Macy’s CEO, department store veteran, is fighting for the future of the Amazon

As Macy’s prepares to release its third-quarter results on November 18 ahead of retail̵[ads1]7;s biggest season, the most pressing in the list of investor questions will be: Does Macy’s ability to build a dot-com business in an old brick-and-mortar -the mortar foundation reached its limit?

Macy’s, which has said digital sales will reach $ 10 billion by 2023, up from $ 7.6 billion by 2020, is likely to say no. But given that Macy’s dotcom sales have been higher than revenues from the same store for years – and that the company operates 788 stores across the portfolio – raises another question: Is Macy’s current management team, led by the “important department store manager”, a retailer? investor recently featured Macy’s CEO Jeff Gennette, the best choice to lead the country’s largest senior department store into the new era of retail that is becoming increasingly sophisticated, digital and dominated by digitally native competitors such as Amazon?

Both questions have haunted Macy’s since October, when activist investor Jana Partners suggested in a presentation to investors that Macy’s could increase its valuation by spinning the e-commerce business. Jana, with her story of pushing large retailers to shake up operations, took a stake in Macy’s and shortly after that presentation urged the company’s board in a letter to spin off the digital arm, speculating that Macy’s online arm could be worth about $ 14 billion, about double what Macy’s is valued at today.

Macy’s declined to comment before the revenue.

Jana Partners would not comment on her stake in Macy’s, but a person familiar with the situation said Macy’s is being encouraged to consider following the same strategy followed by Saks Fifth Avenue to bring in an investor to its dot-com business. to accelerate its growth, highlight its value and better position it to attract top technology talent. This last point was emphasized twice recently at Saks, first when a former Amazon boss joined the board of the new Saks.com – which is reportedly preparing its listed offer – and then during the summer, when another former Amazon leader took the role of COO. on the new free-standing Saks Off 5^th e-commerce company.

“Businesses are going to learn from people who are not necessarily in their own swimming lanes,” said Bernadette Nixon, CEO of Algolia, a technology company that helps retailers optimize their e-commerce. Nixon predicts that we will see many leading technology talents cross industry boundaries. “At the end of the day, we’re in a digital world and Amazon sets the standard, not Lord & Taylor, Saks or Macy’s,” she said.

Gennette was appointed CEO in 2017, when she was given the task of fixing the declining department store model that lost ground for Amazon and the suppliers of cheap fast fashion. Gennette has been with Macy’s almost exclusively since 1983, when he was hired as an undergraduate at Stanford University in the executive trainee program. According to the Wall Street Journal, he rose through Macy’s rankings with both merchandising and in-store experience, capturing millennial shoppers and bringing entertainment into Macy’s stores into two big goals when he became CEO.

Three decades spent in the same old department store probably help explain why he sees the future retail landscape as more than just digital.

“To me, it’s clear that a comprehensive retail ecosystem with physical stores in the best malls and the most productive off-site locations integrated with the best e-commerce offer in the classroom is a powerful combination and leads us forward as a strong, digitally managed omnichannel business,” said Gennette at Macy’s second quarter results conference on August 19th.

Macy’s stock price has risen around 34% since Jana Partners first proposed a spinoff, but historically, love from Wall Street, which sees Gennette as a solid brick-and-mortar guy, has been rare.

“Macy’s online business is not getting the respect it deserves,” said David Swartz, a stock analyst at Morningstar Research. “It is one of the largest online stores in the country, and the valuation has not always reflected that.”

Swartz says that Macy’s network enhancements work, although it does not solve the problem of fewer people shopping at Macy’s physical locations. The retailer announced a turnaround plan in February 2020, which includes closing 125 of its lowest-performing stores, upgrading 100 others and major investments in accelerating its digital business.

Of the company’s 5 million new customers who came in during the second quarter, more than 40% came to Macy’s digital, Gennette said at the earnings interview. In an effort to leverage its most valuable customers – those who shop at Macy’s both personally and online tend to spend three times more than those who only shop at one or the other – Macy’s has invested in data analytics so that they can follow when and what they buy, and tailor incentive programs and product messages to them.

Macy’s also uses social media and digital messaging to try to drive people to their stores, although analysts say there are still too many locations.

“The retail landscape has changed slowly, and the pandemic has gained momentum – there were far too many stores in the United States,” said Jessica Ramirez, retail analyst at Jane Hali and Associates. “With Macy’s, the square footage was ridiculous. However, there is still excitement in clothes to visit a store; you just need something to entice customers in.”

The place for physical stores in the retail of the future will be as channels for branding, say analysts. “You still have people who grew up in the late 1980s and 1990s running large corporations with physical assets stuck to this idea of ​​a physical store as a profit center, and that’s no longer going to be true,” says Lee. Peterson, executive vice president at WD Partners, a retail consulting firm. “The mentality needs to change, physically it’s about brand and online it’s about buying. What will make me really want to go to a department store?”

Making Macy’s stores a destination will require innovation. Unlike its advanced competitor Nordstrom, Macy’s is not known for its groundbreaking fashion brands, Ramirez notes. The company is trying to improve its trendiness by expanding private label brands across all its segments. Oak, a line of environmentally conscious textiles and home goods, is currently debuting. Macy’s has also partnered with Toys R Us to leverage toy sales, a sector that flourished during the pandemic and brought in new customers – millennial parents – many who came to buy toys and then bought goods with higher margins, Gennette said during the conversation.

Although analysts are not so sure about the long-term growth potential of expanding mini-toy stores inside Macy’s stores, they see a lot of upside in that Macy’s uses its stores to give customers more places to pick up or return items they have ordered online. Perfected by Target and Walmart during the pandemic, the idea of ​​using physical stores for retrieval and other distribution efforts has been so effective that even Amazon wants to enter; That’s probably part of the reason why it plans to open its own department store. “It makes sense why Amazon wants to open stores – they bring inventory closer to their customers,” says Ramirez. “It’s the last mile everyone is fighting for.”

Pent-up customer demand for returning to stores in person after the pandemic was a major factor in Macy’s second-quarter results – net sales increased 58.7% year-over-year to $ 5.6 billion and comparable sales increased by 61.2%. Morningstar estimates a 7% operating margin of 36% sales growth for 2021, which will be Macy’s highest since 2015. While Swartz says these margins may not be sustainable in the long run, he does not think spinning Macys.com is the answer.

“This idea of ​​splitting up these businesses goes against integrating the physical stores with the dot com stores – the industry is changing in a way that there is almost no line between the two businesses anymore,” he says. “Macy’s whole strategy has been to try to strengthen both by using them together to increase sales and reduce the cost of shipping, fulfillment and distribution.”

Other skeptics question the long-term viability of separating Macy’s two business flows, especially in a bubbly environment where some digital companies may be overrated. “Activist investors can often be engaged in simple financial development and do not think about shareholders, but make money,” said James Hoopes, Murata Professor of Ethics in Business at Babson College. “Activist investors sometimes unlock wealth and sometimes they destroy wealth.”

Based on extravagant valuations for digital businesses – just a few months after being financially separated from Saks, Saks.com is reportedly preparing for its IPO listing with a potential valuation of $ 6 billion – Macy’s fast-growing e-commerce segment is undoubtedly attractive for impatient investors. Under Gennette’s oversight, Macy’s digital sales grew by 7.7% in 2019 and 23.7% in 2020, though investors are wary of cannibalizing physical in-store sales.

It’s Macy’s giant warehouse footprint that makes investors wonder if its management team needs a little help to turn to a business model where physical devices better meet the needs of dot-com. But as one retail investor put it, when it comes to Gennette, “Who better to succeed in making this turning point than a person who is a brick-and-mortar-colored guy? That would be a powerful message.”