What is Behind Hudson’s Bay Co.’s Reported Plan to Split Saks Fifth Avenue and Saks.com?
In what might prove to be an interesting potential initial public offering this year, Saks Fifth Avenue owner Hudson’s Bay Co. is reportedly looking to take Saks.com public. Ontario, Canada-headquartered Hudson’s Bay “wants to split Saks.com from the Saks brick-and-mortar [business],” a source told WWD last week, potentially in furtherance of a move that “would create a freestanding Saks Fifth Avenue chain of stores, and a freestanding Saks.com company” with the two retail entities maintaining “an exclusive agreement in order to mimic an omni-channel world.”
The report comes as department stores – and most brick-and-mortar stores more generally – continue to suffer as a byproduct of the onset and ongoing impact of the COVID-19 pandemic. “The department stores, which have been failing slowly for a very long time, really do not get over this,” Mark A. Cohen, the director of retail studies at Columbia University’s Business School, told the New York Times last year. “The genre is toast, and looking at the other side of this, there are very few who are likely to survive.” As the owner of Saks and its network of brick-and-mortar locations, including its Off Fifth chain, as well, Hudson’s Bay is not immune to such struggles.
With brick-and-mortar actively driving down the value of many of the biggest names in the retail space, Hudson’s Bay appears to be looking to boost the overall value of the group in one 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.
Hudson’s Bay may not, however, actually want to split off the Saks.com brand entirely, and instead, may be looking to “liberate [those] digital assets” in order to garner value for the company, “while also maintaining the Saks Fifth Avenue brick and mortar [division],” Brian JM Quinn, a professor at Boston College Law School, who focuses on corporate law, M&A, and transaction structuring, told TFL. Specifically, Hudson’s Bay may take a minority stake of Saks.com and let it trade on the public market with one specific goal in mind: imputing value back to the whole.
Should Hudson’s Bay let go of a minority stake of Saks.com, “The market might take a view on a digital asset like a Saks.com and say, ‘Hey, that is really valuable,’ and price the stock accordingly,” he says. “Then that stock price is essentially absorbed by Hudson’s Bay” by way of the Saks.com stock that it is still holding. As a result, Hudson’s Bay “gets a market-based value for the asset without actually giving up control.” That is meaningful, according to Quinn, since “as a holding company, the value of Hudson’s Bay is simply the summation of its assets,” all of which are privately owned, and so, “from its perspective or from the perspective of investors, it is difficult sometimes to understand the value of a [holding company’s] subsidiaries because they are not publicly traded, and people generally like to look at how the market values these assets by looking at the stock price.”
Selling off some of Saks.com via an IPO would solve that issue.
The timing of the report is hardly a fluke. Digital divisions are where most fashion-centric companies are generally faring well amid COVID-centric shutdowns and slow-downs, and e-commerce-based companies, such as Poshmark and Mytheresa, are being rewarded by way of stunning valuations in the wake of their public listings in recent weeks. (Poshmark priced its IPO at $42 a share, giving it an initial valuation of more than $3 billion, CNBC reported on January 14, while Mytheresa Group GmbH, the European luxury e-commerce platform and former Neiman Marcus Group Ltd. subsidiary, went public on January 21 at a $2.2 billion valuation, per the Wall Street Journal). As such, it looks as though Hudson’s Bay has identified the part of the Saks brand that is really performing – i.e., its digital assets – and is aiming to take advantage of the fact that this is the time to trade on them.
Since the market is clearly responding to digitally-native retail operations, taking its private digital assets and exposing them to the market will likely “get Hudson’s Bay a market value that will drive up the average for all of its assets,” Quinn says. After all, Saks has been investing in digital, announcing in early November that it was re-launching Saks.com following “a comprehensive website replatforming and redesign.” The result, per Saks, is “a completely reimagined site experience that emphasizes fashion, ease and personalization,” with Saks’ Chief Marketing Officer Emily Essner saying at the time that as luxury consumer shopping habits evolve, Saks is “making strategic investments across all channels – including our online experience – to solidify our position as the go-to luxury shopping destination.”
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, Quinn says.
But does it make sense for Saks? Retail analyst Steve Dennis says that the move “first and foremost, seems to be a clear sign that [Hudson’s Bay chairman] Richard Baker and team are extremely pessimistic about the near-term prospects of the [Hudson’s Bay] portfolio,” as COVID has “eliminated or dramatically reduced many of the wearing occasions that drive sales of high-end apparel, accessories and cosmetics.” He notes in an article for Forbes that “if we have learned anything from the past two decades of retail disruption, it’s that notions of separate physical and digital shopping behavior are increasingly distinctions without a difference,” thereby, making a potential divorce of sorts (assuming that Hudson’s Bay does, in fact, separate the two Saks properties and sell of Saks.com as a whole) “incredibly short-sighted and opportunistic; all about near-term profit taking and little to do with what works best on behalf of customers.”
“If Saks.com and Saks’ physical operations are not worth more together than apart, that is either a failure of how they are being run by management or a misguided Wall Street aberration.”