Retail Icon Mickey Drexler on Breaking Up Department Stores: “I Don't Get It.”

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  • Activist investor Engine Capital, which owns roughly 1% of shares, says "punishing underperformance and perpetual value disconnect" in Kohl's stock requires a spinoff off online retail from bricks-and-mortar department stores or a private equity sale.
  • Saks already is planning to split its operations and Macy's is under pressure from activist Jana Partners to do the same.
  • Mickey Drexler, who led some of the biggest retailers including Gap and J. Crew, says he doesn't understand how retailers make it work.



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Mickey Drexler has led some big retail brands, and he sees challenges ahead for the sector even as in-store shopping is picking up again. But he doesn't understand how the latest Wall Street idea for retail —spinning off growing online operations — will solve more issues than it ends up creating.

Drexler who has led some of the biggest retailers such as Gap and J. Crew, and was the founder of Old Navy and Madewell, said he always goes by common sense and can't imagine splitting off any of those businesses.

"It doesn't make sense to me. That's the simple answer," Drexler told CNBC on Monday. "But maybe someone is smart and will figure out how to do it. Time will tell." 

The market is focused on Kohl's this week as possibly the next big split in retail. Following Saks' announcement earlier this year that it would spin off its online operations in an initial public offering, and Macy's being pushed by activist investor Jana Partners to consider spinning off its e-commerce, Kohl's is now feeling the pressure from activist investor Engine Capital, who launched a campaign to have the department store explore strategic alternatives for its business on Monday.

The New York-based hedge fund is pushing Kohl's CEO Michelle Gass to consider spinning off the retailer's ecommerce business, or a sale to private equity. "Even the most patient long-term shareholders cannot be expected to endure the punishing underperformance and perpetual value disconnect seen at Kohls," Engine Capital wrote in a letter sent to Kohl's board.   

"We believe a standalone Kohl's ecommerce business could be conservatively valued at $12.4 billion or more," the letter said, which it noted was an amount that "dwarfs the company's current market capitalization." 

Engine Capital added that private equity firms would pay $75 per share for the retailer and based on talks with potential buyers they believe they could further monetize Kohl's real estate. 

The activist fund has $400 million under management and would likely need more shareholder support: it owns 1% of Kohl's stock.

"I don't know what I would do if I had a brick-and-mortar along with a separate online company," Drexler told CNBC. "They are so embracing of each other." 

Drexler said a spin off for any retailer would be challenging, because the business would be managing the operation of two brands instead of just one. "How do you split them off? Do you change the name of one, have different merchant teams, different operation teams?" Drexler added. "I don't get it." 

Drexler, who stepped down as J. Crew CEO in 2017, is now overseeing the boutique fashion brand Alex Mill — started by his son, Alex, and former J. Crew design director Somsack Sikhounmuong — which has two stores in Manhattan.

Saks online IPO could fetch $6 billion valuation

In March, Saks Fifth Avenue led the move when the retailer announced it would be splitting off its e-commerce arm, after raising $500 million from venture capital firm Insight Partners.

Saks' 40 bricks-and-mortar storefronts became a separate entity known as SFA and remain wholly owned by Hudson Bay Company. plans to go public during the first half of next year, at a reported $6 billion valuation that could signal to more investors that it is a profitable strategy for more in the retail sector. 

That $6 billion valuation would triple the value that Insight Partners pegged Saks' online business as being worth when it provided financing early this year.

"If Saks believes it can get $6 billion, and the banks believe it could get $6 billion in an IPO, then what could a Macy's get or what could a Kohl's get?" Drexler said. "It got the wheels turning across Wall Street to look at various retailers to see where some low-hanging fruit might lie in this e-commerce separation idea." 

In a statement from Kohl's to CNBC, it said the retailer's board and management team are continuously exploring opportunities to maximize shareholder value. 

"Our strong performance this year demonstrates that our strategy is gaining traction and driving results," a spokesperson for Kohl's told CNBC. "We appreciate the ongoing dialogue we are having with our shareholders and value their input and perspectives." 

The department store's shares are up nearly 30% year to date, but it has underperformed in recent history, with a stock price that hasn't surpassed its valuation from five years ago.

The future of department stores and in-person shopping remains uncertain, and Drexler includes himself among those who see more challenges ahead for the retail sector.

"The real beginning of the business improving was probably more towards the middle of the year, and I think it's stronger for sure, because you're up against easy numbers and vaccinations started a year or so ago, but it's not back 100%," Drexler said. "Nothing is really ever back 100%, but everyone should be doing a lot better right now."

In-store shopping has picked up, shortages are helping in terms of pricing and margins, but "it's very weird out there," Drexler said. As consumers shift back from "buying a lot of sweatshirts and casual clothes" and enjoy shopping in-person again, he said the comps are "still pretty easy," while rents are going up and he thinks the "tougher challenges" for retailers will start towards the middle of year.

On a recent earnings call, Macy's CEO Jeff Gennette said the company recognizes the significant value the market is placing on pure e-commerce businesses. "As we look at the landscape today, we are undertaking additional analysis that could help inform our long-term strategy to future unlock value for Macy's," he said. 

Macy's has hired AlixPartners, a consulting firm, to review its business strategy. 

"It sounds very challenging and cumbersome," Drexler told CNBC. "But then again, it's not my job."

'Insane financial engineering'

Some bankers agree with Drexler.

"It's insane financial engineering," David Shiffman, co-head of the global consumer retail group for boutique investment bank and advisory firm Solomon Partners, told CNBC in October, adding that it is impossible to separate the two business models. 

"I am not saying someone's not going to try, and I'm not saying that someone's not going to pay a lot of money for that, but at some point, it doesn't work," he said, adding that one retail entity can't be making all the money while the other is holding onto all the assets. 

Spinoffs, at a high level during the past decade, are becoming popular across many sectors right now, from energy to industrials and health care, as major secular and demographic trends force legacy businesses to shift rapidly and invest heavily, but executive teams are often reluctant to make structural changes that mean giving up control.

But Mark Metrick, who will serve as the CEO of the new arm after serving as CEO and president of the retailer, told CNBC earlier this year that at least in its luxury niche, the idea makes sense and now is the right time. He said in a March interview when the company raised $500 million for the deal, that luxury retail has evolved from being an "or" business — companies had to invest in stores or online — to being what he calls an "and" business today, in which both stores can be a focus and investment in digital.

While many retailers are leaning into omnichannel as the model for in-store and online to reinforce each other — Macy's cited data showing that its online and in-store are stronger in areas where there is geographic overlap — Metrick said the two businesses can do that as separate companies.

"This is in no way the end of omnichannel," Metrick said. "It's the beginning of a new way of doing it."

He said the business will be supported through agreements with stores and that anything a customer wants to do — whether an exchange or return or alteration — will be possible, and in-store stylists will also have access to online inventory, which will benefit the consumer from an omnichannel standpoint.

"Now is the right time if you think about where we are today," Metrick said, with luxury spend online increasing and a digitally native younger consumer aging into wealth.

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