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Macy’s, Nordstrom in the market to buy Belk? Don’t kid yourself

April 6, 2015, 5:31 PM UTC

Belk has put out feelers to see if anyone might be interested in buying the regional 297- department store chain that is a de rigueur destination for Southeastern fashionistas. But Belk’s brass shouldn’t hold its breath expecting a fellow retailer to snap it up.

According to Reuters, which broke the news of the sale last week, major department stores such as Macy’s (M) and Nordstrom (JWN), as well as big buyout firms, are expected to soon be contacted by Belk’s investment bankers at Goldman Sachs to gauge their interest.

It’s not that Belk’s financial performance hasn’t been good: in fact, it’s been in line with those of its department store brethren, including Macy’s and Dillard’s (DDS). Last fiscal year, overall sales rose 5% to $4.11 billion, while profit was up 8%, and business picked up late in the year.

But being a department store is precisely why Belk won’t be a tantalizing morsel for the Macy’s of the world: it provides no diversification to retailers that have been aggressively trying to branch out of the traditional department store business.

Belk’s is a fine Southern retailer with a loyal following: its tagline is “this is where southern style lives.” What’s more, Belk co-anchors countless malls with Macy’s and other mid-tier department stores. But that begs the question: Why would any department store double down on its exposure to department stores’ vulnerability given the sector’s challenges? It’s all the more bewildering when one considers that Belk’s comparable-store sales rose last year thanks to a jump in e-commerce, meaning its brick-and-mortar stores are seemingly not being spared the drop in traffic that’s weighing on its peers.

And snapping up Belk could be pricey: its market value last week, just before news of a potential sale process emerged, pegged the retailer at $2.1 billion. (Some 60% of company stock, which is traded over the counter, is owned by Belk family members, and the company, founded in 1888, is being run by a third generation of the Belk family.) Add to that a premium, company debt, and deal multiples for other department store M&A, and you get up to about $4 billion — that’s a big chunk of change for a retailer that’s merely humming along.

Here is a closer look at some the potential department store bidders for Belk — and why they’ll likely take a pass on this deal.

Macy’s, the biggest U.S. department store operator, bought May Department Stores a decade ago in a $17 billion deal that turned it into a national department store chain. But it spent years digesting some of the regional retailers it bought — notably, Marshall Fields in Chicago, where local shoppers resented Macy’s for years. It also closed overlapping stores, and sold off some businesses, such as the Lord & Taylor chain. It’s not clear Macy’s would want to go through that again anytime soon.

In any case, its focus has shifted. In the last few months, Macy’s has announced plans that prove it doesn’t see more of the same — operating U.S.-based department stores — as its path to continued growth: it recently bought beauty and spa chain Bluemercury, has said it may launch an off-price chain (possibly similar to TJX Cos’ (TJX) T.J. Maxx), and announced plans for its first-ever store abroad in Abu Dhabi.

This comes as comparable sales at Macy’s have grown primarily thanks to e-commerce, with store traffic trends difficult. The company has also been closing some stores, bringing its fleet of namesake stores to below 800. It also operates the Bloomingdale’s chain.

Macy’s already operates 116 stores in the Southeast, consistent with the count in other regions, so adding 300 stores in the region, where Dillard’s is a formidable competitor, makes no sense. It could close overlapping stores too, but that would be a laborious, distracting and ultimately wasteful exercise. It’s all the more baffling given how similar Macy’s, Belk and Dillard’s are in their offerings. What would Macy’s gain from Belk, whose e-commerce is certainly not as far along and whose stores don’t bring them in as much anymore? Not much.
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The idea of Nordstrom buying Belk seems even more ludicrous. Nordstrom has a lot on its plate already: it has committed to spending billions in the next few years on its industry-leading e-commerce capabilities and plans to double the number of its Rack outlet stores by 2020.

It has made acquisitions in recent years: Trunk Club and Haute Look, notably. But those have been e-commerce focused. The 116-luxury department store chain would certainly not need a 300-store mid-tier department store, especially one of such modest growth. This is especially true given that Nordstrom’s cautious management team is in the midst of overseeing its expansion in Canada, with the first of two stores open and more on the way.

Hudson’s Bay Co.
HBC is a name that could pop up, if only because of the headlines it grabbed in 2013 when it bought Saks Inc (operator of the Saks Fifth Avenue luxury department stores and Off Fifth outlet stores) for $2.4 billion. HBC, which also owns Hudson’s Bay in Canada and Lord & Taylor, is led by real estate scion Richard Baker who said at the time that “department stores still make a lot of money.”

But here too, HBC has a lot on its hands. It is bringing the Saks Fifth Avenue into Canada next year and is aggressively expanding the Off Fifth outlet chain in the U.S. A big reason HBC was drawn to Saks in the first place was its valuable real estate, notably its iconic flagship on Fifth Avenue, which an appraiser last year said was worth $3.7 billion. (HBC also announced in February it would team up with the top U.S. mall owner, Simon Property Group (SPG), to create a real estate joint venture using the bulk of its U.S. properties, with a view to probably turning the entities into real estate investment trusts and then take them to the stock markets in an IPO in a few years.) Belk does not have similarly iconic flagship stores.

Still, you never know. Dillard’s, also a Southern-focused department store, saw its stock soar a few years ago when it announced plans to create a REIT that would separate its stores into a new stock, though the REIT never happened. And last week, Sears Holdings’ (SHLD) shares jumped when it moved closer to a REIT, expected to be created in June. All would depend on the quality of Belk’s real estate portfolio — it is primarily a mall-based retailer whose stores are smaller than a typical Macy’s. It owns — or has a ground lease — on about half its fleet.
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Bon-Ton Stores
While Bon-Ton’s name has been floating around as a prospective buyer, that notion is ludicrous. For one thing, Bon-Ton has a market value of $150 million, so it’s hard to see how it could buy a company worth 20-30 times more. What’s more, Bon-Ton has been unprofitable in the each of the last two years, and comparable sales were up a meager 0.2% last year. Forget it.

J.C. Penney and Sears
Both retailers are shrinking their store fleet (Sears much more quickly), and both retailers are in a delicate financial situation, so Penney (JCP) and Sears are obviously not going to bid. Besides, even if Penney’s sales are on the upswing, it is weighed down by debt of $5 billion and sales of only $13 billion, so there is no way the retailer could swing a deal for Belk even in the remote chance it wanted to. As for Sears, well, it has been conducting a years-long fire sale to shed its assets.

So it looks like private equity investors will be the ones to make a bid — if any.