Activist hopes to split Macy’s digital biz but experts raise red flags
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Macy’s Herald Square Flagship Department Store, Midtown Manhattan New York.
Nicolas Economou | NurPhoto | Getty Images
A activist investor presses Macy’sTo unlock the potential value in 162-year old department store chain, it decided to separate its digital operations and its stores.
It may seem appealing in the short-term, but experts raise concerns over the long-term logic.
Shareholder of the activist Jana PartnersThe company hopes to take advantage of a growing digital retailer market that has driven valuations higher. Because tech-focused companies are more likely to grow than traditional department stores, investors have been overwhelmingly in favor of them. The sales growth of the former has been accelerated by consumers buying more products online. Mytheresa, Zalando and other e-commerce-savvy retailers are considered assets because they don’t have many stores. Management can invest in marketing and other business areas.
Michael Kollender from Stifel, Head of Consumer and Retail Investment Banking at Stifel said that the market was willing to pay a large multiple for an ecommerce-oriented company. How do we unlock this value?”
Macy’s may allow for a separation. a similar move earlier this year by the luxury department store chain Saks Fifth Avenue. Saks’s retail outlets are owned entirely by Hudson’s Bay Group, a Canadian retailer. However, Saks’ digital division received an investment by venture capital firm Insight Partners. This means that Insight Partners now holds a minor share of the company. Marc Metrick is the chief executive officer for the digital business.
Despite the fact that they are financially separate, their customers won’t notice any changes because it is one seamless experience.
Jana eyes sky-high valuation
According to Jana’s investor presentation, Macy’s online business could achieve a minimum $15 billion market cap. This is roughly double the value of the company before the news about its possible breakup. Macy’s stock gained 18% over the past year, according to Bloomberg. reported on Oct. 6 that Jana was calling for a digital spinoff
The fact that Macy’s ecommerce business continues to grow despite shrinking revenue is pushing that valuation up. The digital sales rose 7.7% in 2019, and by 23.7% for 2020. Macy’s overall revenue decreased by 1.6%, and 29%, in the same time period.
The rapid rise of ecommerce has also fueled the growth of many other online retailers. Fashion companies are huge Revolve GroupTrades at 6.5 times expected 2021 revenues FarfetchAnother online platform for luxury fashion is. Macy’s trading at an average of 0.3-times the expected 2021 sales.
Saks’ digital division is said to be aiming for public disclosure just three months after the official separation. with a valuation of $6 billionIt is roughly six times the revenue. As recently as March, it was valued at $2 billion.
HBC representatives declined to comment.
One calls it “insane finance engineering”
However, experts disagree with the design.
David Shiffman (co-head of Solomon Partners’ global consumer retail division) said, “It is insane financial engineering.” It’s difficult to distinguish the two. While I don’t deny that anyone will try, I also do not believe that everyone is going to be willing to spend a lot to get it done. However, eventually it won’t work.”
He explained that one retail company can’t make all the money and the other has to keep all of the assets.
Saks Fifth Avenue is exited by a shopper in New York.
Bloomberg | Bloomberg | Getty Images
Saks has organized its stores so that affiliate fees are paid to the store segment. This is in addition to online sales, and other benefits associated with having a physical location. Saks.com, in contrast, used the extra capital it had to make investments in website improvements and to market to its customers.
Steve Dennis, former Neiman Marcus senior vice president and retail strategist said that this goes against all we have learned. “It all comes down to these absurd valuations that are being attributed online-only companies.”
Dennis mentioned brands like Warby ParkerAllbirds began its journey on the internet in an initial stage. are now plotting massive store expansionsThe following is the list. Companies claim that having more shops will increase awareness of brands and improve profits.
Dennis stated, “There is no doubt that Saks.com would require stores if it were an independent company.”
Dennis believes that digital fashion companies could see a slowdown soon. They have seen a lot of success during the recent pandemic due to consumers being at home, surfing the net from the sofa, and thereby benefited from it. Although wealthier consumers tend to have more cash in their accounts, that may change as they start shifting spending towards travel, dining out, and other experiences. He said that this wouldn’t be good news for standalone ecommerce businesses.
Dennis commented, “It’s difficult not to see why online fashion doesn’t face significant headwinds going forward,” Dennis said, “There’s a lot of unnatural e-commerce and a dead cat bounce in your numbers.”
However, that doesn’t mean e-commerce won’t continue growing. He said that the growth rates will moderate but not stop growing.
Macy’s touts its’retail ecosystem’
Macy’s refused to comment before its fiscal third-quarter earnings reports. In August, though, Chief Executive Jeff Gennette touted on an earnings conference call that the department store chain was running a “fully integrated business,” between its roughly 800 stores — including Bloomingdale’s — and website.
He stated that “our commitment to providing a seamless, dynamic omnichannel experience for customers across their shopping journeys has never been greater.” I believe that the combination of a strong retail ecosystem, with stores located in high-quality malls and productive off-mall areas combined with an excellent e-commerce platform is very powerful.
Macy’s previously stated that its customers who shop at both stores and on the website are likely to spend between two and three-quarters and three-quarters as much than those who purchase only from one of their channels. Macy’s also claims that it notices an increase in ecommerce sales when it closes department stores.
Some stores also fulfill other functions, like being a fulfillment center for online orders. Macy’s reported that 24% of digital orders in its fiscal second quarter were filled by Macy’s stores.
While a possible separation might provide a short-term lift to Macy’s stock price, it may cause additional headaches down the line.
GlobalData Retail’s Managing Director Neil Saunders stated that this raises a lot of operational questions about how loyalty programs, brand, product development and marketing would work. The potential for confusion and miscommunication is high, especially when the different companies wish to diversify over time.
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