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Saks Soars on Report Goldman Sachs Hired for Buyout (Update 2)

This story has been update from yesterday with additional information.

NEW YORK ( TheStreet) - Saks (SKS) extended gains on Wednesday following reports that the luxury retailer has hired Goldman Sachs (GS - Get Report) to explore a possible sale. A Bloomberg article is now suggesting that KKR (KKR) is considering investing in the New York-based retailer in order to pursue a merger with Neiman Marcus.

Shares were surging 16% to $15.84. The stock jumped 5% on Tuesday after quarterly store sales exceeded analyst estimates.

The owner of the illustrious Saks Fifth Avenue, whose flagship store in Manhattan could be worth more than $1 billion, analysts say, apparently hired Goldman Sachs in recent weeks, according to an article posted by the NY Post after the markets closed on Tuesday.

Buyers of the New York-based retailer could include large private equity firms, perhaps KKR and Leonard Green & Partners, the Post article said.

If such a combination were to occur, the merger would create an upscale department store chain with more than $7 billion in annual sales and second only to Nordstrom (JWN - Get Report), the Bloomberg article says.

Neiman Marcus had also recently hired Credit Suisse to explore strategic options, the article says. the company has about 40 flagship stores and owns Bergdorf Goodman's two New York stores. Neiman Marcus is privately owned by TPG Capital and Warburg Pincus, Bloomberg says.

The company currently operates 42 Saks Fifth Avenue stores, 66 Saks Fifth Avenue OFF 5TH stores as well as its online e-commerce presence.

Saks spokeswoman Julia Bentley said it is against her company's policy to comment on rumors or speculation.

Deutsche Bank analysts Paul Trussell and Matt Siler say a sale is unlikely due to the company's high valuation; management that has "worked tirelessly" to get its balance sheet debt free and an aggressive operating strategy that includes closing underperforming stores and investing heavily in IT.

This is also the third occurrence of leverage buyout chatter for Saks since the fall of 2010.

That said, the analysts conclude that it could sell itself for roughly $16 to $19 a share.

Credit Suisse analyst Michael Exstein and Lauren Thompson suggest that the possibility of a sale may be "another indication that we are getting closer to a cyclical peak for some retail stocks."

"We are becoming more cautious on the group as the events unfold," the analysts said in a May 21 research note.

Credit Suisse rates Saks with a neutral rating.

"So far this reporting season, results have shown the negative relationship of inventories to sale growth for all companies other than Macy's. This has obvious implications for sustainability of gross margins and profit rates. It also marks one of the cyclical turning points for the group," they wrote.
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