A boosted offer from Hudson’s Bay Co. chairman Richard Baker has put an end to the seemingly relentless battle between the company’s majority and minority shareholders.
Although the deal nears its close next month upon approval by the special committee, experts are expecting a turnaround to take time — a minimum of 15 months or so, and given HBC’s complex business structure, potentially longer, said HRC Retail Advisory president Farla Efros. Going private, she explained, would allow the company to rightsize its portfolio as well as test out new concepts amid a broader shift to digital.
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“They need to rethink the whole model — no different to most [retail companies] — as the department store model isn’t as feasible as it once was,” she said. “They also need to figure out how to get the younger customers into that type of environment, and e-commerce will have to be a key component of their strategic focus.”
On Friday, the Canadian department store conglomerate announced that it has accepted an offer from a group led by Baker and will buy shares held by select minority stakeholders for CA$11 ($8.46) apiece. The deal came after months of back-and-forth buyout proposals between Baker’s coalition of investors (including Rhône Capital LLC and WeWork Property Advisors) and private equity firm Catalyst Capital Group Inc.
Nevertheless, in a statement on Friday, David Leith, chair of the special committee of HBC’s board of directors, commended Catalyst’s “constructive approach” to helping the firm come to an agreement, “which we believe is in the best interest of the company and the minority shareholders.”
Since Helena Foulkes took the helm as CEO in February 2018, the retail group has shed many of its less profitable businesses to focus on top performer Saks Fifth Avenue and the namesake Hudson’s Bay. It sold flash sale site Gilt to Rue La La in June 2018, and it let go of its Lord & Taylor business before the start of the 2019 holiday season.
However, HBC’s financial results for the three months ended Nov. 2 showed widening net losses to $CA226 million ($171 million), or $CA1.23 per share — compared with the prior year period’s $CA161 million ($122 million) loss or $CA0.88 per share loss. Losses from continuing operations were $CA175 million. Third-quarter revenues were roughly flat at $CA1.84 billion ($1.39 billion), with comps down 1.7% despite a 15% year-over-year increase in digital sales.
During the third quarter, Saks Fifth Avenue’s comparable sales fell 2.3%, versus a 7.3% increase a year ago. (Its two-year stacked comps were 5%.) The department store chain also currently faces heavy competition in its home base of New York with the flagship store openings of rivals Nordstrom and Neiman Marcus within the past year.
“With last year’s historically high comparable sales growth for Saks, we knew the third quarter would be challenging,” Foulkes said. “Across the industry, there was a pullback among luxury consumers, allowing shoppers to more frequently take advantage of markdowns, which ultimately reduced full-price sales.”
However, the union between Saks and Barneys New York following the latter’s post-bankruptcy sale to Authentic Brands Group in November marks a strategic move for HBC since the Barneys name still boasts strong brand equity and its customer lists remains a valuable asset in today’s marketplace.
“Thinking collaboratively is the only way retailers and brands can change the dialogue around the state of the business,” Cassie Rosenthal, SVP at the retail factoring firm Rosenthal & Rosenthal, told FN in October. “This [plan] could potentially open up more exciting ways other struggling department stores could leverage their brand equity and reinvent how they engage with consumers while also alleviating the burden of a large physical footprint.”
Comps for Saks Off 5th climbed 4.9% and rose 2.6% on a two-year stacked basis, largely due to its digital performance. The off-price outlet, however, competes in a space already dominated by industry leaders TJMaxx and Marshalls as well as Ross and Burlington — all of which recently delivered earnings that surpassed expectations. Last year, HBC said it would shutter up to 20 of more than 130 Saks Off Fifth locations as part of a “fleet review,” as the company works toward streamlining its portfolio.
“This business is in the early stages of its updated strategy to drive the thrill of the find by delivering luxury for less. We’ve begun to see early results after pivoting over a year ago and believe there is even more opportunity ahead,” Foulkes said in HBC’s earnings call last month. “The only true certainty is that retail will be radically different in five years than what we know today.”
Hudson’s Bay’s same-store sales, on the other hand, dropped 3.9% in the third quarter, improving only 0.4% on a two-year stacked basis. In Canada, HBC’s eponymous brand encountered “largely self-inflicted” struggles after attempts to lure in Sears customers in the Canadian marketplace, following the chain’s collapse in the region.
“We made a mistake where we started buying for that Sears customer more broadly and that quite frankly is too down-market from where the Bay really is,” Foulkes said at the WWD Apparel + Retail CEO Summit in October. The department store now seeks to expand its relationship with 250 brands as well as introduce 75 new designers and exit 600 labels.
Over the past couple years, HBC has taken lengths to improve operations and performance at its banners Saks Fifth Avenue, Saks Off Fifth and Hudson’s Bay, during its run as a public company. Despite preparations to go private, HBC noted in its earnings report in mid-December that it does not expect a change in the business’ overall strategic priorities.
“Whether we are a public or private company, our strategy remains the same: making focused investments to drive growth in each of our businesses, enhancing the customer experience across all channels, reducing operating costs and complexity while continuing to fix the fundamentals and capitalizing on the value of our real estate,” Foulkes said in the earnings call. “These actions are crucial in ensuring we can drive both top- and bottom-line performance over the long term.”
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