After a review, the storied retailer announced that it will not spin out its ecommerce arm as a standalone business.
Macy's wants to stay under one roof.
Against a backdrop of growth in digital sales, Macy’s announced that it will not spin off its ecommerce business into a separate company.
After facing pressure from an activist shareholder to spin out its digital business, Macy’s board of directors conducted a review of potential paths forward. Ultimately, it decided that an “integrated, omnichannel” Macy’s was the best path forward.
In making the decision, Macy’s cited “high separation costs and ongoing costs from operating separated businesses, as well as high execution risk for the business and the company’s customers.”
“We are more confident in our path forward as one integrated company. The Board’s review reaffirmed our conviction that we are pursuing a robust strategy, and it provided us with greater clarity on several initiatives that could be further accelerated to unlock additional value for our shareholders, which we are pursuing,” said Gennette. “Our team will continue our work to deliver an even bolder and brighter future for Macy’s, Inc. and all its stakeholders, including our shareholders, our colleagues and our customers.”
Macy’s began its review after activist shareholder Jana Holdings took a stake in Macy’s in October. CNBC reported at the time that Jana cited figures showing a digital business would be worth “a multiple” of its current business, which is valued at $7 billion. It would’ve followed fellow department store retailer Saks Fifth Avenue, which spun out Saks.com to form a $2 billion standalone company last year. Macy's even hired AlixPartners, the same firm used by Saks to conduct its fourth-month review. However, a move by Jana Holdings to cut its stake in Macy's last week preceded the latest announcement.
Macy’s will move forward by pursuing initiatives that “span digital, brand partners, private label, marketing and loyalty and the expansion of off-mall, small-format Market by Macy’s and Bloomie’s stores,” the company said. Macy's will also delay the further closure of its physical stores, with Genette citing changing consumer habits that could position the company's physical footprint to play a role in both online and IRL retail.
“Our stores are also fulfillment hubs supporting our digital operations through ‘buy online, pick up in store,’ curbside pickup and same day delivery,” he told analysts. “Keeping these cash positive stores open also helps us to fund the investments we're making to reposition our fleet over the next several years."
The company’s 2021 earnings reported Tuesday indicated the company’s digital sales increased 13% over 2020, 39% over 2019. Digital penetration was 35% of net sales, which was a 9% decline from 2020, but a 10% improvement over 2019.
When it comes to total sales, Macy’s beat Wall Street expectations to increase comparable sales 43% from 2020 and 3.1% from 2019. Notably, more than 70% of its sales were tied to its loyalty program for the fourth quarter.
The company has been in the midst of a transformation effort that began two years ago. This has included a shift to more ecommerce offerings as consumer shifts toward online retail were accelerated by the pandemic. In November, the company announced plans to launch a curated digital marketplace, powered by tech company Mirakl. It is expected to launch in the second half of 2022.
“Our team began the large-scale work of transforming Macy’s, Inc. two years ago when we launched the Polaris strategy, and today we believe the evidence is clear – our business is stronger, more agile, and financially healthier. We are more digitally led and customer centric and believe we are better positioned for long-term sustainable and profitable growth,” Gennette said. “Thanks to the hard work of our colleagues, successful execution of Polaris, and the strategic allocation of our capital, we believe we are well-positioned to successfully navigate the macro-economic headwinds we expect in 2022.”
The retailer's marketplace is expanding quickly.
When it comes to ecommerce growth, was the pandemic a blip or a new trendsetter?
As we move further from the height of COVID-related closures, it’s a question that will start to be answered through the lens of history.
So far, the narrative of ecommerce growth in the U.S. from 2019-2022 has gone like this: Ecommerce’s share of overall retail saw a huge spike at the height of the pandemic in 2020-21, when goods in general were in demand and online shopping was necessary to preserve health and safety. Experts looked out and saw a permanent exponential change in the penetration of ecommerce as a share of retail that would last beyond the pandemic. Then, in 2022, everyone went back to stores and the trendline came back to 2019 levels. Growth was no longer exponential. There was still growth, but it was not happening as fast as during the pandemic period.
With this in mind, it’s worth pointing out that 2023 is the first year that there likely won’t be a pandemic-influenced swing to influence ecommerce growth. It is also a year where demand has suffered challenges amid inflation and interest rate hikes.
So as we seek to determine the importance of ecommerce to overall retail, it’s worth it to continue taking a close look at what growth trends retailers are seeing now, whether ecommerce is remaining resilient amid consumer pullback and how retailers are preparing for the future.
The latest example arrived this week from Macy’s. It’s a fitting one for the times. Overall, Macy’s is seeing a slowdown as consumers pull back on discretionary purchases, with sales declining 7% in the first quarter versus the same quarter of 2022. Digital sales were down 8%.
Macy’s is particularly susceptible to the macroeconomic headwinds that many brands and retailers are facing, as spending among the middle-income consumers it counts as a primary customer base is particularly softening, said GlobalData Managing Director Neil Saunders.
But while ecommerce is slowing overall, the importance it gained to Macy’s business during the pandemic is remaining in place.
In 2019, ecommerce made up 25% of Macy’s revenue, CEO Jeff Gennette told analysts on the company’s earnings call. That jumped to a high of 44% in 2020. By 2022, digital reached 33% of sales after the pandemic boom. In the first quarter of 2023, it remained at 33%. So, while the trend line dipped after shoppers returned to stores, ecommerce share still settled in at a higher post-lockdown point than it was before the pandemic.
This came in a quarter in which traffic was “relatively good” across both online and in-store, Macy’s CEO Jeff Gennette said. It was “flattish” online, and slightly up in stores.
“We do expect that this is the reset year with the penetration between them,” Gennette said. “But we do expect more aggressive growth in digital in the future versus stores as we think about '24 and beyond. And that's going to be foisted by a lot of ideas and strategies.
Over the last year, the retailer has made investments in boosting ecommerce, even as shoppers returned to stores. In a bid to boost the assortment of goods available online, Macy’s launched a marketplace in September 2022 that welcomes goods from third-party sellers.
The marketplace had an “outstanding” first quarter, said Macy’s President Tony Spring, who is poised to succeed Gennette as CEO next year. Gross merchandise value increased over 50% when compared to the fourth quarter of 2022, while the average order value and units per order for marketplace customers was 50% above those not shopping at the marketplace.
Macy’s is continuing to build the marketplace even as it racks up sales. The retailer added 450 brands, ending the quarter with 950 brands.
This is helping to draw in new customers, as well as younger existing customers who are buying more items, resulting in increased basket size.
“We're very excited as to how marketplace is really attracting the Gen Z customer, particularly in categories where it was not economically feasible for us to carry in the past,” Gennette said.
In the end, Gennette said a strong digital and social presence is key to attracting younger consumers. That's a different type of shopper than other age groups.
“We know the younger customer starts first online,” Gennette said. That behavior will still be in place as the generation gets older, and gains more buying power in the process.
Going forward, Macy’s is seeking to expand the model to other retail banners in its portfolio. Bloomingdale’s will open a marketplace in the early fall.
The Macy’s ecommerce trajectory isn’t that different from the wider U.S. ecommerce narrative detailed above. With one quarter of 2023 data, there is evidence that ecommerce share settled out at a higher point after the pandemic than where it started before COVID arrived. There is flattening now, but the retailer is taking it not as a sign of a slowdown, or a signal to change course. Rather, it sees changing consumer behavior as a reason to build for the future.
