With nothing more than a passing glance, Macy’s (NYSE: M) the shareholders are delighted with the idea. âUnlocking valueâ ultimately means that investors’ stakes will be worth more after the retailer’s online and offline business is separated, so by all means go ahead with the idea.
As the old saying goes, however, there is no free lunch on Wall Street. Everything costs something, in a way. In this case, the cost to Macy’s and its shareholders would be returning only to a physical business that was struggling before the company brilliantly linked it to an incredibly impressive e-commerce operation. In other words, maybe the department store chain shouldn’t be so quick to do what it increasingly seems to want to do.
On the chopping block, maybe
If you’re reading this and you don’t know it yet, Macy’s would be considering the idea of ââparting with its online business.
Activist investor group Jana Partners broached the idea in early October, and although the company had initially been repeating what it said for some time now – it was not interested in doing so – that could change. The the Wall Street newspaper reported last week that Macy’s hired AlixPartners to help weigh the pros and cons of selling its e-commerce business.
Notably, AlixPartners has already helped Saks Fifth Avenue divest itself of its online business. The crux of the argument is that the market values ââsuccessful e-commerce businesses at a high price. Jana believes Macy’s e-commerce site and operations could be worth in the order of $ 14 billion.
Framed in these terms, a spin-off is a wise move. It’s also short-sighted, however.
A winning formula has already been found
Of course, a split can very well âunlock valueâ. He might as well destroy it.
The argument takes a bit of water. Macy’s e-commerce efforts are paying off. Online sales grew a further 19% from a year ago in the previous quarter and 49% from the third quarter before the 2019 pandemic. In total, around a third of the company’s revenue is now generated online. The retailer also just announced that it will add third-party vendors to its e-commerce platform, expanding the network that brings people into the company’s digital ecosystem.
Getting rid of all the shebang theoretically wouldn’t change the results you get online or in stores, but it would add a nice chunk of capital to the company’s coffers. This would make it clearer to shareholders where Macy’s strengths and weaknesses lie. This unknown may keep a lid on the price of Macy’s shares.
Except that this way of thinking ignores a key nuance of a company’s online and offline operations: that is, when run in tandem, they support each other.
The evidence for this argument is incidental, but it is plentiful.
Take, for example, the comments made by CFO Adrian Mitchell earlier this year. During the department store chain’s fourth quarter earnings call, Mitchell noted:
We know that Macy’s per capita digital sales are two to three times higher in the markets [where] we have Macy’s stores. Conversely, from our store closings over the past five years, we have also observed that the digital sales growth rate drops significantly when we close a store in a multi-store market and significantly when we come out of a one-storey market.
The CFO sums up the premise by saying, âStores provide the essential nodes to our digital customersâ.
And other data underscores this idea. While without offering a ton of details, then CFO Paula Price explained early last year that not only are in-store pickups saving the company money on shipping costs, but these pickup customers spend about 25% more once they walk into a store to pick up their order online.
The most notable thing about Macy’s e-commerce operations, however, is that they are taken care of by the company’s stores. Even with plenty of time to adjust to the new normal in a world shattered by the coronavirus contagion, around a quarter of last quarter’s online orders were still fulfilled by its stores.
Connect the dots
None of this suggests that a purely physical Macy’s couldn’t coordinate with a new owner of its online operation. In fact, given the strength of the Macy’s brand, the new owners of its online shopping platform would like to continue working well with the iconic company.
Ultimately, however, the split of the two entities risks not only breaking the successful omnichannel cross-selling machine that Macy’s has crafted over the years, but it paves the way for competition between two players with the same name. When the proverbial push comes to pushing, for-profit companies tend to think of themselves first. Such development alienates customers, which is the last thing anyone wants.
Sometimes the best decision is just to leave it alone and recognize that sweet words like âunlocking valueâ don’t necessarily come about with the bigger, long-term picture in mind.
This article represents the opinion of the author, who may disagree with the âofficialâ recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.