Macy's (M 4.92%) has come under pressure from activist investors this fall, contributing to a roughly 50% gain for Macy's stock over the past two months.
Jana Partners led the way, recommending that Macy's spin off its e-commerce business to achieve a higher valuation. This month, NuOrion Advisors made a similar demand, while also arguing that the company should start accepting cryptocurrency payments and aggressively pursue partnerships with electric vehicle (EV) companies.
In short, activist investors want the department store giant to engage in a variety of gimmicks. The goal, it seems, is to turn Macy's into a meme stock to quickly drive the share price higher. But despite the stock's big gains this year, Macy's is unlikely to become a meme stock -- nor should it try.
Activists come for Macy's
Last month, Jana Partners revealed a stake in Macy's and urged the company to spin off its e-commerce business as a separate company. The activist investment firm noted that Saks Fifth Avenue sold a stake in its e-commerce unit for $2 billion -- approximately two times sales -- earlier this year. At a similar valuation, Macy's e-commerce business would be worth around $14 billion.
The Saks e-commerce unit recently started planning to go public at a stunning $6 billion valuation. That news sent Macy's stock soaring last month, as it boosts the implied value of Macy's e-commerce operations.
Image source: Macy's.
Earlier this month, NuOrion Advisors backed Jana Partners' proposal, noting the intense interest in Saks' e-commerce unit from private equity firms. NuOrion added, "Macy's should form partnerships with EV car companies ... to showcase their products on the ground floor of Macy's 100 top landmark stores ... and to use their massive parking footprint to build an EV charging network." Finally, NuOrion said Macy's should immediately partner with crypto platforms to begin accepting cryptocurrency payments.
NuOrion claims that following its advice could enable Macy's to boost its stock price to $75 -- up from around $30 today and roughly $11 at the beginning of 2021.
Style over substance
From a pure business perspective, none of these proposed moves seem very promising. First, customers expect a seamless experience between a retailer's brick-and-mortar and digital sales channels. Separating the ownership structures of those two channels would make it hard to achieve such a seamless experience.
Thus, Saks' move to spin off its digital business will likely backfire in the long run. Spinning off the e-commerce business would make even less sense for Macy's. Saks' high prices make it relatively easy to absorb shipping costs. For Macy's, using stores as hubs for order pickup, returns, and even e-commerce deliveries is essential to operating a profitable digital business.
Second, most EV companies today are positioning themselves as luxury brands. Putting showrooms in Macy's stores -- except perhaps a couple of the retailer's downtown flagship stores -- would not fit with that brand image. Moreover, Tesla did add mini-galleries to a handful of Nordstrom stores several years ago, without any obvious benefits for Nordstrom's results. (Incidentally, EV brand Polestar had a pop-up shop adjacent to the main entrance of Macy's San Francisco flagship store last year.)
Image source: Macy's.
Third, accepting crypto is highly unlikely to boost sales -- or make Macy's cool again. Whole Foods has underperformed in recent years despite accepting crypto. Nordstrom also began accepting crypto in its stores in 2019, but has posted much weaker results than Macy's over the past year.
Macy's should stick to its strategy
While Macy's stock has soared this year, that's not because it is a meme stock. It has simply recovered far more robustly than expected as the pandemic has eased. In February, Macy's estimated that adjusted earnings per share (EPS) would recover to between $0.40 and $0.90 this year. Now, the company's guidance calls for adjusted EPS between $3.41 and $3.75.
Of course, Macy's has benefited from buoyant consumer spending and a rebound in apparel demand this year. Nevertheless, its strong results in 2021 -- and promising initiatives like piloting small-format stores in locations more convenient for many customers -- bode well for the future. Macy's stock could keep rising if the retailer continues to make progress on its turnaround strategy.
By contrast, gimmicks might boost Macy's stock in the short run -- but even that's not guaranteed. After all, there's no foolproof way for a company to latch on to the meme stock phenomenon. Retail investors' interest in the highest-flying meme stocks developed organically (for the most part).
Meanwhile, attempting to make Macy's into a meme stock could cause management to lose focus on the ongoing turnaround. For long-term investors, that isn't a risk worth taking.
