Is private equity still shopping retail?

NEW YORK (Fortune) -- Despite lackluster retail numbers this summer, cash-rich private-equity shops continue to pore over the sector in search of a bargain. Wednesday, shares of Macy's jumped 7.6 percent to $43.09, close to the high end of its 52-week per share range of $33.52 to $46.70, on a Women's Wear Daily report that private equity shop Kohlberg Kravis & Roberts (KKR) is eyeing the department store giant. But will it actually bite?

While a Macy's LBO is possible, some analysts are saying that it isn't probable. For one thing, history is not on its side. Flash back to 1988 for an episode of leveraged buyouts gone awry. In what would turn out to be the biggest non-oil US merger at the time, Canadian real estate mogul Robert Campeau purchased the retailer, then known as Federated, for $6.6 billion. The April Fool's Day deal, which Fortune's Carol J. Loomis called "a financial megabomb that was barely built before it was detonated," lead the company into a bankruptcy filing less than two years after the deal closed.

Women's Wear Daily reports that KKR is looking to buy Macy's (Charts), formerly known as Federated, for around $24 billion or $52 a share. At $52 a share for the Cincinnati-based Macy's, the private-equity group would be paying a 30 percent premium on Tuesday's closing price. KKR would not answer questions related to the deal.

Macy's same-store sales, or sales at stores open at least a year, dropped 2.7 percent in June, and the company cut earnings estimates. But the department store behemoth is not alone. The Commerce Department reported a 0.9 percent fall in retail sales for the month of June. That's the biggest drop since August 2005. High oil prices and a weakening housing sector are being blamed. But several analysts say Macy's, with its healthy cash flow and ample real estate holdings (it owns 54 percent of its real estate), might look particularly attractive in this market.

Macy's has been struggling to integrate May Department stores into its fold since its $11 billion acquisition in 2005. At the time of the merger, Terry Lundgren, chairman of Macy's, then Federated, said the deal would allow the company to lower costs, create national marketing initiatives, expand its customer loyalty and private-label merchandise lines, and grow the company faster.

But blending the two department store giants hasn't gone as smoothly as expected. Marketing has been a challenge and the company recently replaced its chief marketing office. Trying to develop brand equity while pleasing Wall Street is proving to be a difficult task. And the retailer has also been hit with lawsuits alleging that the company concealed that the integration of May Department Stores was not going well.

Yesterday wasn't the first time the market reacted to Macy's-related private equity buzz. Rumors about a possible play for Macy's have been circling for several weeks. Earlier this month the stock jumped on speculation that Sears Holdings Corp chairman Eddie Lampert would make a play for the retailer. No deal came to light.