Opinion: Separation of Macy's E-Commerce From Stores Unlikely

Morningstar (10/15/21) Swartz, David

The Wall Street Journal reported that Jana Partners has bought an interest in Macy's (M) and proposed that the company split its e-commerce business from its physical retail division. The e-commerce unit is expected to top $8 billion this year, much larger than that of Saks Fifth Avenue, which means it could be even more valuable. Jana suggests each of Macy's businesses could be valued at $7 billion, which approaches the firm's current cumulative market capitalization. Morningstar's David Swartz writes that both practical and strategic reasons underpin the unlikelihood of a separation. "Thus, we are not changing our fair value estimate of $20.50 per share and view Macy's as fully valued," he explains. "We do not think Macy's management will be amenable to Jana's proposal and do not view it as realistic. The idea of splitting its physical and online retail is contrary to Macy's Polaris plan, which is largely based on complete connections between the two channels, including online delivery to stores, returns of online sales in stores, more technology within stores, and a universal loyalty program. While we do not think Polaris will provide Macy's with a competitive edge (hence our no-moat rating), its board and CEO Jeff Gennette are fully committed to it." Swartz also cites positive early results, indicating Macy's is rebounding from the pandemic. "We forecast a 2021 operating margin, excluding real estate, of 7%, its highest since 2015, on 36% sales growth," he writes. "Apart from requiring a shift in strategy, splitting Macy's would also be costly and create significant technology, logistical, and management issues. We had a negative view of no-moat Gap's [GPS] proposed (and eventually dropped) spin-off of Old Navy two years ago for similar reasons."

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Opinion: An Investor's Entry Stirs Bad Memories at US Foods

Crain's Chicago Business (10/13/21) Cahill, Joe

Joe Cahill writes in Crain's Chicago Business that Sachem Head Capital Management disclosed a 5.1% stake in US Foods (USFD), with the investor calling the company's shares "undervalued" and laying out actions it might discuss with management, other shareholders, and "other interested parties." Such actions, as detailed in Sachem Head's filing with the Securities and Exchange Commission, include mergers, asset sales, and management or board changes. Cahill says the move calls up bad memories of the Kraft Heinz (KHC) debacle. Of concern is two typical moves of dissident investors: selling off non-core assets and an outright sale of the entire company. The former strategy can raise share prices fast, especially if non-core businesses are underperforming compared to core operations. But US Foods has few non-core assets. Beyond that, it runs a smaller, relatively profitable cash-and-carry business. Splitting up its core business along geographic or market lines would produce smaller businesses in an industry where scale is critical to success. Meanwhile, selling the company would likely invite government opposition to a merger with the most logical buyers in the food service industry. In 2015, White House antitrust enforcers blocked the planned sale of US Foods to industry leader Sysco (SYY). The current antitrust-aggressive administration also likely ensures a failed acquisition by Sysco or Performance Foods Group (PFGC). "The best hope for a sale of US Foods appears to lie with so-called 'financial buyers,'" Cahill writes. "Private equity, in other words." However, Kraft Heinz owner 3G Capital fits the definition of the kind of company that would be interested. "The question is whether 3G or any private-equity firm would see sufficient upside in US Foods," Cahill says. "Sachem Head calls the stock undervalued, but it hasn't performed all that badly. In the three-year period ending Oct. 6, US Foods stock rose 21.5%, outpacing Sysco's 12.6% rise, but trailing Performance Food Group's 61.6% gain. In the 12 months ended Oct. 6, however, US Foods led the pack with a 55.6% rise." To generate even more value, a private-equity firm would have to raise earnings significantly and increase cash flows to cover the huge debt that a buyout entails. US Foods carries some $5.7 billion in debt, which could double in a debt-financed merger. The company has a market capitalization of $8.5 billion. "The simplest and quickest way to boost margins and cash flow, of course, is to slash costs," Cahill writes. But if the Kraft Heinz episode offers any insight, it is that drastic overhead reductions could also shrink sales growth.

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More Corporate Directors Welcome Rules to Boost Board Diversity

Bloomberg (10/12/21) Boyle, Matthew

A PwC survey of 851 corporate directors indicates that those who backed mandatory policies to increase board diversity grew markedly over the past year. The poll found 33% of directors said "no action" was necessary to realize diversity on public company boards, compared to 71% in the 2020 survey. Nearly 66% of respondents supported stock-exchange listing rules requiring disclosure of board diversity, such as those Nasdaq Inc. (NDAQ) recently deployed, while 20% supported laws mandating minority directors, like legislation California passed last year. Investors including BlackRock Inc. (BLK) and Vanguard Group Inc. are increasingly opposing members of non-diverse boards, and the new California statute fines non-compliant companies. Recruiter Heidrick & Struggles (HSII) determined that the percentage of new Black directors on Fortune 500 boards rose almost threefold last year compared with previous years, but the boards of the largest U.S. companies remain predominantly White. Doubts about diversity efforts, especially among male directors, are a contributor. One in three male board members said the push for more diverse directors leads to boards nominating "unqualified" and "unneeded" candidates, a sentiment repeated by less than 20% of female directors. "I'm very concerned about that statistic," said PwC's Tim Ryan. "When I see that it tells me we have work to do." Evidence is scant that the boost in female directors has reduced board competency. Moreover, nearly 60% of polled directors said diversity is fueled by "political correctness," an increase from the last two years' surveys. Fifty percent of respondents also called shareholders "too preoccupied" with diversity, a slight increase from 2020. The new Nasdaq rule does not require any changes, but does obligate companies that lack women or diverse members to explain why. Securities and Exchange Commission Chair Gary Gensler also has said his agency is considering separate recommendations for company disclosures of diversity data. Meanwhile, California has directed state-based boards to meet gender and other diversity requirements, and that law will head to trial this month.

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