Online business

Separating Macy’s online business would be a huge mistake

With nothing more than a passing glance, Macy’s (NYSE:M) shareholders are delighted with the idea. “Unleashing value” ultimately means that investors’ stakes will have more value 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 are no free lunches on Wall Street. Everything costs something, in a way. In this case, the cost to Macy’s and its shareholders would be a return to just a brick-and-mortar, brick-and-mortar business before the company brilliantly combined it with 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.

But first.

Image source: Macy’s.

On the chopping block, maybe

In case you’re reading this and didn’t already know, Macy’s may have been considering divesting itself of its online business.

Activist investor group Jana Partners broached the idea in early October, and although the company initially repeated what it had been saying for some time now – it wasn’t interested in it – it could change. the the wall street journal reported last week that Macy’s had hired AlixPartners to help it weigh the pros and cons of selling its e-commerce business.

Notably, AlixPartners previously helped Saks Fifth Avenue divest its online business. The crux of the argument is that the market values ​​successful e-commerce businesses at a steep premium. Jana thinks Macy’s online shopping site and operation could be worth around $14 billion.

Framed in these terms, a spinoff is a wise decision. It’s also a short-term view, however.

A winning formula has already been found

Of course, a spin-off just might “unlock value.” He might as well destroy it.

The argument holds water. Macy’s e-commerce efforts are paying off. Online sales were up another 19% year over year last quarter and 49% from the third quarter of 2019 before the pandemic. In total, about 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 the whole shebang theoretically wouldn’t change results online or in stores, but it would add a good chunk of capital to the company’s coffers. This would allow shareholders to better understand where Macy’s strengths and weaknesses lie. This stranger may be maintaining a cap on Macy’s stock price.

Except that this way of thinking ignores a key nuance of online and offline business operations: that when they’re run in tandem, they support each other.

The evidence for this argument is only incidental, but there is plenty of it.

Take, for example, CFO Adrian Mitchell’s comments earlier this year. On the department store chain’s fiscal fourth quarter earnings call, Mitchell noted:

We know that Macy’s per capita digital sales are two to three times higher in the marketplaces [where] we have Macy’s stores. Conversely, from our store closures 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 leave a one-store market.

The CFO sums up the principle by saying, “Stores provide the critical nodes to our digital customers.”

And other data underline this idea. Although without offering a ton of specifics, then-CFO Paula Price explained early last year that not only do in-store pickups save the company money on shipping costs, but that these pickup customers spend about 25% more once they walk into a store to pick up their order online.

However, perhaps the most remarkable thing about Macy’s e-commerce operations is that they are supported by the company’s stores. Even with plenty of time to adjust to the new normal in a world disrupted by coronavirus contagion, around a quarter of online orders last quarter were still being fulfilled by its stores.

Connect the dots

None of this is to say 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 doing well with the iconic company.

Ultimately, however, the split of the two entities not only risks shattering the successful cross-selling omnichannel machine that Macy’s has crafted over the years, but it also paves the way for competition between two players who carry the same name. When proverbially pushed, 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 to just leave things alone and recognize that sweet words like “unleashing value” aren’t necessarily thrown around with a larger, long-term vision in mind.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.