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Macy’s E-Commerce Is Getting Investor Attention. What Would a Spinoff Mean?

Macy’s Inc. is embroiled in an activist-investor maelstrom—but many analysts see little value in going down what they believe would be an “operationally difficult” road. Others, however, aren’t so quick to dismiss what many see as a clever bit of financial engineering.

Earlier this month already, Jana Partners fired off a missive to Macy’s after grabbing a stake in the department-store company, the owner of Bloomingdale’s and Bluemercury plus its namesake nameplate. The New York City hedge fund, which has similarly agitated for change at Apple, Safeway, Walgreens, Tiffany’s and Whole Foods, seemingly wants the storied retailer to steal a page from Saks’ book and unlock the rising value in its fast-growing digital business, which some have interpreted as a call to decouple e-commerce from the asset-laden brick-and-mortar operation.

The industry’s consensus opinion, however, seems to be broadly aligned against abandoning a proven symbiosis of an omnichannel strategy. Some are also concerned that activists distract management from the day-to-day business of running the company.

What analysts are saying

Kimberly C. Greenberger broadly panned the spinoff idea.

“In our view, a potential separation appears operationally difficult and an e-commerce business spin-off may not be the right strategy for long-term value creation,” the Morgan Stanley analyst wrote in a research note Tuesday.

Separating physical from digital not only would be difficult but also layer in additional costs and “stand in contrast with the vision Macy’s laid out in its Polaris strategy,” she added.

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Beyond Macy’s management routinely reiterating omnichannel’s critical role in creating long-term value creation, the retailer has been steadily integrating and managing inventory across channels to maximize revenue and minimize markdowns by reducing stranded inventory, Greenberger pointed out. Moreover, the retailer’s channel-agnostic approach to servicing customers enhances service levels and lowers costs. Vendor direct initiatives expand the company’s revenue and profit opportunity without additional risk since suppliers own and manage the inventory.

What’s more, there appears to be a notable correlation between digital sales and store closures, Greenberger said, noting that e-commerce growth dips when a local store goes dark. “This means the stores business is intertwined with the ultimate realizable value of the e-commerce business and vice versa. Legally separating the businesses strikes us as fraught with difficulty given the inter-dependence. Lastly, Macy’s omni-channel shoppers spend 2.5-3.5 times more than a single-channel shopper, making them the most valuable customer cohort,” she said.

“All in all, we do not see an outcome where separating stores from e-commerce would not potentially jeopardize both businesses’ growth potential, impede seamless cross-channel customer service, and add layers of costs,” Greenberger said.

Walter Loeb, a former retail executive and now retail consultant, echoed the Morgan Stanley analyst’s concern. A one-time principal at the investment bank, he believes in having one set of buyers responsible for inventory across channels, which supports a unified branding message and merchandise offering, with stores serving as “beacons for the banner.” Prorating sales to the two separate channels runs the risk that stores won’t get credit for digitally originating sales, or force brick-and-mortar closures despite the store’s role in driving traffic across channels. That could be worse for brick-and-mortar operation if the location is a store-owned property, since that would result in accounting requirements calling for an asset write-off.

“I do not see how this would work out well for Macy’s, or even the e-commerce business,” said Loeb, who believes the Saks split should not in and of itself be considered proof of success, which could still be a long way off. Even with operational agreements in place, there will be kinks that crop up and need to be ironed out—and with two CEOs promoting their separate agendas, resolving clashes might not be smooth sailing, Loeb said.

In contrast, Cowen & Co.’s Oliver Chen leaves the door open for the possibility that a split might work out. Though “there have not been many successful long-term proof points,” the retail analyst acknowledged in a report Thursday, a spinoff comes with “significant risks to destabilizing the business and slowing momentum.” The Macy’s customer experience must remain integrated and frictionless, with a cross-channel supply chain and inventory management. With two standalone businesses, customer acquisition could falter and cost-sharing could slip through the cracks.

But if done right, Chen believes digital could take off, and the company might have an easier time attracting top talent who otherwise might not want to associate with an outmoded “legacy” business. What’s more, splitting up could ameliorate stores’ capital intensity.

Chen on Thursday raised his price target for shares of Macy’s from $27.00 to $32.00, based on Macy’s e-commerce valuation opportunity. On Friday, Macy’s board declared a dividend of $0.15 a share. Shares of Macy’s closed Friday’s trading session up 1.2 percent to $26.59.

Chen said the separation could unlock significant value—at least on paper. Applying a 1.0 times sales multiple to the dot-com business in Fiscal Year 2023 would yield a market capitalization of $10.9 billion. That’s above Macy’s current overall low of 8 times price/earnings ratio on $8.2 billion of market capitalization.

Presuming Macy’s continues to see comparable sales momentum driven by better performance across both channels—and tight inventory positions provide strong merchandise margins—the upside would see physical store sales improve while the e-commerce channel remains robust. But in the downside scenario, a deteriorating consumer macro environment would put incremental pressure on comps and margins, while supply chain and logistic issues would be headwinds to inventory and fulfillment costs.

Separating the two businesses will be incredibly challenging, and management would need to “form hundreds of agreements” between stores and dot-com, Chen said.

Macy's E-Commerce Grabs Investor Attention. What
Teen singer-songwriter, Macy Kate, performs at YouTube Studios in New York for Macy’s Summer Vibes digital music festival, which aired June 2, 2016, on youtube.com/macys, as part of Macy’s American Icons campaign. Amy Sussman/AP Images for Macy's

What activists want

So what exactly does Jana want?

As an activist investor, is likely all about the money. With digital sales driving 53 percent of Macy’s business last year, and the retailer on track for $10 billion in online sales by 2023, it’s no wonder an investor would call for e-commerce to spin out and ramp up. And Jana believes that the online business could be worth as much as $14 billion, according to a Bloomberg report.

A spokesman for Macy’s declined comment on Jana’s stake.

Essentially, investors believe that e-commerce could command a higher valuation than if the slower-growing store-heavy company remained intact.

Saks’ plan all along was to launch an initial public offering (IPO) by early next year. By focusing on digital, Saks parent Hudson’s Bay Co. is providing a high-growth story that grabs investor attention and offers an enticing reason to buy IPO shares.  The Wall Street Journal confirmed that Saks is on in talks with IPO underwriters, targeting a $6 billion valuation.

That kind of heady valuation for Saks—now triple what it was in March—is enough to make any investor salivate about potential dollar signs at other retail targets.

“I think that this has nothing to do with what is best for the retailer, the employees of the retailer, or the landlord. This is all about shareholders and unlocking shareholder value,” said Sucharita Kodali, vice president and principal analyst at Forrester Research.

According to Kodali, splitting the company into two components isn’t new. Barnes & Noble separated Nook, the e-book business, from retail into two public companies in 2014, she noted.

This decoupling makes sense when “all you care about is shareholder capitalism,” Kodali said. “But we’re in a world now where it’s not just about shareholders. It’s about the stakeholders and that involves communities, that involves employees, that involves suppliers and the whole end-consumers.”

A corporate divorce basically leaves the struggling brick-and-mortar business to fend for itself. Any company going down this road needs a well-thought out approach to omni-channel sales, as a separation would require smart thinking about how to allocate purchasing and merchandising between the two. In fact, Kodali said that in some cases a company can end up replicating services when each component wants its own human resources staff or finance departments.

“It’s very much about making shareholders wealthier, [but] there are a lot of people that are going to inevitably be left behind,” Kodali said.

Financial engineering can take on many formats.

Sears Holdings stands out as the most notable example. Hedge fund bigwig Edward S. Lampert spun off parts of the company, including Lands’ End, and sold its best real estate holdings to form real estate investment trust Seritage Growth Properties. While Seritage has survived, Sears and Kmart increased their overhead by paying rent to the locations spun off to Seritage. Sears ended up in bankruptcy court, and is now part of Lampert’s Transform Holdings group. The tale of Sears has become the poster child for how financial engineering can lead to ruin for the retail operation. Both Sears and Kmart are locked in slow death spiral marked by store closures.

Activist distraction

Coming off a chaotic 2020, and tasked with re-energizing retail, many companies this year also faced the rise of shareholder activism.

Since January activists have sought to shake up the boards at Genesco, Kohl’s and Chico’s. Both Genesco and Chico’s prevailed, leaving Macellum Advisors’s struggle considered a “success” as the department store retailer ultimately agreed to the investor’s board pick.

Earlier this year, Macellum CEO Jonathan Duskin said he doesn’t actually think of the company as an activist, per se. “We really try to identify companies that are broken and try to figure out a way if we can help them improve—and if we have people in our network that can help us help them improve,” he said during a Retail Marketing Society virtual discussion. The last thing Macellum thinks about, he added, is “how can we first work constructively with the board and try to give what we think the right representation is in the boardroom.”

Meanwhile, Perry Ellis International chairman George Feldenkreis says he “can commiserate with Macy’s because the worst thing that happened in my life was having to deal with activists.” He’s all too familiar with the blocking and tackling required when dealing with demanding investors.

Feldenkreis was executive chairman and CEO of the apparel giant when activist investors sought to disrupt management in 2014. The investors triumphed when company attorneys advised adding new board members, resulting in four new directors augmenting the existing slate, he said. Feldenkreis’s son Oscar ascended to the CEO post a year later. But after just 24 months, the board ousted Feldenkreis as executive chairman. That didn’t end the drama. Feldenkreis mounted a campaign to buy back his company by purchasing shares his family didn’t already own. In the process, he once again battled activists for control of the company—they wanted to diminish the Feldenkreis family’s control—as well as compete against another buyer, Randa Apparel & Accessories.

Feldenkreis still doesn’t know why he was ousted, but believes it had to do with wanting to curtail the family’s influence on running the company. And while the process was painful and time-consuming, the retail veteran said he’s satisfied with the end result. He believes that had the activists succeeded in wresting control from the Feldenkreis family, the move would have destroyed the company and forced it out of its Miami  home base. That would have meant that longtime employees would lose their jobs, not to mention the impact on vendors and the local community. In mid-2018, Perry Ellis agreed to go private in a $437 million deal led by Feldenkreis.

Feldenkreis said he’s “very friendly” with Macy’s CEO Jeff Gennette, “one of the nicest people” he knows. “I wish him the very best,” he said.

Addressing the fallout from a potential Macy’s split, Feldenkreis said from a vendor point of view he’s concerned that the emphasis on digital would mean a lack of investment in the store base—and he doesn’t believe in giving up on stores.

“To say that the store business is dead is not really the rule. It’s not correct,” he said. Speaking about some of the stores the company manages for its brands, Feldenkreis said half are now performing better than in 2019. He sees stores and e-commerce as having a symbiotic relationship, with e-commerce supporting the store base and stores leading with marketing and showcasing the brand image. That’s why he isn’t sure splitting up makes sense.

Macy’s has faced activist shareholders before. The retailer in 2015 was the target of activist Starboard Value LP, which wanted to divide the retailer from its real-estate holdings. Starboard CEO Jeff Smith had valued the retailer’s real estate at $21 billion at the time. Starboard eventually threw in the proverbial towel, selling its entire stake in Macy’s by March 2017.