Last week, Macy’s put on its boxing gloves.

In a call with analysts after the department store operator reported strong fourth-quarter sales, chief executive Jeffrey Gennette told analysts that a plan to split its retail and e-commerce business was not in Macy’s best interest.

“In every alternative scenario we considered, the execution risk for the business and our customers was too high,” he said.

Gennette’s measured words amounted to an unambiguous rejection of Jana Partners, an investment firm that had made the proposal to divide Macy’s up after taking a stake in the company in October. But the remarks were also the latest clash in a “knife fight with Wall Street,” as CNN categorised it.

Fashion retailers have become one of the favourite targets of activist investors, hedge funds like Jana Partners that buy shares in a company, then aggressively push for changes ranging from a new CEO to selling assets or even the entire firm. Retail is full of companies that have struggled for years to adapt to e-commerce and other sweeping changes, and whose investors are open to newcomers looking to shake things up.

It was an activist investor that first pushed L Brands to split Victoria’s Secret from Bath and Body Works in 2019 (the companies split in August 2021). An activist investor in 2020 pressured Hugo Boss into a strategy overhaul, which led to the appointment of a new chief executive and the rebrand that’s currently underway.

More recently, activist investors have been circling department stores. Jana Partners was pressuring Macy’s after Saks Fifth Avenue split its digital and retail business. Macellum has been advocating for Kohl’s to find a buyer. Earlier this year, Legion Partners called for Guess to remove founders Paul Marciano and Maurice Marciano.

The arrival of an activist investor can cause the target’s stock to soar, as these shareholders typically prioritise moves that will quickly juice revenue, or provide a windfall of cash. But they can also trigger unpredictable battles over a company’s future, which can drag on for months or even years.

“As a retailer, you think, ‘oh my god, we’ve got activist investors, everyone to the trenches,’” said Lee Peterson, a consultant with WD Partners and former executive at The Limited, then part of L Brands, in the 1980s. “It’s acrimonious.”

Brands eye these investors suspiciously. Their presence implies painful changes, including restructuring and layoffs that could include senior executives and board members. But activist investors can also help a brand execute a pivot they might not have the vision or the risk appetite to pull off on their own.

Fashion’s Activists

Activist investors target every industry, from oil to tech to food. But retail is a particularly ripe target. Well-known names such as Macy’s and Kohl’s trade have struggled to rebound from years of declining sales and waning consumer interest.

Their problems may not be easy to solve, but it’s relatively straightforward for an activist to make the case that a radical course correction is needed.

“They can sway public opinion and the opinion of other investors,” said Thomaï Serdari, a luxury and branding strategist and professor at NYU Stern School of Business. “They are trying to target the advisory board, but they are also influencing analysts, and can change the path of a company in the public market.”

Activist inventors seize on anything negative happening at a company to make their case, supplemented with their own research and ideas. In its letter to L Brands in 2019, Barington Capital Group railed against Victoria’s Secret’s outdated and hyper-sexualised marketing, but also lambasted the company for not competing with Lululemon in the activewear category. In a letter to the Kohl’s board in January, Macellum Advisors accused Kohl’s of relying on casual clothes when shoppers were more interested in going out.

Legion Partners bought Guess stock last year because it saw potential for the brand to thrive under chief executive Carlos Alberini, said Legion Partners managing director Ted White. But the firm said the continued involvement of Paul Marciano, who multiple women have accused of sexual misconduct, is a “reputational and moral risk.” It also argued that settlements paid to Marciano’s accusers could weigh on the company’s finances.

“We are deeply concerned that … the Marciano family exercises far too much influence over the board and company,” said White.

In a Feb. 8 statement, Guess said it “is today supported by a strong balance sheet and solid cash flow generation to propel our growth, while also returning cash to shareholders.” Regarding misconduct allegations against Marciano, Guess wrote that it “has strongly refuted these claims and is contesting them vigorously.”

Guess declined to comment to BoF.

Friend or Foe?

Activist investor groups like Legion Partners say they push for changes that will benefit a company in the long run. In recent years, some funds have taken stakes in companies to push them to operate more sustainably, for example.

The strategy has plenty of critics, however, who argue that these firms are looking for short-term wins that can leave a company ill-equipped to succeed in the long run.

“They want a quick turn-around, which could work for two years, but can also kill a brand,” said Serdari. “They are looking for the best return on investment, and what will benefit their investors. Their intentions are not always so noble. They have their own agenda.”

Funds that target an oil company one day and a packaged food maker the next may not grasp the nuances of the fashion business. Sears’ business collapsed under the stewardship of activist investor Eddie Lampert.

Bill Ackman convinced J.C. Penney to replace its CEO with Apple executive Ron Johnson in 2011. Johnson tried to update the department store’s image and reduce discounting, alienating loyal customers. Roughly two years later, the company’s board of directors — Ackman among them — fired Johnson.

And in 2017, activist investors tried to force Ugg-owner Deckers to sell its Hoka, Sanuk and Teva businesses. The company won that fight, and eventually found viral success with its “ugly shoes.” Shares have more than doubled since the end of 2017.

“There’s an art and a science to doing fashion retail right,” said Petersen. “The art part … is hard and you are never going to get that with venture capital.”

The push for retailers to split their e-commerce and store businesses has reignited the debate over activist investors. In October, Cowen analyst Oliver Chen wrote that spinning off Macy’s e-commerce could “unlock significant value” while Steve Dennis, a retail consultant and former senior vice president at Neiman Marcus told BoF that the move would be “crazy and nonsensical.”

Christopher Kiper, managing director at Legion Partners, acknowledged that fashion tends to fear and distrust activist investors, but maintained that firms like Legion Partners are there to help.

“One of our goals when engaging a company is to leave it in better shape to perform sustainably better for the long-term even after we exit,” Legion Partners’ White added.

Ultimately, brands aren’t obligated to buy into activists’ ideas, but they should be open to hearing what they have to say, said Joel Bines, a managing director with AlixPartners.

“The reaction most boardrooms have, that these activist investors are awful people sending nasty letters is not constructive and it also won’t make them go away,” said Bines. “Get in a room and listen to each other.”

Editor’s Note: This story was updated on Friday, March 4 at 9:30 AM to clarify that Jana Partners was not involved in the split of Saks e-commerce and its retail business.