With nothing more than a passing glance, Macy's (M 1.31%) shareholders are thrilled with the idea. "Unlocking value" ultimately means investors' stakes will be worth more after splitting up the retailer's online and offline business, so by all means, move ahead with the idea.
As the old adage goes, though, there's no free lunch on Wall Street. Everything costs something, somehow. In this case, the cost to Macy's and its shareholders would be a reversion solely to a brick-and-mortar business that was struggling before the company brilliantly paired it with an e-commerce operation that's been incredibly impressive. In other words, maybe the department store chain shouldn't be so quick to do what it increasingly looks like it's planning to do.
But, first things first.
Image source: Macy's.
On the chopping block, maybe
On the off chance you're reading this and don't yet know, Macy's is reportedly mulling the idea of spinning off its online business.
Activist investor group Jana Partners broached the idea in early October, and while the company initially repeated what it's said for some time now -- it wasn't interested in doing so -- this may be changing. The Wall Street Journal reported last week that Macy's has hired AlixPartners to help it weigh the pros and cons of selling its e-commerce business.
Notably, AlixPartners has already helped Saks Fifth Avenue divest its online operation. The crux of the argument is that the market is valuing successful e-commerce businesses at a steep premium. Jana believes Macy's online shopping venue and operation could be worth on the order of $14 billion.
Framed in these terms, a spinoff is a savvy move. It's also a short-sighted one, however.
A winning formula has already been found
Sure, a split may well "unlock value." It could just as easily destroy it.
The argument holds some water. Macy's e-commerce efforts are paying off in a big way. Online sales grew another 19% year over year last quarter, and are up 49% versus the pre-pandemic third quarter of 2019. All told, about one-third of the company's revenue is now generated online. The retailer also just announced it will be adding third-party vendors to its e-commerce platform, widening the net that brings people into the company's digital ecosystem.
Shedding the whole shebang wouldn't theoretically change the results being achieved online or in stores, but it would add a nice chunk of capital to the company's coffers. It would make it clearer to shareholders where Macy's strengths and weaknesses are. This unknown may be keeping a lid on the price of Macy's shares.
Except that way of thinking ignores a key nuance of the company's online and offline operations: That is, when managed in tandem, they support one another.
Evidence of this argument is only ancillary, but there's plenty of it.
Take, for example, comments made by CFO Adrian Mitchell earlier this year. During the department store chain's fiscal fourth-quarter earnings call, Mitchell noted:
We know that Macy's digital sales per capita are two to three times higher in markets [where] we have Macy's stores. Conversely, from our store closures over the past five years, we have also observed that the growth rate of digital sales drops meaningfully when we close a store in a multi-store market and significantly when we exit a single store market.
The CFO sums up the premise by saying: "Stores are providing the critical nodes to our digital customers."
And other data underscores this idea. Though without offering a ton of details, then-CFO Paula Price explained early last year that not only do in-store pickups save the company money on shipping costs, but those pickup customers spend about 25% more once they enter a store to retrieve their online order.
Perhaps the most notable thing about Macy's e-commerce operations, however, is that they're supported by the company's stores. Even with plenty of time to adapt to the new normal in a world upheaved by the coronavirus contagion, about a fourth of last quarter's online orders were still being fulfilled by its stores.
Connect the dots
None of this is to suggest a purely brick-and-mortar Macy's couldn't coordinate with a new owner of its online operation. In fact, given the strength of the Macy's brand name, new owners of its online shopping platform would want to continue working well with the iconic company.
Ultimately, though, splitting the two entities not only runs the risk of breaking the successful cross-selling omnichannel machine Macy's has crafted over the years, but it sets the stage for competition between two players that bear the same name. When push proverbially comes to shove, for-profit companies tend to think of themselves first. Such a development alienates customers, though, which is the last thing anybody wants.
Sometimes the best decision is just leaving things alone, and recognizing that sweet words like "unlocking value" aren't necessarily thrown around with the bigger, long-term picture in mind.
