Macy’s: Financial Engineering Is Not The Solution (NYSE: M)


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As a result, the market can no longer do without department store inventory due to the potential for e-commerce spins. Macy’s (M) has been the main target of a split with Jana Partners promoting a valuation of $ 14 billion just for the e-commerce division. My investment thesis is not bullish on the spin-off of a significant part of the omnichannel retail experience, but the stock could easily skyrocket over the next few months due to still valuation. cheap.

Electronic commerce spin-off

Last week, Jana Partners introduced the concept of Macy’s digital business with a market valuation of $ 14 billion. The company’s current market valuation is only $ 7.5 billion, even after the stock jumped 17% in trading on Monday to new multi-year highs.

Movements are private Saks Fifth Avenue is preparing an IPO for its e-commerce unit at a valuation of $ 6 billion. The company sold a 25% stake in the business in March for just $ 2 billion, increasing interest in splitting e-commerce units from other department stores.

This move would be odd because Macy’s has previously emphasized the importance of an omnichannel experience allowing a combination of online shopping, in-store distribution and in-store experiences. The company suggests that an omnichannel customer buys 3 times more frequently than a single-channel customer. A prime sign that 1 + 1 = 3.

Source: Macy’s Presentation Q2’21

The retailer has made it clear that stores are a critical part of the order fulfillment strategy for digital sales. In the last quarter, digital sales on by stores increased by 24%.

Macy’s forecasts e-commerce sales for FY21 of about $ 8.4 billion out of a total sales target of $ 23.75 billion. Jana Partners estimates digital activity at around twice the sales. The business would have substantial costs to develop an execution strategy for an e-commerce-only business, while department stores would struggle to be relevant without the online connection.

The Polaris strategy announced by Macy’s pre-covid aimed to push digital sales up to $ 10 billion per year. The digital channel performed astoundingly in the shift from Covid to online sales with an average number of visits up 22% from Q2’19 levels and 41% of new customers going through the digital channel leading to a digital sales increase of 45% compared to Q2’19 levels.

Source: Macy’s October 2021 presentation

Financial engineering

The biggest problem with the business unit division is that the current setup is what allows Macy’s to compete more effectively with an internet retailer such as Amazon (AMZN). A business can use stores as distribution centers and showrooms with an advantage over Amazon. This configuration allowed Best buy (BBY) to successfully fend off Amazon despite the e-commerce giant’s long focus on the electronics category.

The question is how the separation of companies adds value to shareholders. Macy’s would now have 2 competing units trying to present a general facade to customers. The problem is, different employees would clearly have different incentives to push customers towards an online or in-store experience, perhaps in the best interests of the business as a whole.

the Retail diving some solid quotes by industry leaders against such a move. The director of retail sales at Columbia University’s Graduate School of Business and former CEO of Sears Canada sees this as the beginning of the end of the business:

… separating dot com from brick and mortar is completely dumb, unless you’re a financial hacker just looking to cash in. It is ultimately the death knell of a company.

Additionally, GlobalData Managing Director Neil Saunders is more adamant that this is pure financial engineering aimed at investment firms to make quick money at the expense of department stores in the long run:

He was born out of a desire to play short-term financial games with Macy’s and the value of its business rather than a long-term business necessity. In reality, e-commerce and shopping are not two separate businesses for Macy’s – they are part of a holistic ecosystem that must work as one in order to function effectively. Consumers don’t see the two companies as separate entities either – to them, Macy’s is Macy’s, whether online, offline, or at a parade.

The stock is cheap at around 8 times EPS estimates, but a disbanded company probably wouldn’t even make those profits with the extra expense. Not only would management spend time on a complex move to separate businesses, but new management would also be needed to manage the complex connection between the two units to ensure a seamless experience for customers.

Nordstrom (JWN) is trading at 12.6x futures EPS estimates while Kohl’s (KSS) is trading at a similar P / E multiple. Investors should focus more on expanding existing earnings multiples and less on financial engineering that hurts the business aspects of the business.

Data by YCharts

Many retail stocks are trading at futures P / E multiples closer to 20x, showing that Macy’s has been successful in growing its omnichannel business.

To take with

The main investor to remember that Macy’s could go along with any plans to split off the e-commerce business, but retail operations would not benefit from such a move. The stock is expected to rebound from here as the digital sector contributes to growth and Macy’s is reassessed with a higher P / E multiple. Investors should beware of the financial engineering surrounding a split and use any irrational rally as an opportunity to get out of a position in Macy’s.


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