Last fall, investment fund Jana Partners launched an activist campaign at Macy’s. The fund aimed to double Macy’s share price by separating the department store’s growing ecommerce business from its physical stores. Jana Partners portfolio manager Scott Ostfeld estimated that Macy’s digital operations could be worth $16.8 billion: far more than the entire company’s market value at the time.
Macy’s management took this suggestion seriously. Rather than rebuffing Jana Partners, CEO Jeff Gennette told investors in November that Macy’s had hired AlixPartners to evaluate a potential ecommerce spinoff.
Macy’s recognized that separating its stores from its digital operations made no strategic sense. But the board and management felt that if the market were willing to pay enough for the ecommerce business, they had to consider doing so anyway.
However, within months of launching its activist campaign, Jana Partners exited most (if not all) of its investment in Macy’s. And to nobody’s surprise, the company abandoned the ecommerce spinoff concept soon thereafter.
A Serious Threat
Jana Partners’ rationale for advocating an ecommerce split was that Saks Fifth Avenue separated its stores from its ecommerce operations in early 2021 and received a minority investment at a $2 billion valuation for the ecommerce unit. That equated to a heady valuation of roughly two times sales. The fund argued that Macy’s ecommerce unit could fetch a similarly high valuation if it were spun off.
There were many reasons to doubt the soundness of this plan. For one thing, while Saks got a big windfall up front, it remains to be seen whether a web of service agreements between Saks Fifth Avenue stores and the new ecommerce unit can replicate a seamless omnichannel experience.
Additionally, Macy’s has many more stores and far more omnichannel integration than Saks. That would make separating the stores from the digital business even more complicated and perilous. The ability to browse in stores and buy online (or vice versa), pick up ecommerce orders at a nearby store, make returns or exchanges in stores, etc. is a key competitive advantage for Macy’s vis-à-vis pure ecommerce retailers.
Macy’s board and management were well aware of these issues, as well as the advantages of an integrated omnichannel model. As Gennette said during Macy’s Q3 earnings call, “This past year, we conducted an analysis of our ecommerce and brick-and-mortar operations evaluating how each contribute to the value of the Company as well as how each benefits from being integrated and working together. … This work supported our digitally led omnichannel Polaris strategy that we are successfully executing.”
So why didn’t Macy’s immediately shoot down Jana Partners’ proposal? It came down to one word: money. Genette continued: “That said, we also recognize the significant value the market is assigning to pure e-commerce businesses.”
In short, Macy’s recognized that separating its stores from its digital operations made no strategic sense. But the board and management felt that if the market were willing to pay enough for the ecommerce business, they had to consider doing so anyway.
Jana Partners Goes Away
In a February securities filing, Jana Partners revealed that it slashed its Macy’s stake by nearly 84 percent during the last three months of 2021. This suggests that within a month or two of publicly disclosing its investment in Macy’s (and its proposed strategy), the fund was already dumping shares. By the end of January, Jana Partners reportedly exited the investment entirely.
Why the abrupt reversal? First, Macy’s stock surged last fall. In early October, when Jana Partners first made its case for an ecommerce spinoff, the shares traded for around $22. But Macy’s stock surpassed $30 in early November and remained there for most of the month, peaking at a multiyear high of $37.95 the day of Macy’s strong Q3 earnings report (which was also when the company announced the strategic review with AlixPartners).
Even in the $30s, Macy’s shares traded for less than what Jana Partners claimed they would be worth if the company spun off its ecommerce business. But as the saying goes, a bird in the hand is worth two in the bush. The fund booked a quick profit and moved on.
A second reason why Jana Partners may have backed down is that its thesis that an ecommerce spinoff would be highly valued began to fall apart. Pure-play ecommerce companies’ valuations retreated in late 2021 due to slowing growth and rising interest rates. For example, shares of Wayfair and Chewy (two prominent ecommerce firms) each fell by more than 20 percent between the beginning of November and year-end.
Put simply, the lower the valuation a Macy’s ecommerce spinoff would receive, the less rationale there would be for attempting such a complicated maneuver.
Macy’s Sticks to Omnichannel
In its recent Q4 earnings report, Macy’s announced that it will double down on its omnichannel strategy rather than attempting to spin off its ecommerce operations. The company explained:
Ultimately, based on the work completed, the Board determined that an integrated, omnichannel Macy’s, Inc. with an acceleration of certain Polaris initiatives, will deliver greater value to our shareholders than a separation of digital and physical assets at either the enterprise or brand levels. Key to the Board’s decision-making were the high separation costs and ongoing costs from operating separated businesses, as well as high execution risk for the business and the company’s customers. As a result of the review, the company is accelerating Polaris initiatives that span digital, brand partners, private label, marketing and loyalty and the expansion of off-mall, small-format Market by Macy’s and Bloomie’s stores.
Even with the pressure from Jana Partners, it was unlikely that Macy’s would have separated its stores from its website when push came to shove. Once Jana Partners was out of the picture, it was a foregone conclusion that Macy’s would stick to its omnichannel strategy. After all, there’s no objective business rationale for operating the brick-and-mortar and digital channels as separate units.
Making the decision even easier, ecommerce valuations have continued to plummet. Wayfair and Chewy shares have each lost more than a third of their value this year, leaving them about 65 percent below the highs set in early 2021. Thus, even if Macy’s were to create an ecommerce spinoff, it wouldn’t be worth nearly as much as some investors had assumed last fall.
What Does It Mean for Kohl’s?
While Macy’s has survived its activist pressure with no ill effects, rival department store chain Kohl’s still faces a big fight with activist investor Macellum Advisors. Macellum has nominated a new slate of directors to replace Kohl’s current board. The fund wants to boost Kohl’s stock price by any means necessary: selling the company, spinning off its ecommerce business, cutting capital expenditures to boost free cash flow, and/or using sale-leasebacks of Kohl’s real estate to raise cash to fund bigger share buybacks.
Earlier this month, Kohl’s reported that adjusted earnings per share reached a record $7.33 in fiscal 2021. That eclipsed the previous high by 31 percent. Nevertheless, Kohl’s stock has actually declined over the past 12 months. As a result, Macellum Advisors hasn’t had a particularly good exit opportunity (unlike Jana Partners), so the fund is ramping up its pressure on the retailer.
Macellum CEO Jonathan Duskin indicated after Kohl’s recent investor day that he thinks the company should sell itself. The retailer has reportedly received (and rejected) offers in the $64-$65 per share range. That’s well below what Duskin has previously said Kohl’s is worth, but like Jana Partners, it appears that Macellum would gladly give up a lot of upside potential to lock in a profit.
Selling Kohl’s to a private equity firm would be almost as bad for business as Macy’s spinning off its ecommerce operations. A private equity buyer would likely sell and lease back most of Kohl’s real estate to help finance the deal and slash capital spending and other expenses to free up cash to repay other deal-related debt. Moves like these could jeopardize Kohl’s long-term competitiveness, particularly if they impacted the company’s new partnership with Sephora.
Despite these risks, Macellum Advisors’ board slate could gain support from other major Kohl’s shareholders. Kohl’s stock has been stagnant for two decades, which means there are surely plenty of disgruntled investors hoping for a big shakeup.
This highlights the importance of telling Wall Street a good story. Kohl’s is posting record profits per share, yet its stock has struggled, making it vulnerable to an activist attack that could hurt it badly in the long run. Macy’s recent fundamental performance hasn’t been much better, but the stock’s rally in late 2021 helped it shake off its activist threat. That will allow management to focus on maximizing the company’s long-term potential in the years ahead.