Why Selling Macy’s Would Be Very Complicated

Over the past two weeks, speculation that Macy’s Inc. is on the selling block has been heating up.

The struggling department-store chain — which kicked off 2017 by announcing more than 10,000 job cuts as well as ongoing store closures — is said to be courting several suitors, including Canada-based Hudson’s Bay Co.

Despite the recent turbulence, Cowen and Co. analyst Oliver Chen could think of several reasons why Macy’s could be attractive to a potential buyer: its “inexpensive” valuation; real estate assets, valued at $15 billion to $20 billion; and $2.8 billion in free cash flow. Yet Chen suggested that those factors might pale in comparison to the challenges that would come with trying to snap up and integrate the chain.

We think potential strategic buyers could have discomfort on the prospects of continued comp store sales declines combined with a store closure program, which makes sense but is likely to drive lower near-term revenue growth,” Chen writes. “Most significantly, structural but related problems include the continued rise of the off-price channel and shifting millennial shopping habits.”

Chen added that he believes that Macy’s supply chain lead times are too long and that shoppers are generally transitioning away from shop-in-shop brand models, which does not bode well “for the similarity of all Macy’s stores.”

A buyer would likely need to be excited or prepared to execute better than current management with respect to a turnaround,” the analyst noted.

Meanwhile, where HBC is concerned, Chen and other experts seem conflicted on the pros and cons of a possible merger.

While Macy’s is in the midst of a hard-fought turnaround, HBC’s own debt as well as its volatile shares could make a potential deal “prohibitive,” according to Chen.

HBC, which has a market value around $1.9 billion CAD, or $1.5 billion, has built an impressive portfolio, which includes Saks Fifth Ave., Lord & Taylor and the Hudson’s Bay department-store chain. In 2015, it snapped up Galeria Holding, parent of German mega-department store chain Kaufhof, in a step toward European expansion. It added luxury e-tailer Gilt to its stable last year.

Despite its acquisition hungry identity, the firm’s department stores have not been immune to the struggles felt by many retailers over the past 18 months.

Comparable store sales at Saks Fifth Ave., Saks Off 5th, Gilt and HBC Europe (Galeria Kaufhof, Galeria Inno and Sportarena) all suffered declines during the recent holiday season.

Cowen and Co. listed Fast Retailing and Primark as well as other companies “from the Middle East or Asia” as other potential buyers for Macy’s.

We believe a U.S. asset could be potentially interesting to these parties if they are looking for tangible assets, but there may be geopolitical risk,” Chen noted.

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