Is Macy's about to become Canadian?

Macy’s (M) shares surged as much as 11 percent on a report that the department store chain is in talks to be acquired by Hudson’s Bay, the Canadian corporate parent of Saks Fifth Avenue and Lord & Taylor.

Discussions between Macy’s and Hudson’s Bay are preliminary and may not lead anywhere, according to the Wall Street Journal. The retailers are also exploring other ways to work together, including a potential real estate deal, the paper reported. 

Representatives for Hudson’s Bay and Macy’s declined to comment.

For Hudson’s Bay, which runs more than 480 stores around the world, buying Macy’s would be a splashy way of expanding in the U.S. New York-based Macy’s owns more than 850 stores in 45 states that operate under the Macy’s and Bloomingdale’s. Like other brick-and-mortar retailers, the company has struggled in recent years as consumers shifted their spending from physical stores to online merchants like Amazon (AMZN).  

Macy’s recent financial performance has been weak. During the third quarter, the retailer reported net income of $15 million, or 15 cents per share, a decline of 87 percent during the year-earlier period. On an adjusted basis, per-share profit was 17 cents, well under the 41 cents Wall Street expected. Same-store sales, which measures activity at locations opened at least a year, slumped a worse-than-expected 3.3 percent, while overall revenue fell 4.2 percent to $5.63 billion.  Holiday sales in 2016 were also disappointing, falling 2.1 percent on a same-store basis.

Macy’s has reported declines in same-store sales, a key retail metric, in 12 of the past 14 quarters. Many retail experts don’t see Macy’s fortunes improving anytime soon, particularly given its $7.5 billion in debt, which the Journal says is “complicating” a takeover.

“The whole thing makes no sense to me,” said Howard Davidowitz, CEO of Davidowitz & Associates, a retail consultancy and investment bank, adding that heavy debt loads are a huge obstacle for chains to overcome. “What you are going to do is add a lot of debt, and you are going to move the chairs around on the Titanic.”

This is the second time in less than a week where Macy’s has been linked to a potential buyout. According to the New York Post, Macy’s CEO Terry Lundgren is “receptive” to a friendly buyout offer as he prepares to step down from his position this spring

Macy’s stock price has plummeted more than 20 percent over the past year -- and that’s even with today’s run-up. The average 52-week price target of Wall Street analysts’ is $35.60, about 7 percent higher where it currently trades. Most of the 23 analysts who follow the stock rate it as a “hold.”   

Macy’s does have one highly valuable asset -- real estate worth about $20 billion. That has drawn interest from activist investor Jeffery Smith of hedge fund Starboard Value, who has sought a seat on the company’s board.

A Starboard spokesperson didn’t immediately respond to a request for comment.

A sale of Macy’s, which has been synonymous with retailing since before the Civil War, could be a bonanza for the 65-year-old Lundgren, who has served as the retailer’s CEO since 2003. According to recent proxy statement, he could be eligible for a golden parachute worth more than $82 million if Macy’s is sold. 

For most of his career, Lundgren earned a reputation on Wall Street as a savvy dealmaker. He was instrumental in Federated Department Store’s $11 billion acquisition of the May Co. in 2005, which combined the two largest department store chains. But he has stumbled in recent years, and was slow to recognize the importance of such trends as off-price retailing. 

Although Macy’s is one of the largest ecommerce retailers, the online gains haven’t been enough to offset the decline in its traditional business. In response to the changing retail environment, Macy’s has been closing stores and laying off employees. Earlier this year, Macy’s said it would shutter 68 locations and fire 10,000 workers. Other brick-and-motor chains are in a similar predicament, and more store closures and layoffs are expected.

“He’s in an impossible place,” said Davidowitz of Lundgren. “Making progress in ecommerce is one small part of the problem.... The more you do in ecommerce, the more you also eat your own lunch [by sacrificing in-store sales] because you are stuck with overhead in all these big stores.”

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    Jonathan Berr is an award-winning journalist and podcaster based in New Jersey whose main focus is on business and economic issues.