The retail industry is a very tricky business. Consumer tastes change enough that one year of sales doesn’t guarantee another year of profits. Technology is also another threat as consumers opt to shop online to avoid the consumer traffic in malls. These are always factors that retailers have to bear in mind. It is for these reasons that I am long on Hudson Bay (OTC:HBAYF).
The markets do not seem to agree with me though because it is currently trading closer to its 52 week low, and its Q3-2016 performance punished the stock further. Retail is a very tricky business and not everyone gets it right. The same can be said of Hudson’s Bay, but the company has a strategy, and I think it will be a profitable business over the long haul.
The following are the reasons why I am bullish on Hudson’s Bay:
It is investing heavily in its digital channels to compete with online retailers such as Amazon
It has a large real estate holding to back up its strategy
Q3-2016 profits are down but it is more reflective of the industry than the company
Hudson’s Bay Digital Sales Channel:
It comes as no surprise that online sales are making a huge dent on retail sales for brick and mortar stores. Online retailers such as Amazon are taking a huge slice of the retail pie. In response, traditional retail brands have invested heavily in its online presence. For example, Canadian Tire (OTC:CDNTF) has shifted some of its capital spending to focus on ecommerce.
Hudson’s Bay – back in 2013 – realized there was an opportunity for an ecommerce business when it identified a gap in the luxury specialty store in Canada. Since then, it has taken a more active stance by acquiring online retailers such as Gilt in early 2016, an off price high end retailer.
Its investment in a high tech warehouse also shows the company’s commitment to its online business. In early Nov 2016, it opened its 750,000 sq ft warehouse, and claims the warehouse can turnaround an online order in 15 mins (from receiving it and shipping the item). Previously it would take at least 2 hours.
Hudson’s Bay is also eyeing to expand its robot technology into Vancouver and Toronto. This marks a substantial transformation from just a bricks and mortars store to becoming a contender in the online retail business.
Hudson’s Bay Has a Large Real Estate Holding:
One item Hudson’s Bay does not disclose in its financial report is its real estate holdings. A Globe and Mail article reported back in Oct. 2016 that Hudson’s Bay controls nearly 50 million square feet of leasable space in Canada, US, Europe. This is through JV, ground leases, site subject to sale, leaseback arrangements. The total real estate is estimated to be worth as much as $13 billion if it was to spun off as a REIT.
Hudson’s Bay is not going to spin off its real estate anytime soon but it is safe to say that the likelihood of the company going bankrupt is low.
Hudson’s Bay is also not sitting idle in its real estate strategy. It has formed a joint venture with Riocan where the JV (50% interested owned by Hudson’s Bay) has exclusivity on selected enclosed mall acquisition opportunities in Canada identified by Riocan.
The HBS Global Properties is a JV between Hudson’s Bay and Simon Property Group. This JV owns a portfolio of 83 properties in US and Germany and the objective here is to acquire potential US and European retail assets over the long term.
Where the team up with Riocan focuses on Canada, the partnership with Simon Property is for Germany and the US. Instead of spinning off the real estate into its own REIT, the next best thing is partnering with real estate professionals. The partnerships allow Hudson’s Bay to utilize the real estate expertise of its partners to develop and manage some of the Hudson’s Bay real estate portfolio.
The Financials Were Down in Q32016:
Its latest financials reported a EPS loss of $0.69. The company has been losing money for the past 3 quarters. It isn’t pretty but it isn’t the end of the world. At the same time, Q3-2016 also saw a significant rise in its online sales of 73% from the prior year.
Hudson’s Bay’s dismal financial performance has more to do with the consumer spending on an industry level than because of the Hudson’s Bay brand. Average consumer spending had actually fell from the prior year.
A glance at the sales show the gross margins have been steady at the 58% to 60% levels after factoring in cost of sales. After considering selling, general, and admin expenses, the gross margin falls into a range of approximately 40%.
These numbers show that Q4 (Christmas and holiday shopping) is where the company earns its money back. It had also lowered its sales expectations for the year but on a company wide level, I think the company is still on the right track to transforming its business into a retail powerhouse.
I believe Hudson’s Bay is a hidden gem because of its real estate portfolio, and as the company moves its business into the digital world, investors should see a payoff in the long run.
Source: Seeking Alpha