him started. 

No. 1: Sign on the dotted line, already. 

Gennette's most pressing task will be to make the decision on what to do with the company's valuable real estate -- and fast. Until then, investors will be reticent to buy into any kind of turnaround story. 

Activist investors agitating for a real estate spinoff, such as Starboard Value, argue the brick-and-mortar buildings that house Macy's stores are worth at least $21 billion, more than Macy's entire retailing business (Macy's enterprise value now sits at $17 billion). Lundgren rightly spurned this idea years ago when he didn't want to mortgage Macy's future for a short-term cash infusion, but Gennette should chart his own path. Today's picture has changed. It's now clear shoppers leaving department stores are a secular, not cyclical problem.

Macy's can take half its 870 stores, including top properties like its flagship store in Manhattan's Herald Square, and form separate joint ventures with mall operators like General Growth Properties or Simon Property Group. Sears and Hudson's Bay have made similar moves, in which the department store retains majority ownership in the real estate entity but takes the cash from the property sale to buy back stock, pay down debt, or reinvest. 

Time is of the essence. Back when Starboard first floated the plan, Macy's stock was trading at nearly $80. Now it's down to about $33. The company has hired folks to help explore options, but it hasn't gone far enough. Real estate prices are near all-time highs, interest rates are low and mall operators are looking for ways to grow. It's time to pick a partner like General Growth Properties, one of the largest and well-equipped mall operators, and move forward.

No. 2: Use the property spinoff to force store closures and kick the new-store habit

Macy's e-commerce growth has slowed, but it's still driving the company's sales. That's even in the face of a decline in average order size to $154 last year from $189 the year before, according to Slice Intelligence principal analyst Ken Cassar. 

With online sales providing all the momentum and revenue at brick-and-mortar locations on the decline, it would make sense for Macy's to shrink its physical footprint. Yet despite annual store-closing announcements, the retailer has more locations than it had in 2005. Even Lundgren admits that Macy's has too many stores. 

Worse, it's keeping poor-performing locations open on the basis that they're not losing money. But that's because Macy's doesn't have to pay rent on many of those stores. A real estate spinoff that requires Macy's to include rent calculations will make it harder to justify keeping doors open.

No. 3: Go where the shoppers are. 

Macy's has bemoaned the decline of tourists at its U.S. stores amid the economic upheaval in China and Europe. Instead of trying to lure foreigners to the U.S., it should use its global brand recognition to expand abroad through e-commerce, the way it has with Alibaba in China, as well as in physical stores in key international locations such as its Abu Dhabi Bloomingdale's store.

No. 4: Regain the power in brand negotiations

Macy's says it's building stronger ties with long-time partners such as Coach and Ralph Lauren. It's important to maintain good relationships with key vendors but these companies have made clear their allegiances don't lie with Macy's. Macy's should instead cultivate trendier brands, as well as up-and-coming companies that clamor for the nationwide exposure Macy's can provide. Why should shoppers find Rebecca Minkoff tops and Tory Burch dresses at T.J. Maxx, but not at Macy's? And if Target can create budget-friendly products with popular designers like Lilly Pulitzer and Marimekko, why can't Macy's do the same?

Investors might give Gennette some time at the outset. But the clock's already ticking. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story: Shelly Banjo in New York at sbanjo@bloomberg.net.

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net.