Saks is a retailer to watch in the wake of the pandemic. The future of retail is unabashedly omnichannel, with brands and retailers across the board (including traditionally digitally-hesitant luxury brands) continuing to benefit from the increased consumer reliance on e-commerce, while at the same time, maintaining – and in some cases, expanding upon – their networks of physical stores. Yet, as the dust continues to settle on the global health pandemic that has rocked the retail space since late 2019/early 2020, the reality of modern retail is proving to be a complicated one, and Saks’ strategy provides some interesting insight.
In the wake of the pandemic, retail companies are readily reevaluating established ways of doing business, taking into account the role of physical outposts (and what it means for a sale to take place “in-store” in 2021 and beyond), and the need to prioritize e-commerce and mobile commerce. Big-name department stores, in particular, are navigating the swiftly-changing retail landscape – and looking to maximize the benefits of their historically brick-and-mortar-dependent model – by putting a formal divide between online and physical stores, thereby, giving rise to the e-commerce spin-off and potentially shedding light on what might become a larger industry trend.
New York-headquartered Saks, for instance, made headlines early this year amid reports that parent company Hudson’s Bay Co. (“HBC”) was looking to spin off Saks.com from the Saks brick-and-mortar business, and take the former division public, all while maintaining an exclusive agreement between the two arms to mimic an otherwise omnichannel operation. In October, people familiar with the matter told the Wall Street Journal that the company is working towards an initial public offering that could take place in the first half of 2022 and could garner a $6 billion valuation for the online division, alone. (The online-only division was valued at $2 billion in March.)
An IPO would be the second phase of a plan that HBC announced in March in connection with which it revealed the Saks’ forty brick-and-mortar stores will operate separately from its e-commerce division.
Saks is not alone in believing that a department store business may be worth more if it splits itself into two parts; Jana Partners, the activist investor that has taken a stake in Macy’s, is pushing the 163-year-old chain to go ahead with a brick-and-mortar, e-commerce split that mirrors Saks’ move. And still yet, United Kingdom-based department store chain Selfridges is said to have engaged in discussions about a similar effort of its own.
As for what is driving the recent push towards retail spin offs (and an enduring pattern of spin off across industries more generally), K&L Gates LLP’s Matthew Miller says that “typical considerations of parent companies seeking to spin off a subsidiary company include increasing shareholder value, facilitating growth, presenting a clearer tax and operational profile to investors, and a host of other legal, business, and practical considerations.” In many cases, he notes that a spin off usually follows from the view that “the parent and subsidiary have fundamentally different business models and that both entities could benefit from the subsidiary being its own independent company – including, but not limited to, obtaining a higher aggregate valuation due to the ability of investors to better appreciate all aspects of the distinct businesses.”
As TFL noted in January, with brick-and-mortar actively driving down the value of many of the biggest names in the retail space when compared to e-commerce gains, HBC is likely aiming to boost the overall value of the group in a way that makes sense right now: taking Saks’ privately-held digital assets – the ones responsible for approximately $1 billion in annual revenue – and floating them on the public market.
Since the market is responding to digitally-native retail operations (as evidenced by the success of Allbirds and Warby Parker’s recent stock market debuts, and those of Poshmark, Mytheresa, etc. before that), taking its private digital assets and exposing them to the market will likely “get HBC a market value that will drive up the average for all of its assets,” Brian JM Quinn, a professor at Boston College Law School, who focuses on corporate law and M&A, told TFL earlier this year, noting that using the market to assign value of a formerly privately-held asset and then absorbing that value back into a larger entity is a “common motivation” in instances like this.
In the meantime, Marc Metrick, previously president and CEO of Saks Fifth Avenue, and now CEO of the new Saks.com arm, told the AP that the stand-alone company “can grow bigger much faster.” Since March, when the formal Saks, Saks.com split took place, Metrick says that the e-commerce business – with $500 million in cash from VC firm Insight Partners – has acquired “about half a million new customers, while maintaining all the right economics,” meaning that “not only [are] customer-acquisition costs moderate to low,” the “lifetime value of these customers” is promising.
As for the split, itself, he stated that as the Saks began watching the “digitally-native consumer come to life,” even before the onset of the pandemic, the retailer’s management “decided to really structure our business in a way where we can win with both [e-commerce and in-store] channels the right way.”
Given the rise of the digitally-native customer and the seeming high-growth-centric benefits that come with separating the digital and the physical, and depending on how Saks’ potentially impending IPO plays out (Metrick would not confirm if/when that will happen), other companies – including those outside of the traditional department store space that, nonetheless, maintain robust physical networks and budding e-commerce divisions – very well may be prompted to spin off e-comm, too, creating a rather complex new picture of what retail looks like in a digitally-connected, post-pandemic market.
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