Macy’s (NYSE:M) was devastated by the pandemic when it was forced to shut all its stores to customers. That may have been a blessing in disguise. It forced the company to emphasize its digital business, which is now thriving.
It is doing so well that management is considering spinning it off on its own. Macy’s is considering this idea because of the potentially increased value the e-commerce business could have as a separate entity. Let’s take a closer look at Macy’s digital business.
Options for its digital business
Interestingly, Macy’s digital sales in the third quarter were 49% higher than in the same quarter in 2019. That figure highlights the impact the pandemic has had on the company’s online sales.
In all, digital sales made up 33% of Macy’s overall sales in Q3. The dramatic change in consumer behavior at the pandemic’s onset has helped Macy’s build its online business. Considering a business sale now, when it is arguably the strongest it’s ever been, might be a good idea.
Here’s what CEO Jeffrey Gennette said about the idea:
This past year, we conducted an analysis of our e-commerce 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. In collaboration with our Board and with assistance from our advisors, we look at multiple business models that would create long-term shareholder value while always respecting the omnichannel behavior of the customer. This work supported our digitally led omnichannel Polaris strategy that we are successfully executing.
That said, we also recognize the significant value the market is assigning to pure e-commerce businesses. And as we look at the landscape today, we are undertaking additional analysis that could help inform our long-term strategy to further unlock value for Macy’s, Inc. To help in these efforts, we have recently engaged AlixPartners to work with our Board and financial advisors. It is too early to tell what the results of this additional analysis will be, but we plan to update everyone after the work is complete.
Investors will be watching closely. Macy’s online business has helped the company bounce back from the devastations of the pandemic and is on pace to reach $10 billion in sales by 2023.
Macy’s digital business could be worth close to $40 billion
The market liked what it heard about Macy’s possibly spinning off the e-commerce business. The stock price shot up 21% after the earnings announcement and discussion by management.
The company also reported excellent results for the quarter, so it’s hard to determine how much of the stock price increase was due to talk off of a spinoff or the latest numbers. Macy’s comparable-store sales increased by 37.2% from the same quarter last year and 8.9% over the same quarter in 2019. Additionally, Macy’s repaid $1.6 billion in debt ahead of schedule.
Still, Macy’s is trading at a price-to-sales (P/S) ratio of 0.5, far below that of several e-commerce businesses (see chart). The average P/S ratio of the e-commerce businesses listed above is roughly 4. This is what management means when it sees the value a stand-alone e-commerce business could have.
If you combine that with Macy’s projected $10 billion in sales for its digital business in 2021, it results in a value of about $40 billion. It’s no surprise then why management is considering a sale. Anything close to that value would be substantial, considering Macy’s market cap as of this writing is only about $11 billion. Stay tuned.
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