STAMFORD, United States — An activist shareholder of Hudson's Bay Company (HBC) is making headlines by airing his grievances against the Canadian retail conglomerate — and threatening to try to remove members from its board of directors.

On Monday, Jonathan Litt, founder and chief investment officer of Land & Buildings Investment Management, LLC, which owns about 4.3 percent of HBC's shares, urged the company to take drastic action by selling Saks Fifth Avenue, turning that store's flagship into high-end residential condos or taking the parent company private, among other potential strategies.

The letter was a follow up to one issued to the board of directors on June 19 asking the company to be more aggressive in tapping real estate value. Just a little over a week earlier on June 8, HBC had announced 2,000 jobs cuts, including senior-level roles at Saks Fifth Avenue, Gilt Groupe and Lord & Taylor, as part of a six-month "Transformation Plan" to streamline back-of-house operations and save more than $350 million by the end of the 2018 fiscal year.

"We strongly believe that our model of combining world-class real estate assets, which are less impacted by short-term trends, with our diverse retail businesses provide value for the company and our shareholders," HBC executive chairman Richard Baker told investors at the time.

Litt’s first letter to the board urged the company to prioritise its real estate portfolio — which has always been a stated core value proposition and a focus for Baker — over the retail businesses. The Saks Fifth Avenue flagship store was valued at about $3.7 billion when HBC acquired in it 2013, and the Lord & Taylor flagship was valued at $655 million when refinanced in 2016.

"Hudson's Bay is a real estate company, full stop," wrote Litt to shareholders in June. "Is the best use of [the Saks Fifth Avenue flagship] location truly a department store? What about a hotel? Or office? Or boutique retail stores [like] Apple and Gucci? Or an internet retailer looking to go upscale through a bricks-and-mortar presence as Amazon appears to be doing with its purchase of Whole Foods?" He argues that the company's real estate is valued four times higher than HBC's stock value.

Is the best use of [the Saks Fifth Avenue flagship] location truly a department store?

In Monday’s letter — in which Litt threatened to call a special meeting of shareholders to remove board members — he wrote about a meeting with Baker and HBC chief executive Jerry Storch, both of whom, he said, communicated that the company has evaluated all its strategic options. “We completely disagree,” wrote Litt. “We are therefore taking this opportunity to outline what we believe is a path to unlock value at the company, and why, if left with no other choice, we believe it will be necessary to call a special meeting of shareholders to remove board members.”

Calling such a meeting requires the consent of 5 percent of shareholders, which means that, in order to do so, Litt only needs to compel a person or parties that own a total 0.7 percent of shares to agree with him.

“We welcome feedback from all of the company’s shareholders, and look forward to continued dialogue with Land & Buildings,” a spokesperson for HBC told BoF in a written statement. “We are committed to our strategy of both operating leading retail banners and also creatively unlocking the value of our associated real estate holdings.”

“We continue to transform our business to optimise performance and pursue growth in North America and Europe,” the spokesperson continued. “Meanwhile, HBC has a strong history of successfully realising underlying value of the company’s real estate assets, and has generated more than $3 billion in cash proceeds through these efforts. We are constantly evaluating additional opportunities to continue this track record of significant value creation in the best interest of the company and our shareholders.”

So, was Litt’s effort all for nothing? The investor has a reputation for pushing real estate companies for strategic change in well-publicised and sometimes contentious ways. In June, shareholders of the family-owned shopping mall operator Taubman Centers rebuked Land & Buildings’ efforts to take two seats on the company’s board. (The Taubman family controls 30 percent of the voting power.)

Litt’s criticism of HBC comes at a challenging time for the conglomerate, which is navigating a sea change in American multi-brand and brick-and-mortar retail. "If you are an investor and you are looking at HBC and you are trying to figure out how they are going to improve performance and free up some cash, Saks can look like both a valuable asset and also, at the same time, one that does not have an obvious growth path," says Steven P. Dennis, a retail consultant and former Neiman Marcus executive. "Where do they go to try to get top line growth?... They are locked in this battle with Neiman Marcus. The world probably needs 1.7 luxury stores and there happen to be two. Something has got to give there for profitability."

The world probably needs 1.7 luxury stores and there happen to be two. Something has got to give for profitability.

In fiscal 2016, HBC retail sales hit $11.6 billion, but consolidated comparable sales decreased overall by 1.7 percent, and net loss was $414 million, versus a loss of $310 million in the prior fiscal year. In the most recent quarter, HBC saw net sales decrease 3 percent to $2.6 billion, largely due a decrease in comparable sales of approximately $75.4 million. The company posted a net loss of $117 million.

In light of these continued challenges, would selling Saks Fifth Avenue make sense for HBC? Comparable sales decreased 4.8 percent in the most recent quarter, demonstrating that the reinvention of the department store’s safe image — as exemplified by the new Brookfield Place women’s and men’s stores in Lower Manhattan, which is glossier than its stores of the past— has yet to translate with shoppers. The company's off-price channels, Off Fifth and Gilt Groupe, have also proved problematic: the company recently took a $116 million impairment charge on the division.

Without Saks Fifth Avenue in its portfolio, which also includes Lord & Taylor and Hudson’s Bay in Canada, HBC would have more cash to invest in the rest of its businesses and be able to more easily execute its “Turnaround Plan,” integrating digital functions and optimising back-of-house operations over fewer properties. And it could focus on Hudson's Bay in Canada and Lord & Taylor in the US, which now has its own dedicated leadership team under Liz Rodbell. (HBC does not report sales figures for Lord & Taylor.)

But to divest Saks Fifth Avenue would mean losing one of the most valuable retail buildings in the country, now worth 1.5 times more than the $2.4 billion HBC paid for Saks Fifth Avenue in 2013. And while Litt criticises HBC for not maximising the real estate value of its portfolio, Baker has long emphasised the strength of the portfolio based on its holdings.

“To continue to highlight the value of our real estate assets, we may take additional actions which could include the sale of additional equity in our joint ventures or real estate assets, and a potential public listing of either or both of the joint ventures, in all cases subject to prevailing market conditions,” Baker said during the company’s most recent earnings call.

“The opportunity for us to be able to monetise our real estate is very strong,” he added. “Notwithstanding what’s going on in retail, the real estate market in the United States and in Europe and in Canada is very strong, especially for the types of location that we own.”

Litt’s letter also urged HBC to monetise its two joint ventures: RioCan-HBC Joint Venture in Canada and HBS Global Properties in the US (the latter is a partnership with Simon Property Group). At the time of formation in 2015, the combined value of the funds was $3.05 billion. In a recent interview with Reuters as a response to Litt’s letter, the founder of RioCan said an initial public offering of either fund was unlikely. “That opportunity exists if we choose to go down that road, and as far as our opportunity to do an IPO — it's still available, but obviously I think that’s a tougher situation today than it was six months ago,” Baker said.

In addition to seeing value in the Saks Fifth Avenue real estate holdings, HBC also sees value in its team — despite the widespread layoffs announced in June. For instance, Saks Fifth Avenue fashion director Roopal Patel has been given oversight of fashion at all of HBC’s North American stores.

And finding a worthwhile buyer for Saks Fifth Avenue in today’s retail market is unlikely. Neiman Marcus, facing similar challenges and debt, failed to do so earlier this year. Reports surfaced that HBC was considering the acquisition, but talks reportedly fell through over disagreements on price. A joint venture between Neiman Marcus and Saks Fifth could prove to be an attractive proposition, if the capital structure at Neiman Marcus — which includes nearly $4 billion in debt — could be addressed in a way that satisfies its private equity owners.

"Strategically, at this point, the thing that makes the most sense to help restore the luxury department store sector in the US is have Saks and Neiman Marcus together," says Dennis. "Whether that can be negotiated and financed, [is the question]... The pricing of Neimans is the big barrier."

The proximity between the Bergdorf Goodman, Saks Fifth Avenue and forthcoming Neiman Marcus flagships in New York City — not to mention the Neiman and Saks locations that already flank malls across the country — may also nullify the positive impact of such a partnership.

As Litt mentioned, Amazon could very well turn up as a surprise suitor. The e-commerce giant bought Whole Foods grocery stores for a whopping $13.4 billion in June, quickly turning the online merchant into a powerful brick-and-mortar presence.

Amazon wants to become an even bigger player in fashion too, especially in luxury where brands have been more reticent to join its marketplace. "I think anything is possible with Amazon," Dennis says. "They clearly are and have been interested in going more upscale in the fashion business."

Could Saks Fifth Avenue be the answer? "It's a buyers market," says Dennis. "Amazon would be in a good a position as anybody to force the deal."

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