The Update Issue: Department Store E-Commerce Spinoffs, Hertz and Tesla Strike a Deal

Shares of department store Macy's (M) jumped almost 18% on October 18 when an activist investor urged the retailer to spin off its e-commerce business... Hedge fund Jana Partners is lobbying for Macy's to separate its growing online operations (which have about $8 billion in sales) from its physical stores (which are in secular decline […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] The Update Issue: Department Store E-Commerce Spinoffs, Hertz and Tesla Strike a Deal By Berna Barshay Shares of department store Macy's (M) jumped almost 18% on October 18 when an activist investor urged the retailer to spin off its e-commerce business... Hedge fund Jana Partners is lobbying for Macy's to separate its growing online operations (which have about $8 billion in sales) from its physical stores (which are in secular decline as shoppers increasingly spend their dollars online or shop in more specialized retailers). This idea mimics the plan to spin off Saks.com from the luxury department store Saks Fifth Avenue. The problem here is that this concept makes absolutely no sense to anyone who actually works in retail. There are tremendous synergies between brick-and-mortar stores and e-commerce sites. Separating them will create costs and complexities, as I explained in the [March 5 Empire Financial Daily](... Saks.com also benefits greatly from the omnichannel synergies that it gets from being connected to the physical stores. The company recognizes that the ability to buy online, pick up in store ("BOPIS") and buy online, return in store ("BORIS") is a competitive advantage and plans to retain these options for Saks.com customers... but store labor doesn't come for free. Brick-and-mortar Saks will need to charge Saks.com for the time workers spend processing orders and returns. Brick-and-mortar Saks will also have to charge Saks.com if a loyalty program customer who has accrued points buying things online comes in and uses those points for a discount at the physical store. It sounds like this deal is going to require hiring more accountants and lawyers to see what these companies owe each other. And those aren't the only shared costs that need to be divided up... Right now, buyers at Saks conduct merchandising for both the stores and online. Is online going to hire its own set of buyers? Or will the two companies keep product selection uniform, so that they can collectively achieve the maximum potential inventory productivity that can result from omnichannel offerings like BOPIS and BORIS? And what happens to the shared services like IT and HR? Will Saks.com build out its own departments for that? One more question... will the new Saks.com have to pay to hang up the sign below?  Source: Bloomberg All the complications that would arise from cleaving the online operations away from the stores at Saks exist with Macy's as well... Ironically, Macy's went through an arduous and costly restructuring about five years ago to merge the buying and merchandising, marketing, and support functions that existed in parallel at the stores and online. After going through all that effort and expense... why would it pull them back apart? Not only would recreating parallel infrastructures raise overall expenses versus a revenue pool that is not going to expand proportionately in the split but also this all seems very customer-unfriendly. A customer doesn't care if Macy's and Macys.com are separate public companies, with separate performance metrics, profit and loss statements, and management equity compensation plans. Customers care that they can find what they need when they need it, at a competitive price, with good customer service, and preferably with a cohesive loyalty program that recognizes them whether they decide to shop in store or online. And when a purchase doesn't work out, they want to return it easily, either in-store or by mail. --------------------------------------------------------------- Recommended Links: [Have you bought Enrique Abeyta's No. 1 stock yet?]( Enrique has found what could easily be the biggest winner he's found in his 25 years on Wall Street... That is, if you buy shares soon. He says this single stock could turn every $5,000 into $55,000. "In fact, even if everything goes 'wrong,' it could still triple," he says. [Get the details right here](. --------------------------------------------------------------- [Teeka Tiwari's urgent crypto warning]( We're just weeks away from a major event in the crypto markets. 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Meanwhile, the Macy's store in Columbus, Ohio has several pairs of that shoe available. If Macy's can ship me that shoe from that store, it's rescued the full-price sale... and eliminated the risk that it has to sell that pair of shoes on clearance at the end of the season in Columbus. I've noticed that half the time I order online from Bloomingdale's (which is owned by Macy's), my item is shipped from one of their stores, not a centralized warehouse. Will that still happen if Macys.com spins off from Macy's like Jana is seeking? And if it still ships from the store to fulfill my order when the centralized e-commerce inventory is sold down, who will own the profit on my order, Macy's or Macy's.com? At the very least, it sounds like the cost of the accounting department is going to explode. More likely, it is much worse... it undoes everything it's worked so hard to achieve in omnichannel, angering its best customers in the process. All the department stores have repeatedly touted that customers who shop both in store and online are their most valuable customers. If you don't believe me, here are some other people who probably wouldn't see the logic here, either... Here's the reaction of one department store veteran... This is insanity... There are so many things wrong about it... The company went through a long overdue reorg in 2015 to become omnichannel. This would be like going 10 steps back. Then, on Tuesday night, Philipp Schindler, the chief business officer of Alphabet's Google (GOOGL) – one of the most digital businesses in the world – was waxing poetic about omnichannel on the Alphabet earnings call... We've seen explosive growth in digital over the last 20-some months. But as the world begins to reopen, shoppers are returning to stores, brick-and-mortar isn't dead. Instead, omnichannel is in full force. Searches for open now near me are up four times globally versus last year. Strong growth in local shop inquiries means people are researching their visits to stores more often before they go. As a result, we've seen more advertisers include in-store sales alongside e-commerce goals to drive omnichannel growth. Adoption has nearly doubled over the past year... Schindler called out retailer Kohl's (KSS) for its omnichannel accomplishments... Take Kohl's, it optimized media spend into trending categories and launched curbside pickup just two weeks after its 1,100 stores shutdown. After testing local inventory ads in the fourth quarter, Kohl's went all in on omnichannel bidding across its paid search portfolio and is leaning heavily into a full-funnel approach on YouTube... Kohl's net sales were up 31% year over year in the second quarter, led by higher foot traffic and continued strength in digital. This call-out is highly ironic... Last week, in the wake of Jana's pressure on Macy's to split off its dot-com operations, Yahoo Finance reported that activists were circling Kohl's and it would be the next retailer to come under pressure to spin off its e-commerce operations. I'm going with the opinions of the department store veteran and the Google chief business officer – as well as everything I have been told by virtually every retailer for the past decade about the importance of having a well-oiled omnichannel machine to compete in the modern retail world. Investors may be thirsty for e-commerce pure-plays, but that doesn't make the Macy's or Saks online spinoffs a good idea. These proposed dot-com spinoffs make no sense... And if these retailers are bullied into ill-thought, strategically senseless exercises in financial engineering, I predict they will end up having to put Humpty Dumpty back together again. That's what happened almost 20 years ago when bookseller Barnes & Noble spun off Barnesandnoble.com to take advantage of a hot market for e-commerce stocks at the expense of sound corporate strategy. History does repeat itself... Saks.com is supposed to go public sometime in the first half of 2022. That means it will take more than a year to get the spinoff ready. The complexity of pulling apart strategically intertwined businesses is surely contributing to that timeline. I would hope and expect Macy's to resist Jana's illogical demands and at least want to wait and see how it works out for Saks before agreeing to anything. Elsewhere in weird corporate events... In May 2020, I wrote about the [weird post-bankruptcy trading in shares of car rental company Hertz (HTZZ)](. In a way, Hertz may have been the original meme stock... the first in a line of challenged, old-school companies like videogame retailer GameStop (GME), movie theater chain AMC Entertainment (AMC), and telecom equipment maker Nokia (NOK) to see its stock go inexplicably parabolic. Hertz paired up with another company that is no stranger to controversy earlier this week: electric vehicle ("EV") leader Tesla (TSLA), whose stock is a perennial source of heated bull-bear debate. Just four months out of bankruptcy, Hertz made the bold move of announcing on Monday that it would order 100,000 Teslas for its rental fleet. This is the single-largest order ever for EVs, and when fulfilled, will generate about $4.2 billion in revenue for Tesla. Hertz only has about $2 billion of cash on hand and has net debt over four times earnings before interest, taxes, depreciation, and amortization ("EBITDA")... so this is a big capital commitment relative to its size. But in this credit market with the cars as collateral, it should be able to finance the order. TSLA shares soared 13% on Monday, tacking on about $118 billion in market cap...  This move pushed TSLA shares more than $1,000 for the first time... and the company into the trillion-dollar market cap club, rare terrain only inhabited by tech giants Apple (AAPL), Microsoft (MSFT), Alphabet, and Amazon (AMZN). Hertz also fared well on the press release... tacking on more than $1 billion in market cap. Hertz is increasing financial leverage and making a potentially risky, big bet on pricey EVs... without any guarantee, and the fancy cars will translate into higher daily rental rates. But the big winner here has to be Tesla... If you do the math, Tesla tacked on more than $1 million in market cap for each $42,000 car it will sell. But why do math when you are talking about cult stocks (or meme stocks)?! There's a reason Bloomberg called Tesla founder and CEO Elon Musk the "Meme-Stock Lord" on Monday. In the mailbag, a reader looks for a past essay, plus reactions to recent pieces on the supply chain... Are you an omnichannel shopper? Is buy[ing] online/pick up in store or buy[ing] online/return in store an important retail feature for you? Would you pay a premium to rent a Tesla on your next business trip or vacation? Share your thoughts in an e-mail to feedback@empirefinancialresearch.com. "Dear Berna Barshay, I enjoy reading your articles. I think you write beautifully and intelligently. It makes it fun for me to read financial pages. I have a request to make of you. Could you please send me a link to your recent article about Vivendi (VIV.PA)/Universal Music Group and the music entertainment business in general published a few weeks again? Thanking you in anticipation." – Marina K. Berna comment: Marina, thank you for the kind words! You can find the essay you are looking for [here](. As a reminder, you can find all back issues of Empire Financial Daily on the [Empire Financial Research homepage](. The archive is under the Newsletters tab and includes everything I have ever written, plus all the essays penned by my new colleague Herb Greenberg, who writes on Tuesdays and Fridays, as well as guest essays from other Empire folks and investment gurus from our sister companies. "I just drove across the country from North Carolina to Arizona. So many trucks on the road, at rest areas, at truck gas stations. More trucks than cars. One entrance to the 40W had trucks lined up on both sides. Lot of boxcars on the trains also. Don't know if this means Santa will get here on time." – Sheila L. "Hi Berna, I am all on board buying gently used! "Here are some of my recent buys, where I found them, and approximate value new (keep in mind I am in Canada and prices may be higher than in the U.S.) "Fall wardrobe for my 16-year-old daughter: $80 at the thrift store (her idea!), worth about $300. "Hairdryer: $3.99 at the thrift store, worth about $25. "Snow Tires and Rims for my SUV: $500 on a social media marketplace, worth $2,000. "Vintage Tommy Hilfiger Men's Jeans: $19 at the thrift store, worth about $80-$100. "Not only is it a good way to stretch your dollar, buying from a thrift store usually helps charities and provides employment, and keeps stuff out of the landfill." – Jeff S. Berna comment: Jeff, I agree with everything you said here. And you are on-trend... [resale and reuse are gaining steam](... for reasons of thrift and sustainability! It's interesting but not surprising that it was your teenager's idea to shop gently used for her fall wardrobe. Regards, Berna Barshay October 28, 2021 If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2021 Empire Financial Research. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Empire Financial Research, 601 Lexington Ave., 20th Floor, New York, NY 10022 [www.empirefinancialresearch.com.]( You received this e-mail because you are subscribed to Empire Financial Daily. [Unsubscribe from all future e-mails](