Brick-and-mortar retailer Macy's (M -1.52%) had an incredible year in 2021. The company bounced back from the devastation caused by the onset of the coronavirus pandemic when it was forced to temporarily shut its doors for in-person shopping.
Its surprising performance and management's strong response despite the ongoing pandemic may have actually turned Macy's into a better business than it was before the outbreak. Investors seemed convinced of this theory and helped Macy's stock elevate by 136% in 2021.
Here's why Macy's stock could go even higher in 2022.
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Macy's digital channel is helping profits surge
One of the primary reasons why Macy's business is better than before the pandemic is the investment that management made in improving its online business. Before the outbreak, the company was hesitant to emphasize its online channel because it would cannibalize higher-margin sales from its brick-and-mortar stores. When its stores were forced to shut down temporarily, caution was thrown to the wind and there was an all-out effort to prioritize online sales.
As a result, Macy's third quarter of 2021 (ended on Oct. 30) saw digital sales increase 49% compared to the same quarter in 2019. Comparisons to 2019 are fairer and more relevant because of the unusualness of 2020 for retailers. To put that 49% rise into context, the company's overall sales have decreased at a compounded annual rate of 3.2% over the last decade. Consumers are increasingly shifting their spending online, and Macy's has finally moved its focus to match the public's desire.
Digital sales accounted for 33% of Macy's overall sales in its most recent quarter, and the trend has positive side effects. In the nine months ended Oct. 30, Macy's earned a net income of $687 million on revenue of $15.8 billion. That's more than triple the net income of $224 million on revenue of $16.2 billion during the same time in 2019.
Macy's online business provides many advantages. The site can operate 24 hours per day, offer an exponentially wider assortment of items, and reduce staffing needs.
Management realizes the lucrative value its online business might fetch and it has admitted that it's considering selling or spinning off the segment. Here's CEO Jeff Gennette discussing the matter in Macy's most recent conference call:
That said, we also recognize the significant value the market is assigning to pure e-commerce businesses. And as we look at the landscape today, we are undertaking additional analysis that could help inform our long-term strategy to further unlock value for Macy's, Inc.
Macy's online business may be worth more than the entire company
And therein lies the reason why Macy's stock can go parabolic in 2022. If the company sells its online business, it could boost the stock price dramatically. Macy's market capitalization is $8.2 billion. However, its online business alone may be worth more than that.
Consider e-commerce businesses Amazon and eBay, which trade at a price-to-sales ratio of 3.82 and 3.78, respectively. Now consider that Macy's is estimating sales from its digital channel of $10 billion by 2023. If you apply the average e-commerce price-to-sales multiple of 3.8 to Macy's online business, it could fetch $38 billion in a sale.
At that price, the cash from the sale would be more than four times Macy's current market cap. Since stocks represent ownership in the business, Macy's stock would rise in response to a balance sheet with a $38 billion addition. The sale unlocks a higher value for the stand-alone e-commerce business. Macy's stock is trading at a price to sales ratio of 0.36, less than one-tenth of the price to sales ratio of the e-commerce businesses mentioned above.
The chance for this scenario to play out is far from certain, but if it does happen, Macy's stock could explode in 2022.
