Macy’s Online Spinoff: The Ultimate Window Display

An activist investor thinks Macy’s M 17.51% should split itself up. That could give the retailer a fashionable look, unlocking value, but keeping up appearances will be tough.

Last Thursday, The Wall Street Journal reported that activist shareholder Jana Partners has taken a stake in Macy’s and is urging the department store to spin off its e-commerce business. The proposal is modeled off Saks Fifth Avenue, which earlier this year announced that it was splitting off Saks.com. That spinoff is apparently looking to go public with a target valuation of roughly $6 billion, according to a Journal report on Sunday.

Macy’s e-commerce operation on a stand-alone basis has shown impressive revenue growth—at least compared with its bricks-and-mortar business. Digital sales grew 7.7% at Macy’s in 2019 and then by 23.7% last year as the pandemic took hold. This year, it expects e-commerce sales to grow 9.3%. Meanwhile, the department store’s in-person sales are an estimated 16.3% lower this year compared with 2019. Some of this is inevitable as Macy’s shuts down less-productive stores.

Investors tend to value e-commerce retail far more generously than department stores. Saks.com’s targeted valuation is six times its revenue. Mytheresa, which was a spinoff of Neiman Marcus’s e-commerce platform, has a market capitalization of 2.9 times its forward revenue, while Farfetch fetches 5.5 times. Macy’s shares trade at 0.4 times forward revenue. Even during headier days, the department store has never commanded a multiple that exceeded one times forward revenue.

Even given Saks.com’s most recent implied valuation of just $2 billion or two times revenue, the thinking is that Macy’s e-commerce business could snag a market capitalization of at least $15 billion, or roughly twice what the combined company is worth today. Investors get excited about e-commerce because it promises high growth rates. Mytheresa’s sales are expected to grow at a compound average growth rate of 19% over the next three years, while Farfetch is expected to grow at 30%.

But not all e-commerce companies are the same. Macy’s Chief Executive Jeff Gennette has said he expects Macy’s online revenue to grow to $10 billion within the next three years, implying a more modest compound average growth rate of 6.8%. Even that seems ambitious. Last year, Macy’s digital sales benefited from the pandemic; this year, a strong rebound in consumer spending and lack of retail inventory across the board has meant every retailer got an boost.

Ultimately, Macy’s online business will run into some of the same problems as its department stores. At least luxury e-commerce sellers such as Saks.com, Mytheresa and Farfetch are shielded by luxury brands’ pickiness; only a few sell on Amazon. With thriving discount stores such as T.J. Maxx and Ross Stores in its bricks-and-mortar neighborhood and Amazon in its e-commerce sphere, Macy’s isn’t going to suddenly gain wings unless it figures out how to distinguish itself from other retailers.

Macy’s management might raise objections to the proposed split on purely logistical grounds as it would go from an omnichannel seller to two separate companies, but the smoothness of Saks’s separation should allay concerns. Meanwhile, investors are certainly enthused, if not fully convinced. Macy’s shares have surged roughly 25.7% since the Journal report on the proposed spinoff came out—still nowhere close to the jump in value that the activist investor envisions for Macy’s two combined businesses after the spinoff.

A spinoff could provide a stock boost. It will take fundamental fixes to sustain it.