Deals

Shelly Banjo is a Bloomberg Gadfly columnist covering retail and consumer goods. She previously was a reporter at Quartz and the Wall Street Journal.

Hudson's Bay is in for a bad deal. 

The owner of the Saks Fifth Avenue and Lord & Taylor department stores could be close to buying the flash sales website Gilt Groupe for $250 million, The Wall Street Journal reported Monday. It should take another look before signing on the dotted line.

Weighed Down
Hudson's Bay shares have dropped 32 percent so far this year.
Source: Bloomberg

That sale price sure looks like a discount -- it values Gilt at about a quarter of what the reported $1.1 billion venture capitalists thought the company was worth back in 2011. But just because an ugly sweater from last season is on sale doesn't mean it's a steal. And Hudson's Bay shouldn't waste its money buying a company well past its prime, even at a discount.

There was a time when daily deals and flash sales web sites were all the rage. Bloomberg Gadfly's Tara Lachapelle recently reminded us how Google wanted to buy Groupon for $6 billion back in 2010, when tech unicorns were actually rare and venture capitalists thought websites like Gilt, Fab, and Ruelala were poised to overtake the outlet mall.

But shoppers fell out of love with the model after being inundated with marketing emails that made it difficult to differentiate one website from the next. The excitement waned further when retailers such as Saks Fifth Avenue and Neiman Marcus began offering their own online discounts on luxury goods. Five years later,  a dozen or so flash sale sites are no longer around, and the others -- Groupon, One Kings Lane, Ruelala -- struggle to grow sales as they lay off staff and, like Gilt, try to turn profitable. 

The Bay's bid for Gilt follows similar moves from Nordstrom, which acquired HauteLook in 2011 for $180 million in stock; and QVC, which bought Zulilly at a fraction of its IPO price. But this is 2015, and Hudson's Bay can do better. It's smart for the Canadian department store chain to want to bolster its e-commerce operations. But why choose a dud like Gilt when there are other pure-play online retailers out there to consider, such as Bonobos, Everlane, or German e-retailer Zalando? Those companies are actually growing and could teach the Bay a thing or two about running a luxury e-commerce company. 

Plus, with only $223 million in cash on its balance sheet at the end of the most recent quarter, Hudson's Bay doesn't even has enough cash to buy Gilt outright. Years of billion-dollar acquisitions have left the company over-levered, with 5.5 times net debt to EBITDA, compared to the North American department store median of 1.9, according to Bloomberg. 

Over-Levered
Net Debt/EBITDA Ratio For North American Department Stores
Source: Bloomberg

Already, Moody's rates the company's debt as speculative, meaning its bonds face a higher risk of default than those of its more credit-worthy rivals. In August, the ratings agency said it wasn't worried about liquidity in the short term -- Hudson's Bay has easy access to revolving credit facilities and a bunch of valuable real estate -- but that there was "very limited capacity" for the company to take on more debt while maintaining a stable outlook.

Most likely, Hudson's Bay will have to take on more debt to fund the purchase of Gilt, or structure the deal with stock. Other options include tapping  an existing credit line, or selling some of its real estate assets, as it did to fund the $2.7 billion purchase of European department store chain Galeria Kaufhof. Either way, Hudson's Bay is stretching its financial capacity to buy a retailer that, in the end, most likely won't be worth it. It's not too late to avoid buyer's remorse.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shelly Banjo in New York at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net