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The
163-year-old retailer said last month that it had asked
consulting firm AlixPartners to review its business structure
after Jana Partners urged it to separate its e-commerce arm.
The activist hedge fund said in October that the e-commerce
business could be worth $14 billion on its own, more than Macy's
entire market capitalization of about $8 billion.
AlixPartners also advised HBC, the owner of Saks Fifth Avenue,
on the separation earlier this year of its e-commerce business
from its department stores.
Macy's views a similar separation as more challenging because of
its large store footprint and its online customers' reliance on
it, the sources said.
Macy's has close to 800 stores. It has said its online sales are
two to three times higher per capita in regions where the stores
are located, because of the convenience for customers of picking
up and returning items at the stores.
Saks, on the other hand, has only about 40 stores, and the
privately held company's e-commerce business generates annual
revenue of less than $1 billion. That is a fraction of Macy's
e-commerce revenue, which is set to exceed $8 billion this year,
according to Morningstar analysts.
A separated Macy's online business will need to have extensive
commercial agreements with the company holding the department
stores. They would have to govern everything from merchandise
distribution and storage to promotions and marketing, in order
to provide Macy's customers a seamless experience in-store and
online, the sources said.
Such agreements will need to withstand the test of time as the
company holding the department stores downsizes further,
shutting down locations on which the e-commerce business relies,
the sources added.
"The introduction of numerous service agreements to compensate
stores would likely lower profitability," Cowen analysts said in
a note last month.
Macy's did not respond to requests for comment.
The duplication of functions now housed under one roof, such as
logistics and administration, would add to the costs, the
sources said.
Macy's has been going in the opposite direction with its
"Polaris" strategy launched last year, which envisions $1.5
billion in annual cost reductions through the synergies of
brick-and-mortar retail with e-commerce by the end of 2022.
In a letter to Macy's in October, Jana suggested that a benefit
of separation could be a cash infusion in the online business
that would help hire top talent and invest in new technology,
the sources said. It pointed to the case of Saks, which
attracted a $500 million investment from private equity firm
Insight Venture Partners at a $2 billion valuation for its
online business.
The Macy's review is also exploring this possibility, according
to the sources.
"Our objective is to light a fire under this company that has an
incredible brand," said Guy Phillips, managing member at NuOrion
Advisors, a Macy's investor that is also pushing the company to
make changes.
Macy's has not provided a timeline for completion of the
business review.
While Jana applauded Macy's decision to launch the review, it
has not ruled out a challenge to the company's board. It will
have the opportunity to nominate directors early next year
should it decide the company has not made enough progress.
PASSING ON COSTS TO CUSTOMERS
This is not the first time Macy's faces calls for a breakup. It
fended off demands from activist hedge fund Starboard Value LP
six years ago to sell its real estate and then lease it back for
its stores. It has subsequently trimmed its property portfolio
and entered into a partnership with Brookfield Asset Management
to cash in on some of it.
Department stores have enjoyed a sales rebound in recent months
as Americans splurge on perfumes, dresses and formal wear
following COVID-19 pandemic lockdowns. But their profitability
has suffered amid shipping logjams, labor shortages and
inflationary pressure.
Macy's has fared much better than most retailers thanks to its
ability to pass on some of the additional costs to customers.
Its shares are up 143% year-to-date, compared with an 18% rise
in the S&P 500 retailing index.
Macy's said last month it expects a 1% rise in gross margins
from pre-pandemic 2019 levels. It also raised its full-year
sales and profit outlook and expects full-year net sales of
$24.12 billion to $24.28 billion, compared with $23.55 billion
to $23.95 billion previously.
(Reporting by Svea Herbst-Bayliss in Boston and Anirban Sen in
Bengaluru; Editing by Greg Roumeliotis and Dan Grebler)
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