As stock tumbles, Hudson’s Bay tries to distance itself from the U.S industry that is collapsing around it
Executives of Hudson’s Bay Co. sought to mollify the market Friday, asserting the value of its department store network means it does not need to shrink, but investors are clearly worried that the company is getting swept up in a broader retail rout decimating many of HBC’s U.S. counterparts.
“The nature of the business right now is that you have declining store traffic and brutal competition,” chief executive Jerry Storch told analysts on a conference call a day after the company unveiled a massive restructuring plan in response to bigger than expected first-quarter losses and sliding sales.
But HBC’s shares, which had fallen 27 per cent this year before Thursday’s after-markets announcement, were down another 10 per cent on Friday.
“We are planning for industry conditions to remain very tough,” Storch said. The plan, aimed at saving $350 million a year by the end of fiscal 2018, includes separating the management structure of Hudson’s Bay in Canada from that of its U.S. chain Lord & Taylor, laying off 2,000 employees and harmonizing a number of functions in marketing and IT.
“We want to develop a business model that can succeed even in tough conditions.”
Uneven winter weather and a late spring affected sales at many seasonal and apparel retailers, but HBC’s management is focused on bigger industry problems than the conventional ones.
“We aren’t acting like suddenly the sun is going to come out and people are going to throng to the malls and want to buy at department stores,” Storch said.
The company is keen to present its plan as truly proactive, particularly in a painful U.S. marketplace in which rivals such as Macy’s, J.C. Penney, Sears and Kohl’s are closing hundreds of stores.
Executives maintain that it’s the other players in the market who have too many stores and are engaging in very aggressive discounting as a result. HBC’s 50 Lord & Taylor department stores are in the heart of the siege but are profitable enough to stay open.
But the company is taking a more prudent view on stores that it has yet to open. “Certainly we are looking at all stores that we presently don’t have a commitment for,” executive chairman Richard Baker, the real estate investor who bought the flagging HBC chain in 2008 and began to engineer its strategic turnaround. The company has said it will open up to seven full-line Saks stores in Canada and as many as 25 of Saks Off Fifth stores, which it is also expanding in the U.S. and Europe.
All the same, industry watchers say, it’s almost impossible for the healthiest of retailers to avoid getting hurt amid the industry turmoil.
There is no clear answer as to how well bricks-and-mortar retailers will balance the costs of growing their internet operations while traffic slips at their stores. Amazon, meanwhile, is on track to be the biggest apparel retailer in the U.S. this year, and continues to grow unabated without having to support the costs of a store network.
“Whenever I hear restructuring words like ‘streamlined,’ ‘nimble’ and ‘ready-to-adapt,’ it all sounds good, but it’s buzz word bingo,” said Doug Stephens, founder of Toronto-based advisory firm Retail Prophet.
“What I haven’t really seen HBC doing is trying something really different, like taking even one store and making a radical departure from their traditional model.”
Sears Canada recently devoted a third of its store space to offering off-price deals on designer brands.
And Starbucks, Stephens noted, has opened a handful of upscale Starbucks Reserve stores, selling $10 coffees in a more sophisticated, lounge-like setting.
“At least Starbucks is trying different tactics. With HBC, I’m seeing a pattern of the same dialogue quarter after quarter, and cutting back when results are poor. If I was a shareholder, I’d be worried.”
Give the dire state of the U.S. market, analysts are also anxious about HBC’s anticipated plan to tap into the value of its real estate holdings by selling off or financing its most valued buildings, or by making an initial public offering of shares.
In addition to acting as a market consolidator of department stores through the purchase of the Kaufhof chain in Europe, Baker has struck a number of savvy property deals in recent years, using the proceeds of selling Zellers’ leases to help fund his purchase of luxury chain Saks Fifth Avenue, executing a sale-leaseback of its flagship Toronto Hudson’s Bay store for $650 million, and partnering in 2015 with large real estate investment trusts in the U.S. and Canada to form joint-venture deals worth $4.2 billion.
Six months ago, analysts were pegging HBC’s real estate value at $30 per share on a stand-alone basis; today, that is more than three times the price of the retailer’s own shares.
“The opportunity for us to be able to monetize our real estate is very strong,” Baker, long keen to separate HBC’s real estate portfolio from its underlying retail business, said on Friday.
“Notwithstanding what’s going on in retail, the real estate market in the U.S. and Europe and in Canada is very strong, especially for the types of locations that we own. That opportunity exists if we choose to go down that road. As far as the opportunity to do an IPO, it is still available, but obviously I think that is a tougher situation today than it was six months ago.”
Management consultant Mark Satov, founder of Toronto-based Satov Consultants, said HBC might not be able to avoid the negative elements of the market that are collapsing around it, given the existing over-penetration of department stores in the U.S.
“They are being proactive and I think they want to show the market that they are on top of things, and want to cut deeper and less often rather than having to react,” Satov said.
But the most experienced and successful retailers have no idea how the steady uptick of e-commerce will affect their bricks and mortar business over time.
“Every retailer who can should be monetizing their real estate because it is valued differently,” Satov said. “Depending on the structure of the real estate ownership, the challenge is that you have to believe that there is somebody else to take the space. And my view is, there is just too much space in the U.S. We are all wondering what the reset is going to be. Will (HBC’s restructuring) be enough, and if it is not enough, what is the next move?”
