Power Sheet – January 12, 2015

What’s a leader supposed to do in a position like Terry Lundgren’s? He’s the CEO of Macy’s and a hero of retailing in his nearly 13 years running the company. He expanded it, led it successfully through the financial crisis, and showed that big department stores could thrive in the era of discounters and e-tailing. As of just six months ago his performance absolutely thrashed the S&P, beating it during his tenure by hundreds of percentage points. Not bad at a 158-year-old company.

Macy’s stock price has plunged by almost half since last July, and now an activist investor, the Starboard Value Fund’s Jeff Smith, is publicly urging Lundgren to sell “a substantial minority interest” in the company’s massive real estate portfolio. Smith bases his case on a troubling fact: All that real estate, he estimates based on the opinions of real estate experts he has hired, is worth about $21 billion. But Macy’s total enterprise value – the market value of all the stock plus the value of all the debt – is only about $19 billion. The market seems to be telling Lundgren that his business is worthless.

It gets worse. Macy’s includes a valuable credit card business. Smith calculates that if you subtract its value, then the market is valuing the actual retail operations of Macy’s at -$10.4 billion.

What could possibly explain such a mind-bending result? One possibility is that investors were simply clueless about the immense value of the company’s real estate. But that seems unlikely – Macy’s is a big, well-researched company – and in any case, the release of Smith’s analysis has nudged the stock up only a bit.

Could investors really think the underlying business is as terrible as the analysis implies? That also seems unlikely. The company is very profitable by any measure.

So what do you do in Lundgren’s position? Probably you do what he’s doing: Engaging Smith, listening to his proposals and looking at his slides, calling in real estate experts to advise on ways to realize value from the portfolio, closing stores and cutting jobs in order to reduce costs.

Then you hope that rationality somehow returns to the market. And you remain confident that the other possible explanation of the apparent craziness in the company’s valuation – that investors have lost all confidence in the future of bricks-and-mortar retailing – isn’t correct. Even after the steep sell-off in Macy’s stock, Lundgren’s record still beats the S&P. But retailing, like many industries, is in uncharted territory.

You can share Power Sheet with friends and followers here.

What We're Reading Today

Sanders' fans worry Clinton

Democratic front-runner Hillary Clinton has grown nervous in Iowa over the strong support voters are showing Sen. Bernie Sanders. The trend recalls how Barack Obama energized the base to beat Clinton in 2008. Clinton now backs raising the income tax on the wealthy by four percentage points, similar to what Sanders has already proposed. NYT

VW CEO: "We didn't lie."

In an interview with NPR, CEO Matthias Müller initially claimed the software used to trick regulators was an engineering solution to meet environmental standards. Müller's PR team quickly requested a do-over; on the second try, Müller said Volkswagen accepts "the violation." His slip-up may provide insight into the company's internal beliefs, indicating that bigger cultural issues persist within the organization. Coins2Day

Can Dov Charney make a return?

The embattled founder of American Apparel, who was ousted in 2014 after a series of harassment lawsuits, bad press, and poor performance, wants to buy the company, which filed for bankruptcy in October. Charney has raised $300 million. A deal would have to be signed by Jan. 20, the day the company will finalize a bankruptcy plan. Fast Company

Discovery Communications' sports play

The creators of "Shark Week" in the U.S. Are vying to become a sports leader in Europe. For CEO David Zaslav, it's a bet based on vastly different economics: Filming sharks is cheap; sports are not. Discovery will pay $1.4 billion for European broadcast rights to the Olympics for eight years beginning in 2018 and is bought the Eurosport TV network. If Zaslav can turn Eurosports's programming from second-tier games to top-tier, then the financials "are compelling," he says. WSJ

Building a Better Leader

Developing a growth mindset in a child...

...doesn't mean providing empty praise. Instead it's about teaching and persistence, according to the professor who coined the term "growth mindset." Quartz

To become a leader at your company...

…you don't have to mimic the boss's style. Create positive change, and it won't matter how you do it. Coins2Day

Expect some thinning of the unicorn herd

Many of the highly valued startups possess neither the profitability nor the prospects to justify their status. Knowledge@Wharton

United We Stand

Drug companies join together on cancer

Companies including Amgen and Celgene will begin working cooperatively on quickly testing combinations of cancer drugs. Creation of the National Immunotherapy Coalition was led by billionaire entrepreneur Dr. Patrick Soon-Shiong, based on new findings that combinations of drugs could boost the immune system to fight off cancer. NYT

Car makers unite over safety rules

The U.S. Government and a group of global carmakers are set to sign an agreement on Friday intended to improve auto safety and security. Last year set a record for safety-related fines, recalls, and investigations. The agreement would improve efforts to heighten cyber security within vehicles and devise early warning systems to spot bigger problems. Critics note that the commitments are voluntary, not legally binding. Mary Barra's GM, Mark Fields's Ford, and Sergio Marchionne's Fiat Chrysler are all in talks to sign the agreement. Reuters

Public sector unions face serious fate

The Supreme Court heard arguments yesterday in a case over public-sector unions' right to collect dues from non-member employees while negotiating labor contracts. The justices seem set to disallow the practice, with Justice Anthony Kennedy questioning its legitimacy in light of free speech rights. A loss in the case would be a major blow to public unions' ability to raise funds during labor disputes. NBC News

Up or Out

Biotech company Celgene has promoted president and chief operating officer Mark Alles to CEO, effective March 1. Current CEO Bob Hugin will become executive chairman. Financial Times

EMC has hired ML Krakauer as CIO. WSJ