Svea Herbst Bayliss & Anirban Sen

(Reuters) – Macy’s Inc. (NYSE:) is trying out ways to separate its e-commerce operation from its existing customers. This includes retaining those who rely upon Macy’s department stores for returns or pick-up of online-purchased items.

After Jana Partners had urged the retailer to split its e-commerce division, 163 year-old AlixPartners was asked to examine its business structure.

According to the activist hedge-fund, Macy’s market capitalization is about $8 billion. The e-commerce company could generate $14 billion in its own right.

AlixPartners advised HBC (the owner of Saks Fifth Avenue) on its separation from its department store stores earlier in the year.

Sources said that Macy’s considers a similar separation more difficult because of the large number of stores it has and the reliance it places on its customers online.

Macy’s boasts nearly 800 locations. According to Macy’s, online sales in certain regions are up to two-to three times more than the local stores. This is due to the ease of customers picking up or returning products at their stores.

Saks has just 40 stores and its e-commerce company generates less than $1 million annually. Morningstar analysts believe that Macy’s online sales will exceed $8 billion.

The online Macy’s business must have an extensive contract with the retailer that holds the department stores. According to sources, they would need to oversee everything, from merchandise storage and distribution to marketing and promotions, to ensure Macy’s customers have seamless experiences in-store as well as online.

The agreements need to be durable as the store holding company shrinks and closes down stores that are vital for e-commerce, according to sources.

Cowen analysts stated in a note that “the introduction of multiple service agreements to compensate shops would likely lower profitability.”

Macy’s declined to comment on requests.

According to sources, duplications of tasks, like administration or logistics, will increase the cost.

Macy’s is moving in the opposite direction. It launched its “Polaris(NYSE:)” strategy last year. This plan, which aims to reduce annual costs by $1.5 billion through synergies between brick-and mortar retail and e-commerce, has already seen $1.5 Billion in cost savings.

Jana sent a October letter to Macy’s suggesting that separation could result in an infusion of cash into the online business. This would allow for top-quality talent to be hired and new technology investment. Saks received a 500 million investment by Insight Venture Partners for $2 billion.

Sources claim that the Macy’s review will also investigate this possibility.

Guy Phillips, managing director at NuOrion advisors (a Macy’s shareholder) stated, “Our goal is to light an fire under this company, that has an amazing brand.” He also pushed for changes to the company.

Macy’s did not provide a time frame for the completion of its business review.

Jana commended Macy’s move to start the review. But, Jana has not dismissed the possibility of a challenge by the company’s board. Should the review fail to make sufficient progress, the board will have an opportunity to nominate new directors.

FACTORY PASSING ON COSTS OVER TO CUSTOMERS

Macy’s isn’t the only one who has called for a split. Starboard Value LP, an activist hedge fund, demanded it sell its real property and lease it back to Macy’s six years ago. Brookfield Asset Management has been able to help it reduce its property portfolio.

Recent sales gains in department stores reflect the American trend to spend big on dresses, perfumes, and formal wear after the COVID-19 Pandemic Lockdowns. Their profitability is being affected by shipping delays, shortages of labor and inflationary pressure.

Macy’s is doing better than many retailers because it can pass some of its additional costs onto customers. The company’s share price is up by 143%, while the retailing index has seen an 18% increase.

Macy’s announced last month that they expect a 1 percent increase in gross margins relative to pre-pandemic 2019. The company also improved its profits outlook and full-year sales. It expects total sales for 2019 to be between $24.12 and $24.28 trillion, as opposed to the $23.55 billion and $23.95 billion it had previously.