Macy’s CEO Terry Lundgren Faces Several Different Threats by Geoff Colvin @FortuneMagazine January 12, 2016, 11:06 AM EDT E-mail Tweet Facebook Linkedin Share icons What’s a leader supposed to do in a position like Terry Lundgren’s? He’s the CEO of Macy’s m and a hero of retailing in his nearly 13 years running the company. He expanded the company, 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. Sign up for Power Sheet, Fortune’s daily morning newsletter on leaders and leadership. 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.