As Macy’sThe company will release third quarter results on Nov. 18. This is ahead of Retail’s most important season. One of the pressing questions for investors will be: Does Macy have the ability to start a successful dot-com venture within an existing brick-and-mortar foundation?

Macy’s has stated that its digital sales will reach $10 billion by 2023. This is an increase of $7.6 billion from 2020. But given that Macy’s dotcom sales have been outpacing same-store revenues for years — and that the company operates 788 stores across its portfolio — begs another question: Is Macy’s current management team, led by the “quintessential department store executive,” as one retail investor recently characterized Macy’s CEO Jeff Gennette, the best choice for leading the nation’s largest legacy department store into the new era of retail that is increasingly sophisticated, digital and dominated by digitally-native competitors like Amazon?

Since October when Jana Partners, an activist investor in Macy’s, suggested that investors should be aware of these questions through a presentation Macy’s could boost its valuationIt spun off its ecommerce business. Jana’s track record of encouraging big retailers to streamline operations was evident when it took an ownership stake in Macy’s. soon after that presentation urged the company’s boardIn a letter, Macy’s digital arm was suggested to be worth approximately $14 billion. This is roughly double the current value of Macy’s.

Macy’s refused to comment before earnings.

Jana Partners will not comment on Macy’s stake, however, a source familiar with the matter said that Macy’s was being asked to consider whether it would pursue the offer. same strategy followed by Saks Fifth Avenuein bringing an investor into its dotcom business to speed its growth, emphasize its value and better position the company to attract top tech talent. This last point was underscored twice recently at Saks, first when a former Amazon exec joined The board of the new Saks.com — which is reportedly readying its initial public offering — and then over the summer, when another former Amazon executive took the COO role at the new standalone Saks Off 5^th e-commerce company.

Bernadette Nixon CEO, Algolia Technology, which helps retailers improve their online e-commerce, stated that companies will learn from others. Nixon believes that there will be a lot of cross-industry talent in senior tech leadership. “At the end of the day, we’re in a digital world and Amazon is setting the bar, not Lord & Taylor, Saks, or Macy’s,” she said.

Gennette was appointed to CEO in 2017, tasked then with fixing the waning department store model which was losing ground to Amazon and purveyors of cheap fast fashion. Gennette started working at Macy’s as an intern in 1983. He was also a graduate of Stanford University. According to Wall Street Journal, Gennette rose through Macy’s ranks as a merchandising professional and store operator. He made it his goal to bring entertainment and attract millennial customers into Macy’s stores when he was appointed CEO.

He believes that the future retail landscape will be more than digital because he has spent three decades at the same heritage department store.

Gennette stated that “It’s obvious that a comprehensive retailer ecosystem, with physical shops in the top malls and productive off-mall areas combined with the best-in class e-commerce offerings is a powerful combination” during Macy’s August 19 earnings conference call.

Macy’s stock is now up 34% from Jana Partners’ first suggestion of a spinoff. However, Wall Street has never loved Gennette because he views him as a brick-and mortar guy.

Morningstar Research’s equity analyst David Swartz stated that Macy’s online retail business does not get the recognition it deserves. It’s the nation’s largest online retailer, and the valuation of that company hasn’t always been accurate.

Swartz claims that Macy’s online improvements are effective, even though they don’t address the overall problem of lower Macy’s sales. A turnaround plan was announced by the retailer in February 2020. It included closing 125 of the lowest performing stores and upgrading 100 more. The company also invested heavily in its digital business to accelerate its growth.

Gennette stated that 40% of the 5 million customers who came into Macy’s in the second quarter came from Macy’s online. In an effort to capitalize on its most valuable customers — those who shop at Macy’s both in-person and online tend to spend three times more than those who only shop at one or the other — Macy’s has invested in data analytics so it can follow when and what they shop, then tailor incentive programs and product messaging to them.

Macy’s also uses social media and digital marketing to drive customers to its stores. However, analysts warn that there is still too many.

“The retail landscape has been changing at a slow rate and the pandemic sped it up — there were way too many stores in the U.S.,” says Jessica Ramirez, a retail research analyst with Jane Hali and Associates. The Macy’s square footage was absurd. There is still an excitement in apparel and people will go to stores. You just have to offer something that will entice them.

Analysts say brick-and mortar stores will become channels for brand promotion in the future retail. Lee Peterson, executive vice-president at WD Partners (a retail consulting firm), says, “You still have people that grew up in late 1980s or 1990s managing large companies with physical assets. That idea of a physical shop being a profit center is no longer true.” It is time to shift the mentality to physical being all about brand while online is more about purchase. How can I make it a desire to visit a departmental store?

Innovation is required to make Macy’s stores a destination. Ramirez notes that Macy’s doesn’t have the reputation of being a high-end fashion brand like Nordstrom. It is trying to boost its trendsiness and build out private label brands in all segments. Oak, an eco-conscious line of textiles and home products is currently being launched by the company. Macy’s has also partnered with Toys R Us to exploit toy sales, a sector that bloomed during the pandemic and brought in new customers — millennial parents — many who came for toys then who went on to buy higher-margin goods, Gennette said on the call.

Although analysts don’t believe that Macy’s will be able to grow long-term, there are many benefits to Macy’s allowing customers access to its shops to purchase or return items purchased online. Target and Walmart have successfully used the concept of physical stores to provide curbside pickup for their pandemic items. Amazon is likely considering opening brick-and mortar department stores. “It makes sense why Amazon wants to open stores—they’re getting inventory closer to their customers,” says Ramirez. It’s the last mile everyone fights for.

Pent-up customer demand to return to stores in person post-pandemic was a big factor in Macy’s stellar second quarter results — net sales rose 58.7% year over year to $5.6 billion and comparable sales were up 61.2%. Morningstar projects an operating margin at 7%, based on 36% growth in sales for 2021. This would mark Macy’s best performance since 2015. Swartz believes that these margins may not be sustainable in the long-term, but he does not believe Macys.com should be spun off.

“This idea of splitting these businesses up goes contrary to integrating the physical stores with the dot com stores — the industry is changing in a way that there’s almost no line between those two businesses anymore,” he says. Macy’s entire strategy is to boost both stores and to reduce shipping and fulfillment costs.

Others are skeptical about the viability of Macy’s separation of its two business streams. This is especially true in an environment that may see some overvalued digital companies. James Hoopes is the Murata Professor in Ethics and Business at Babson College. He says that activist investors are often engaged in financial engineering, but don’t think about shareholders. “Activist investors can sometimes unlock wealth, and sometimes destroy wealth.”

Against the backdrop of extravagant valuations for digital businesses — only a few months after being separated financially from Saks, Saks.com is supposedly preparing for its IPO with media reports of a potential $6 billion valuation — Macy’s rapidly-growing e-commerce segment is undoubtedly attractive for impatient investors. Gennette’s guidance, Macy’s digital sales grew 7.7% and 23.7% respectively in 2019, but investors worry that this could lead to a decline in physical sales.

Investors are wondering whether Macy’s huge department store network is a hindrance to its ability to pivot into a model that allows its brick-and mortar entities to better support its dot.com customers. A retail investor said that Gennette would be the most successful person in this pivot if he was a brick-and mortar guy. This would send a powerful message.