Remember when we (along with me and every other financial exec in department store land) all sold our receivables portfolios? I studied that every year for about 20 years (literally) when I was an executive at the May Department Stores Company (May Co.) before we finally made the move. We knew it would never actually improve the operating company to get rid of the receivables portfolio, but we were finally offered deals so good on the valuation of the portfolio and finally negotiated to the point that the operating disadvantage was manageable. So, we all did the deal which was actually completed after Federated Department Stores (now Macy’s) acquired May Co. Like I said, “everyone” did it.
The Rack lowers the consumer impression of the Nordstrom brand to such an extent as to make it much cheaper. But the Rack also makes Nordstrom much bigger. In fact, it is so big now and viscerally connected to the Nordstrom persona that I think the Rack is not nearly as valuable independently.
Disadvantage on the Margin
But not so fast. Despite the receivables sale being economically very lucrative in the short term, we all knew it was at least a marginal negative to the operating company and that in the future it might grow to be more than just a marginal disadvantage.
Nonetheless, we drank the “sell it” Kool Aid. Next, we all looked at Propco/Opco spin-off/sale opportunities with our real estate holdings. At the time, all the activists pushed us to do those deals. But no matter which way we looked at it, we decided that exiting real estate for a big-short term gain was just too damaging to the operating company. So, no deal.
Clearly retail can be run without real estate ownership. Most of off-price operates with the lease model. In fact, we had 4,500 successful leased shoe stores. But we certainly never pulled the trigger on real estate for the department store business, and no one else did either. OK, Sears, but they were going broke and were owned by a single-focused real estate “genius”. For us, the deal just was not good enough to take the hit on the operating business. And the last time I checked there were only 25 Sears stores left.
Spinning in Circles
So, here we are again. Activists pushing to spin off assets. Retail picking up media headlines and kick starting a lot of opinionated conversation about the pros and cons. And it is not like Dillard’s, Nordy or Walmart have to fear activism. They all have blocking positions. Macy’s, and Kohl’s don’t have that advantage. The most an activist can do with that first group is embarrass and harass. They can’t really win. As Bruce Nordstrom once said to me when we were in “gentle” discussions to buy the company, “We can buy 20 percent faster than you can buy 51 percent.”
From my perspective? I think spinning off the online business for those guys contemplating it is the dumbest idea they have ever had — so far. Target has finally perfected the integration of its channels and everyone else is getting there. The valuations are so crazy on digital businesses vs brick-and-mortar businesses that the short-term value may actually outweigh the huge damage I see to the operating company. And if the agreements were structured well enough between the Opco and the online, maybe the spin would not wreck the growth trajectory of the operating company…for a while, anyway. So, unless valuations of online businesses fall very rapidly, we will see some of those deals get done. Even though I still think it is a completely stupid idea.
Nordstrom on the Rack
Now my take on Nordstrom et. al. and the Rack. I have a much different view of Nordstrom spinning out Rack than I do Saks, Macy, Kohl’s or Nordy spinning out online. I don’t think the Rack and Nordstrom full line really need to be one company. On the other hand, I am not so sure that the valuation of the Rack is all that compelling. Its performance in recent years has not been great. But recent full line performance hasn’t either. Depending on the valuations, I could go either way on that decision.
I don’t think that Nordstrom Rack has been tremendous for the Nordstrom brand.
- They often focused on the Rack at the expense of the mainline stores.
- The Rack lowers the consumer impression of the Nordstrom brand to such an extent as to make it much cheaper. But the Rack also makes Nordstrom much bigger. In fact, it is so big now and viscerally connected to the Nordstrom persona that I think the Rack is not nearly as valuable independently.
So, if Nordstrom spins Rack off, they would need to cut a deal to keep use of the Nordy name at Rack. Their buyers for years have been able to leverage the equity of the Nordstrom brand to secure favorable inventory. I am not sure that would continue if there were a separation. Overall, I don’t think it would hurt Nordstrom as a brand, but it would be very tough for Nordstrom Rack as a brand (especially if the name, Nordstrom, was not part of the deal).