This initiative to monetize retailer ecommerce assets is a great idea, at least it is if you have zero understanding of retail. It’s much like the old monetization of Real Estate for retail theme, except this theme is way worse. At least with real estate, one of the remaining assets has terminal value on its own (the real estate). How many successful campaigns came from all those real estate activist moves on DDS, M, KSS, etc? ZERO, which is the number of them that made sense in terms of value creation. One of the key problems is that its hard to truly treat the assets as independent, since monetizing real estate would mean putting a market level rent on the square footage, which would crush the retail profits, which would close the stores, and therefore pressure the real estate value. The separation anxiety of a sum-of-the-parts for ecommerce would be even greater. The play here seems to be a simple valuation argument on ecommerce businesses for retailers. Ecommerce is growing, ecommerce companies have big multiples in public markets, why not put said multiple on the sales of a retailer’s ecommerce operation? Saks.com seems to be the go-to ‘thesis validator’ which recently got an investment implying a valuation of $2bn (about 2x sales) and is apparently pursuing an IPO at $6bn. First of all, we strongly doubt Saks.com’s long term cash flow can justify the $2bn valuation, let along one of $6bn. The $6bn number is being fed through the bankers to mainstream media to set an artificially high price. We can’t apply multiples of public ecommerce companies that have built their platforms, executed their investments, and won their customers for an ecomm-only future, to a model like Saks.com. In that case, we definitely can’t apply the multiple of a Saks.com, that is high-end with a small physical store base, to a large-scale mid-level department store like Macy’s.
Let’s do an academic sum of the parts and then further elaborate on the problem.
Credit: ~$770mm in revenue at say 90% margin flow through, 25% tax rate, and 8x multiple (slightly below COF/SYF) = ~$4.2bn.
Real Estate: Wide range what this this could be worth, the old Starboard case of $21bn was clearly wrong, but there has to be some value in top stores like Herald Square. Though liquidity for such a large asset in a post Covid world is probably low. Let’s say $4bn is an achievable value.
Ecommerce: ~$8bn in sales, the right multiple in our view is well below real ecommerce companies like OSTK, W that trade at 1-2x sales. For M, 0.7x is ambitious, especially given that it needs physical stores to both grow and fulfill orders. That’s $5.6bn. If Jana thinks M’s ecommerce business is really worth $14bn, it should buy all the OSTK it can get its hands on at these prices.
B&M Retail: The brick and mortar retail business is worth $0 at best in SOTP. Starboard said retail (with ecom) was worth $4bn on its real estate campaign. We just gave ecommerce a $5.6bn value, so that would imply negative. B&M is in decline, not making money, and the constant SOTP bull cases suggest nobody actually wants to own this as a retailer.
SOTP Total: That total gets to about $13.75bn in EV, and a stock up around $39 or $40. So there’s your back of the envelope SOTP math, and that’s probably exactly the math Jana is hoping investors do to get the stock up before M management describes why this separation can’t be done and Jana “has” to sell its stake at a nice quick profit.
The problem with the SOTP math is it simply doesn’t work in practice, the value of each piece is intrinsically reliant on the health and continued existence of the other pieces. Macy’s brick and mortar can’t afford market equivalent rents on real estate monetization, credit revenue is lost if stores shut down, ecommerce sales are lost if a store closes (often a 20-40% change on a market’s ecommerce sales when a store closes per historical retailer commentary). If you take away Macy’s stores, Macy’s ecommerce probably loses between 40% and 80% of its customers. Then how does the division work from an economics perspective? How is credit revenue split? How does store pick up work from an expense perspective? Does B&M get paid by ecommerce for the marketing value of its store presence in a market? Do the entities share inventory access, can they each handle returns? If B&M doesn’t survive, in the end you are totaling credit and ecommerce businesses with almost no customers left. What’s zero plus zero?
If you think continuing on one portion of an omnichannel operation makes sense, why isn’t Circuit City online a multi billion dollar business today? Yes, it still exists. If this makes sense from a long term value creation perspective, why do we get the sense if you were to ask the head of any omnichannel retailer/brand with a quality online business (NKE, RH, LULU, URBN) to spin off its online business, the CEO would likely break out laughing.
Our take on the M stock here is that the SOTP case is punk, but the narrative will get some momentum on top of continued traffic recovery and a very healthy consumer driving strong sales. We’re in Macro Quad2 where cheap, junk tail names like M often trade up. We’re waiting for the moment to step up and make this one a top short idea, but we get the sense that could be several weeks down the road and with a stock in the 30s.
