Yahoo Finance The Spin-off Potential: Saks as Dot-com Test Case
Is it time for an omnichannel undo?
Retail is going to have to figure that out fast.
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After more than a decade of chasing an omni future and bringing bricks and clicks closer together — both on the back end and for consumers — Richard Baker, chairman and chief executive officer of Saks parent Hudson’s Bay Co., upset the status quo in March by separating the luxury firm’s retail and e-commerce businesses.
Now, activist investor Jana Partners is pressuring Macy’s Inc. to follow suit and other retailers and industry experts are trying to gauge just which way the wind is blowing. Macy’s has declined comment on reports of the Jana pressure.
Saks has become a kind of test case. And if the e-commerce business does file to go public — some see a big-time valuation — the details of just how well the split is working could ripple across the industry. Saks declined comment on whether it was looking to an initial public offering in the near future.
Specifically, if Saks’ IPO paperwork shows signs of real strength and value in the separation, it could turn up the heat for retail to continue to make big changes even after big changes have been made during the pandemic.
“Once the information will become broadly available to the market, the pressure will be massive, not only on Macy’s,” said one person familiar with the situation at Macy’s.
While splitting apart the brick-and-mortar and web business does add complexity, people who have looked at the issue closely argue that the two sides of the business can still work well together and that the web business will become more of a draw for tech experts.
“It’s an arms race for tech talent and a dot-com currency is a huge draw,” the person said.
But many in the industry still see something of a mathematical magic trick, where one business is split in two and suddenly worth twice as much.
“It is absolutely financial engineering,” said consultant Greg Portell, lead partner in Kearney’s global consumer practice. “At best case, these types of deals create uncertainty [and] complex businesses. More realistically, they are a short-term mistake.”
Separating a retailer from its dot-com operations flies in the face of a decade’s worth of omnichannel coming together, where the industry at large pushed to eliminate the divisions between their bricks and clicks to focus more squarely on their relationships with shoppers and where they were selling.
“We talk about consumer centricity, we talk about omnichannel — this is a pivot completely in the other direction that is being done for the investor’s benefit, not the consumer’s benefit,” Portell said.
“From a pure shareholder value perspective, there’s a lot of value in these types of splits and that’s what’s going to create the pressure on the executive teams to have really clear answers on why they are making the choices they are making,” he said. “Yes, this solves a short-term [valuation issue], but what is left unanswered is the long-term route to profitability.”
That makes the current debate a part of retail’s hard look at e-commerce, which has been a central topic in the industry for a generation, but is still unsettled in many ways.
“Nobody argues that this isn’t a unique strategy, creative and never tried before. I give Richard and his team enormous credit for working through the complexities. But you have to start with a consumer — that’s the real question,” said Steve Sadove, Mastercard senior adviser and former chairman and CEO of Saks Fifth Avenue. “If the consumer experience is seamless, it could potentially be very value-creating. If the consumer experience is hurt, there could be an issue. But I believe Richard and Marc Metrick (CEO of saks.com) are doing everything they can to make sure the consumer experience is seamless. I know they are making investments and focused on that.”
Simeon Siegel, managing director of equity research at BMO Capital Markets, said: “The question ultimately becomes what is the operational impact — does this have an impact on the customers’ experience. What about the whole notion of being seamless and synergistic? This is the dissection of a company. If a company can dissect its operations and garner a higher valuation and not impact a customer experience, it’s hard to argue against not taking advantage of current market dynamics. What we continually see are smaller online businesses generating higher market values than larger store-plus-online businesses, but the question is does it retain that valuation, does it grow into its valuation? If the separation drives a wedge between management and the customer, then ultimately that has to erode the value of the operations.
And Mark Cohen, director of retail studies, adjunct professor, at the Columbia University Graduate School of Business, said: “It’s a catastrophic, short-sighted, of-the-moment strategy. It’s moving against the tide for all viable retailers integrating their operations rather than separating them.”
There have been reports that saks.com, which does a volume of about $1 billion, could be valued as high as $6 billion. “That’s raw speculation that eventually could become valid based on demonstrated performance, or invalid based on performance,” said Cohen.
Before the Neiman Marcus Group spun off its Mytheresa subsidiary into a separate company, it garnered a high valuation. That could have motivated Baker to split saks.com and the Saks stores into separate companies, with the intent of taking saks.com public, possibly next year.
“The Mytheresa situation was completely different. It was a wholly owned subsidiary of Neiman Marcus, and not part of the fabric of Neiman Marcus or Bergdorf Goodman,” said Cohen. “Mytheresa operated independently and was a normal divestiture of an asset. Neiman Marcus had to raise money. But it was an independent dot-com business as opposed to neimanmarcus.com. When you divest a piece of a parent you are left with a stub, and if a stub is not performing well, the stub has every reason to become nonviable, and all the value shifts to the divestiture.”
Divesting assets is not always a good idea. Years ago, Bill Ackman of Pershing Square Capital Management tried to force Target Corp. to sell its real estate assets and mounted a proxy fight. “He failed,” said Cohen. “Target’s board wasn’t willing to roll over and play dead in the face of a proxy. It had a deeply held view that its long-term best interests were on owning the real estate rather than leasing the real estate. Years earlier, Target studied lease versus owning and came to the conclusion they were better off owning its real estate and in control of their rent and occupancy costs. They weren’t motivated by an of-the-moment opportunity to create cash.”
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The message from HBC is that saks.com can get bigger and more profitable faster and serve a larger audience as a stand-alone company with new financing. As reported, Insight Partners, a venture capital and private equity firm, made a $500 million minority equity investment in saks.com last March, valuing it at $2 billion. The money flowing into saks.com is being used to increase marketing, expand the assortment with new categories and more depth in categories currently carried.
Last June in an interview, Metrick said orchestrating the split wasn’t as complicated as others had imagined. Hudson’s Bay Co. had already decentralized its shared services structure, enabling its divisions to operate more independently, and by the time the split was announced on March 5, 2020, the work to separate saks.com and Saks stores had already been underway. He said more than 150 operating service agreements and 150-plus transitional agreements were established between the two companies, that saks.com charges fees for the services it provides to SFA, and vice versa, and that the intellectual property is owned by saks.com.
Saks.com’s chief merchandising officer Tracy Margolies and her team handle the buying and merchandising for saks.com and Saks Fifth Avenue stores. Emily Essner, chief marketing officer of saks.com, is in charge of all the pricing, promotion and brand image for saks.com and the Saks Fifth Avenue stores. For the merchandising and marketing, saks.com charges fees to SFA, Metrick said. Meanwhile, because the SFA stores company is handling such functions and services as buy online, pick up in stores; returns; exchanges and alterations, SFA charges saks.com fees through the operating service agreements.
The strategy could catch on but experts say it’s not likely for high-multiple companies like Costco, or even Walmart Inc., which are driven far more by store operations than by the internet, compared to Macy’s and Saks. They also compare the Saks stores to being a “franchisee” of saks.com.
Some complications could come from how merchandise is handled. For example, if a fashion item is bought online and returned to a Saks store, it must be sent back to the dot-com operation. Days are lost trying to sell something that is perishable over time. Also, many shoppers select items online but want to pick up items in-store. Not everything seen online is available in the store, but Saks store associates are trained to help in-store shoppers purchase online.
“The separation has been working much better than they imagined,” said one source familiar with Saks Fifth Avenue. “With the private equity investment in saks.com, they have been spending more on marketing, buying more categories and buying in greater depth in the older categories. There is more inventory available in stores and online, and if you go and visit a store today, nothing is different. If anything, there is an improvement. This isn’t the first time Baker is disrupting the retail landscape.”
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