If activist investors get their way, Macy's may no longer be the owner of such iconic stores as the retailer's flagship store at Herald Square in New York City. Image source: Eunice.

It's not quite alchemy, though activist investors targeting retailers with deep real estate portfolios seem to view their assets of as a primary compound in turning property into shareholder gold. Still, what's good for the activist investor, may not always be a benefit for the retailer.

Macy's (NYSE:M) is just the latest retailer to have an activist investor take an interest in the value of the land and buildings it owns. And though we may not see it spin off those assets into a real estate investment trust since Congress has taken a dim view of the tax-free treatment they receive, we are likely to still see the department store chain do something to monetize the properties.

Taking an active interest
Hedge fund Starboard Value, which revealed it had taken a stake in the retailer last July, said at the time that Macy's real estate alone was worth some $21 billion, or almost double the $11 billion valuation the company had at the time, which it said "implies that the operating business is currently trading for a negative value."

Although the private equity firm had originally recommended Macy's spin off its real estate holdings into a trust, Congress passed a bill last month that would strip from such deals the tax-free benefits they provided investors. While that hasn't become law, it does hint at the direction the government is heading, and Starboard Value on Monday recommended instead Macy's pursue joint ventures for its real estate holdings to separate the property from the company. It could be so valuable that the retailer might be able to maintain its investment-grade credit rating while also paying off its debt.

Flexing its financial muscles
The problem with performing such financial gymnastics is they do nothing to help or even address the underlying issues that led to the business being undervalued in the first place. Whether it's in the form of a REIT, a sale-leaseback, or some other bit of earnings engineering, it's a short-term salve that doesn't fix a weak business, and instead allows the wound to fester.

One need only look at Sears Holdings (NASDAQ:SHLDQ) to see the shortcomings of the strategy. CEO Eddie Lampert often uses financial wizardry gleaned from running his ESL Investments hedge fund to artificially enhance the retailer's earnings. That is, until they no longer worked. Then he began stripping from it everything of value, spinning off Sears Hometown & Outlet Stores and Land's End, and finally even spinning off some of Sears properties to the Seritage Growth Properties REIT.

All the while, Sears and Kmart's sales have steadily spiraled down, notching dramatically lower comparable-store sales year after year. Instead of investing in its stores, Lampert chose financial gimmicks to the detriment of the retailer's shareholders.

Poor sales last year and this past Christmas are leading Macy's to close hundreds of underperforming stores and layoff thousands of workers. Image source: Mike Mozart.

A retailer on the run
Macy's hasn't engaged in the same kinds of trickery, but its sales have been festering for some time. A weak economy and a strengthening U.S. dollar have led the retailer scrambling to attract customers.

U.S. consumers have remained cautious in their spending, and when they do shop, they've found alternative channels to patronize. E-commerce has become even more of a threat to bricks-and-mortar retailers, and some estimates show online sales surging as much as 20% this past Christmas, outpacing the retail industry as a whole. Even Macy's saw a 25% increase in revenues in its online channel.

But the department store chain was also hit by the dollar's rising value against foreign currencies, which makes it less attractive for tourists to purchase U.S. goods. Macy's, more so than rivals Kohl's and J.C. Penney, relies heavily on tourists, who account for about 5% of its sales.

It's also been threatened by the success of discount chains like T.J. Maxx and Marshall's that's led it to haphazardly launch its own off-price store called Backstage.

When Starboard Value reiterated its call this week for the retailer to do something, it favorably noted Macy's management was already "actively exploring" proposals it has recommended. Macy's previously rejected the hedge fund's call to spin off its properties to a REIT, stating it would not create much value for shareholders. Fast-food giant McDonald's similarly rejected a call by activist investors who have pushed the restaurant operator to create a REIT.

Risky business
One of the risks of Macy's using its real estate portfolio to infuse its balance sheet with cash is that it turns an asset into a liability, which increases its costs and restricts its ability to finance its needs.

Unfortunately, pursuing strategies that result in just a short-term boost to earnings without addressing the underlying causes of why its profits were depressed to begin with only ensures that Macy's will eventually be back where it began, looking once more for help from alchemists like Starboard Value to transform a leaden business into gold.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.