Hudson’s Bay eyeing possible buyout: activist investor

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Hudson's Bay Co.'s board of directors has hired – or is hiring – J.P. Morgan to advise it on strategic options including going private, a U.S. activist investor in the retailer suggests.

And Toronto-based HBC's management has hired Bank of America to look into a possible buyout and privatization of the retailer, investor Land & Buildings Investment Management LLC believes.

In a statement on Wednesday responding to HBC's weak second-quarter results, the activist investor lashes out at HBC for its "lack of urgency in addressing deep undervaluation."

And it criticizes HBC for a lack of transparency in light of its hiring an investment bank to look at strategic alternatives as well as potential "serious third-party interest in HBC's German assets." HBC owns Galeria Kaufhof in Germany, its namesake in Canada and, in the United States, Saks Fifth Avenue, Lord & Taylor and Gilt.com.

The rising tensions between Canada's oldest retailer and its minority shareholder come as HBC races to turn around its flagging fortunes amid a fast-changing retail environment and activist pressures for it to generate more value from its real estate assets.

Investors over all seemed enthusiastic about a potential sale of HBC. Its shares jumped more than 8 per cent to close at $12.19 on the TSX after having fallen for much of Wednesday before Land & Buildings issued its statement. HBC's real estate alone has been valued at $35 a share, which is almost three times Wednesday's closing price of $12.19.

Hudson's Bay has resisted taking radical actions, such as selling Saks or turning its crown jewel – its flagship store in New York – into boutique retailers on the first three floors and high-end condominiums on the upper floors.

Land & Buildings, which holds more than a 4-per-cent stake in HBC, has urged the retailer to look at monetizing its real estate holdings, go private and divest its European business.

But the retailer this week expanded into the Netherlands with its first store outside of Canada under the Hudson's Bay name.

Land & Buildings again threatened Wednesday to call a special board meeting to remove current directors unless HBC takes "decisive action in the near-term."

If there is a proposal to buy Kaufhof in Germany, "we would expect the board to fully and fairly evaluate any such offers with an eye towards negotiating a transaction that maximizes the value of these substantial assets for all shareholders."

HBC spokeswoman Meghan Biango said in an e-mail that it welcomes feedback from all shareholders and shares Land & Buildings's view that "the public markets do not fully reflect the intrinsic value of HBC's global businesses, powerful brands and unique assets.

"To drive shareholder value now and over the long term, we are actively evaluating the best use of our retail and real estate portfolio and are focused on making the right decisions to improve performance, grow through our all-channel strategy, and identify opportunities for accretive real estate transactions," she said.

HBC would not comment on whether it and management had hired the financial advisers or had been approached with a $10-a-share takeover offer for its European chain, at a premium to what HBC paid several years ago.

Ms. Biango said the retailer is confident in its model of combining real estate assets with the company's diverse retail businesses in North America and Europe and expects to gain a "substantial" boost from its restructuring efforts by the second half of this year. "Our management and board have deep expertise in retail, real estate, and finance, and are highly qualified to oversee the successful execution of the company's strategy."

Jerry Storch, chief executive officer of HBC, told an analyst conference call Wednesday that the retailer would consider closing some of its stores if it got an offer for them that provides more value than that of their current use. It already is shutting one of its Saks Fifth Avenue stores at Short Hills Mall in New Jersey by selling its lease, a move that comes amid a raft of chains across North America closing hundreds of brick-and-mortar stores as the retail landscape shifts to online selling.

There was nothing wrong with Saks in Short Hills, but "the value of the alternative use was that much higher," Mr. Storch said. "The opportunity is to do better with the stores we have across the board. We're always open to real estate opportunities through the entire portfolio."

Mark Petrie, retail analyst at CIBC World Markets, said in a note Tuesday that HBC had provided "some incremental" feedback on its formal plan to monetize real estate holdings and potentially spin them off into an initial public offering after it diversified them further.

"This is in line with previous commentary" from HBC, Mr. Petrie said. "The question remains how effectively HBC can diversify and whether it can do so in a cost-effective manner."

HBC's second-quarter results, which included a wider loss than last year at $201-million, failed to hit many analysts' bottom-line forecasts.

Mr. Storch agreed HBC's performance was "very disappointing – and I wouldn't paint it any other way in the second quarter – as we look to the future I think we see continued improvement" from the retailer's heavy investments in its digital and physical store operations along with cost-cutting.

But he also acknowledged the industry's difficulties amid the rise of online powerhouses such as Amazon.com.

"There's no doubt we're going through a period of much more rapid change than any of us have witnessed in retail before," he said. "And that's why we're so focused on the digital side of the business."

He said HBC's digital sales are rising faster than those of the overall market. Second-quarter online sales at the retailer grew 11 per cent on a constant currency basis and almost 20 per cent at its Hudson's Bay and Lord & Taylor divisions. But over all, HBC's same-store sales, a critical retail measure, fell 1.3 per cent, including 2.8 per cent at HBC Europe.

"We're making the moves that we think we need to make in order to be forward-looking and provide great customer experiences online and in-store, which is the answer to the online-only threat," Mr. Storch said.

Richard Baker, governor and executive chairman of HBC, said he wasn't in the position to make specific announcements about the retailer's real estate plans, but he said the company continues to look for opportunities to use its retail space more productively. For example, it operates fast-fashion specialist Topshop in Hudson's Bay and its German Galeria Kaufhof stores, and it is setting up cosmetics purveyor Sephora in Kaufhof stores and Pusateri's food halls at its two Saks locations in Toronto.

"One of the hallmarks of the company is the aggressive real estate activity," Mr. Storch added. "We certainly never stopped that and we continue every day."

He said he's encouraged by HBC's third-quarter performance so far, pointing to some improvement in the general retail environment and the company's cost-cutting and investment efforts, which are expected to pay off more in the second half of 2017. This month alone, it plans to launch 10 Hudson's Bay stores in the Netherlands.

"Every time we have a Sephora shop open inside one of our Kaufhof department stores there's a lineup out the door and down the block," he added.

"There is truth to the fact that there is a threat from the Internet in general," he said. "But the answer is to invest to make the department store experience better. … People don't dislike department stores. They dislike bad department stores, and they like good ones."

In its second quarter ended July 29, HBC's loss widened to $201-million or $1.10 a share from $142-million or 78 cents a year earlier. Sales picked up to $3.29-billion from $3.25-billion.