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Can Going Private Save Hudson’s Bay Company?

Executive Chairman Richard Baker wants to take the owner of Saks Fifth Avenue and Lord & Taylor private. Public or private, the ailing department store operator will need to close stores and endure some short-term losses to survive, industry experts say.
Saks Fifth Avenue | Source: Shutterstock
By
  • Cathaleen Chen

TORONTO, Canada — Real-estate developer Richard Baker dove into the fashion industry in the mid-aughts with his acquisition of Lord & Taylor. In the ensuing decade, he would go on to purchase multiple billion-dollar retailers, including Saks Fifth Avenue and Canada's Hudson's Bay, the oldest corporation in North America. Even then e-commerce was beginning to chip away at department stores' dominance, but his plan, at least at first, was to capitalise on the land and buildings owned by these storied chains.

But real estate could not protect Hudson’s Bay Company from the shifting tides of the retail industry. As Amazon expanded and mall traffic declined, sales at department stores faltered. Since 2015, Hudson’s Bay share price has fallen by nearly 80 percent, with a series of strategic moves, including international expansion and the acquisition and disposal of off-price retailer Gilt Groupe doing little to stem the slide.

“They never fixed the fundamental problem of why people don’t shops at stores anymore,” said Kim Forrest, founder and Chief Investment Officer of Bokeh Capital Partners, a tech and retail focused investment firm.

On Monday, Baker proposed a radical move: take the company private. The offer for C$9.45 per share valued the company at C$1.74 billion ($1.3 billion) — a 48 percent premium to its closing price on the Toronto Stock Exchange on Friday. He reasoned that in addition to debt financing, the transaction can be partially funded by an ongoing sale of Hudson’s Bay’s European real estate holdings, which the company announced Monday and would generate C$1.5 billion, or $1.13 billion. Shares rose 46 percent on Monday.

They never fixed the fundamental problem of why people don't shops at stores anymore.

Baker, now the executive chairman of the company, is leading the bid alongside investor Rhône Capital and WeWork, which has a partnership with Hudson’s Bay that included the co-working space taking over the former Lord & Taylor flagship in Manhattan.

Going private would potentially grant Hudson’s Bay time to conduct its much-needed turnaround. Public companies are subject to the day-to-day whims of shareholders as well as quarterly earnings reports, which pressures retailers to post continuous growth rather than make operational changes that may hinder sales in the short-term but serve its longevity years down the road.

“We believe that improving HBC’s performance requires significant time and patient long-term capital that is better suited in a private company context without the emphasis on short-term results and returns,” Baker said in his letter to the board Monday.

Being private, nonetheless, cannot salvage the company alone. Neiman Marcus Group and Barneys have had their problems as private companies, after all. But Baker and his partners are gambling that a strategy built around closing unprofitable stores, investments in merchandising and customer experience, real estate sales to generate cash flow can give Hudson’s Bay a fighting chance.

A successful bid is no guarantee. In 2017, the Nordstrom family, who own about a third of shares, offered to buy out the company. The company's board rejected multiple offers, amid concerns about the amount of debt the family would need to raise. However, HBC's bid would not require the same level of debt, and the retail landscape has grown more dire over the last two years.

“The number of assets that Hudson’s Bay has and all these different financial levers that can be pulled through the [real estate joint venture] sales — with all of these factors in play, it seems that they’d be able to construct a deal that would satisfy shareholders,” said Andrew Billing, principal for retail and CPG at consultancy North Highland.

The board of directors for Hudson’s Bay has formed a special committee of independent directors to review the proposal, a process that could take up to six weeks or longer. Hudson’s Bay declined to comment on the matter.

In the short-term, it might be a bloodbath — a lot of layoffs.

If the committee rules in favour of Baker and his cohorts, it will only be the first step in a long and arduous road to recovery, said Gabriella Santaniello, an analyst and founder of retail consulting firm A Line Partners. The process will likely entail selling off more assets and closing stores, moving toward a smaller revenue stream overall. Hudson’s Bay shuttered the Lord & Taylor flagship in Manhattan last year and will close an additional 10 stores this year.

"Right-sizing" is a common issue among American retailers today: the US has roughly five times the retail space per capita than most European countries. Already this year, over 7,200 store closures have been announced, surpassing the full-year total in 2018, according to Coresight Research.

“In the short-term, it might be a bloodbath — a lot of layoffs,” Santaniello said.

They may even take steps that negatively impact margins, she added, such as clearing through excess inventories to phase out certain unprofitable categories — “essentially a reset.”

But Hudson’s Bay will also need to make investments as a private company — investments that would continue to drag down the bottom line, according to Billings. The company reported a loss of C$226 million ($170 million) in its quarterly report April.

“Will it be sacrificing unprofitable revenue or a lot of core investments based on innovation that will shrink profit for many years to come? I think it will be a combination of both: some revenue streams cut along with investments in infrastructure,” he said, pointing to potential store-in-store partnerships with brands and other functions that create the type of experiential retail that would drive customers into its stores.

Hudson’s Bay may also have to change its product offerings, Forrest added, and that may look like getting rid of unprofitable categories but investing in smarter merchandising tools and a better design team.

“If the deal goes through, it doesn’t mean they’ve eliminated financial pressure,” she said. “They’ll have to quickly formulate a plan for success, and it’s still high stakes survival mode.”

Under new CEO Helena Foulkes, Hudson's Bay has made strides in growing sales at Saks, including closing an unprofitable womenswear store in lower Manhattan and finishing renovations at its flagship on Fifth Avenue.

This is like making a U-turn as the Queen Mary … But the alternative might be to die a very long, painful death by bleeding out.

The company has also been slimming down its portfolio. Off-price retailer Gilt Groupe was sold to Rue La La last year. On Monday, the company said it would sell its 50 percent stake in its German real estate joint venture, effectively exiting the country just seven months after creating the partnership with Austrian real estate company Signa. Hudson’s Bay purchased Germany’s Galeria Kaufhof chain in 2015.

A portion of the proceeds from this sale will be “used to fortify HBC’s balance sheet by fully repaying its outstanding $436 million term loan,” the company said in a press release.

As part of its wider turnaround, going private won’t be a short-term fix, Santaniello said. “This is like making a U-turn as the Queen Mary … But the alternative might be to die a very long, painful death by bleeding out,” she said.

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