Macy’s shares soar on report of buyout offer

New York (CNN) — Shares of Macy’s soared more than 17% early Monday on a Wall Street Journal report that the iconic 165-year old retailer closely associated with the holiday season might itself be bought.

The report said the offer, which would pay shareholders a 32% premium above the stock’s closing price Friday, comes from Arkhouse Management, a real-estate focused investing firm, and Brigade Capital Management, a global asset manager, noting that that the bidders had discussed the proposal with Macy’s.

It isn’t clear how the retailer views the proposal. Spokespeople for Macy’s and Arkhouse had no comment on the Journal report. Brigade did not immediately respond to a request for comment.

Macy’s has 722 store locations in 43 states, Washington, DC; Puerto Rico and Guam. It operates about 500 Macy’s branded stores, as well as 55 of the more upscale Bloomingdale’s branded stores and 160 locations of the beauty and skin-care chain Bluemercury, which it acquired in 2015.

“Where Arkhouse likely sees value is in Macy’s real estate,” said Neil Saunders, a retail analyst with GlobalData. “An investor group that sells off real estate and perhaps takes other actions such as spinning off the ecommerce business, would certainly make some short-term gains.”

But this strategy would hurt Macy’s as a retailer, Saunders said.

“Unless some of those profits were reinvested in revitalizing the core retail business, it would leave Macy’s in the worst of all worlds,” he said.

Macy’s and other traditional department stores have struggled for decades now. Competition both from online retailers like Amazon and big box retailers, such as Walmart and Target – which offer shoppers the chance to buy groceries as well as clothes and other household goods – has left Macy’s with a smaller slice of the retail pie.

Macy’s has long outlived its early rival, Gimbel’s, which closed in 1986. It is not only known as the sponsor of the Thanksgiving Day Parade in New York, it was one of the pioneers in the 19th century in getting Americans to associate the Christmas holiday with shopping for gifts. The 1947 film “Miracle on 34th Street” about Santa Claus bringing the spirit of Christmas back to retailing is still a holiday classic film more than 75 years after its debut.

In recent years Macy’s has closed stores to cut costs. The number of full department stores under the Macy’s and Bloomingdale’s brands is down by a third, or 280 stores, in the last nine years. Its net income in the first three quarters of this fiscal year fell 74% compared to a year earlier. Sales at stores open at least a year were down 7%.

Share price is also down from a peak of $73 a share in June of 2015. The $5.8 billion offer being discussed, while a 32% increase from Friday’s closing valuation, is down 75% from that 2015 peak. Since then, Macy’s has spent $3 billion on share repurchases in an unsuccessful attempt to support its steadily declining stock price.

In June it cut its annual profit and sales forecast after customer demand slowed.

“The US consumer, particularly at Macy’s, pulled back more than we anticipated,” Macy’s CEO Jeff Gennette said on an earnings call Thursday. Customers “reallocated” spending to food, essentials and services, he said.

Gennette, who has run the 165-year old retailer for the last seven years, is set to retire in 2024.

Investor groups such as private equity funds and hedge funds have been active in recent decades in buying struggling or under-performing retailers, with the stated goal of taking them private, improving their operations and selling them for a profit. But the results have often led to closure, not salvation, for many well-known companies.

The new owners often load up the company with unaffordable amounts of debt, and sometimes split the retailers’ extensive real estate holdings apart from its retail operations. With the real estate and retail operations now legally belonging to two separate companies, the retail operation is forced to pay rent to the real estate company, which now officially owns the building the stores are in. The long-term prognosis for the legacy retailer in such a set-up might be poor, but it does allow the real estate’s new owner to extract a maximum return on the property.

There have been numerous major retailers that have gone out of business once private equity becomes involved. Lord & Taylor, Toys R Us, Payless ShoeSource, Sports Authority, RadioShack, The Limited, Wet Seal, Claire’s and Aeropostale all filed for bankruptcy and closed all their US stores after being purchased by private equity.

Sears Holdings, which was bought by a hedge fund and operated both Kmart and Sears, another iconic department store chain, filed for bankruptcy as well, and while it remains in business it has only a handful of locations where it once had hundreds of stores under each brand.

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