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Hudson’s Bay Co., Canada’s oldest company, will return to the Toronto Stock Exchange after more than six years as mass-retailer Target Corp. (TGT) and upscale department store Nordstrom Inc. arrive from the U.S. to challenge both the high and low-end of its market share.
The 342-year-old retailer, which owns the U.S. fashion store chain Lord & Taylor and The Bay department stores in Canada, is pursuing an initial public offering after “executing a transformation” and “revitalization” of its stores, Hudson’s Bay said in a regulatory filing. The Toronto-based company didn’t disclose the amount to be raised or the share price.
Hudson’s Bay, which dates back to 1670 when it was founded as a fur-trading venture, seeks to sell shares at a time when retail competition is poised to intensify in Canada. Minneapolis-based Target, the second-biggest U.S. retailer, plans to open 125 to 135 stores in the country next year, and Seattle-based Nordstrom (JWN) plans to open the first of what may be nine locations in 2014.
“The Bay is getting squeezed from both sides, Nordstrom from one side and Target from the other side,” said Alex Arifuzzaman, a partner with InterStratics Consultants Inc., a retail consulting firm in Toronto. “They’re trying to cash in right now before this retail invasion comes next year.”
Hudson’s Bay may seek to raise C$500 million ($511 million), two people with knowledge of the matter said on Sept. 5, who asked not to be identified as the process is confidential. Hudson’s Bay would probably sell 20 percent of itself, one person said.
Hudson’s Bay said “over the long term” it plans to pay quarterly dividends with a target payout ratio of 20 percent to 25 percent of expected profit.
Potential investors may have “a little bit of discomfort on account of the reality and the threat of U.S. encroachment in the retail sector in Canada,” said Michael Smedley, who helps manage about C$1 billion at Morgan Meighen & Associates in Toronto. “That might put the brakes a bit on the reception in the marketplace.”
Smedley, whose firm invests in consumer and discretionary stocks, said he’d consider investing in the retailer, which he noted has improved its offerings in the past couple years.
“It’s in a very important sector for us and we obviously have to look at an issue like this,” Smedley, 74, said.
The Bay has a “moderate” merchandise overlap and 40 percent of its stores will be within a kilometer (0.62 miles) of a Target and 72 percent within five kilometers, according to an Oct. 1 note from Barclays Plc analyst Jim Durran.
Hudson’s Bay had C$3.9 billion of retail sales in fiscal 2011, according to the filing. That included C$2.2 billion of sales from stores under The Bay name, and C$1.4 billion of sales from the 48 Lord & Taylor stores, according to the filing.
“The North American department store segment has benefited from a revitalization in recent years, resulting in improved sales and margin trends for us and many of our competitors,” the company said in its filing.
Profit rose to C$1.45 billion for fiscal 2011, from C$88 million in 2010, according to the filing. In January 2011 Hudson’s Bay sold leases for up to 220 of its Zellers stores to Target for C$1.8 billion. Profit from continuing operations was $57.3 million in the period. The retailer posted a C$147.8 million loss for the 26 weeks ended July 28, according to the filing.
Same-store sales rose 3.7 percent in 2011 and 3.2 percent in 2010, compared with 2.8 percent average growth among 10 major U.S. department stores last year and 2.9 percent growth in 2010, according to data compiled by Bloomberg. Most chains count locations open at least a year to tabulate same-store sales. The revenue is a key indicator of a retailer’s growth because new and closed sites are excluded.
“It looks like it’s doing fine in terms of sales, three percent sales growth is a pretty healthy number for department store growth,” said Poonam Goyal, a retail analyst with Bloomberg Industries. “Typically department stores grow at low single digits.”
The store’s margin from earnings before interest, taxes, depreciation and amortization, a key measure of profitability, was 8 percent in 2011 compared to an average of 9 percent among 10 U.S. department stores, according to data compiled by Bloomberg.
“They bring that up closer to what their peers are, that’s a significant opportunity to increase their profit,” said Arifuzzaman. “But again with the competition, one of the ways they can drive sales in a very strongly competitive market is to lower the EBITDA margin, so there’ll be pressure to keep it down.”
Hudson’s Bay was previously publicly traded in Canada until U.S. investor Jerry Zucker took the chain private in 2006 for C$860 million after fighting for control for more than a year.
In 2008, NRDC Equity Partners LLC, owner of the Lord & Taylor and Fortunoff chains, agreed to acquire Hudson’s Bay, investing $500 million in new equity. NRDC Chief Executive Officer Richard Baker became CEO of Hudson’s Bay. In 2008 Baker hired Bonnie Brooks as president and put her in charge of The Bay after Brooks engineered the turnaround of Hong Kong-based department store Lane Crawford Joyce Group.
Since 2008 Hudson’s Bay has invested in upgrading and modernizing its stores and replacing under-performing brands with stronger ones.
Lord & Taylor, founded in 1826, became a unit of Hudson’s Bay in January. Today, the company operates 90 Hudson’s Bay department stores and 69 Home Outfitters housewares stores across Canada, as well as 48 Lord & Taylor stores in the U.S.
“We have achieved significant earnings growth through a combination of enhanced sales productivity, ongoing margin enhancement and expense reduction,” Hudson’s Bay said in its filing. “Our retail banners are well-positioned in their respective markets and we believe that we can continue to achieve sales and earnings growth.”
The sale is being led by Royal Bank of Canada (RY), Bank of Montreal (BMO), Canadian Imperial Bank of Commerce and Bank of America Merrill Lynch, the company said in a statement.
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