Separation of Macy’s E-Commerce From Stores Unlikely

According to the Wall Street Journal, activist investor Jana Partners has taken a stake in Macy's M and proposed to the board that its e-commerce business be separated from its physical retail. Jana's plan is inspired by Saks Fifth Avenue's recent split of its store and e-commerce operations after raising capital at an implied valuation of $2 billion for its online business. Macy's e-commerce is expected to exceed $8 billion this year, much larger than that of Saks (probably less than $1 billion), so it could be worth more. Jana suggests that each of Macy's businesses could be worth $7 billion, close to the firm's current (combined) market capitalization. However, this is speculative, and do not expect a separation to happen for both practical and strategic reasons. Thus, we are not changing our fair value estimate of $20.50 per share and view Macy's as fully valued. We do not think Macy's management will be amenable to Jana's proposal and do not view it as realistic. The idea of splitting its physical and online retail is contrary to Macy's Polaris plan, which is largely based on complete connections between the two channels, including online delivery to stores, returns of online sales in stores, more technology within stores, and a universal loyalty program. While we do not think Polaris will provide Macy's with a competitive edge (hence our no-moat rating), its board and CEO Jeff Gennette are fully committed to it. Moreover, early results have been encouraging, as Macy's appears to be recovering well from the pandemic in, admittedly, favorable market conditions. We forecast a 2021 operating margin, excluding real estate, of 7%, its highest since 2015, on 36% sales growth. Apart from requiring a shift in strategy, splitting Macy's would also be costly and create significant technology, logistical, and management issues. We had a negative view of no-moat Gap's proposed (and eventually dropped) spin-off of Old Navy two years ago for similar reasons.

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