Time to rethink investment in Hudson’s Bay

Time to rethink investment in Hudson’s Bay

Time to rethink investment in Hudson’s Bay HBC stock jumped more than 8% Tuesday on news that CEO Richard Baker has secured $1.25 billion in new financing for Saks using its Fifth Avenue department store as collateral. With a value of $3.7 billion for its Fifth Avenue location alone, value investors ought to be chomping at the bit.
 
As CEOs go, Richard Baker ranks right up there with most any chief executive operating in Canada. What he’s done with Hudson’s Bay is nothing short of miraculous. His latest coup – HBC paid $2.9 billion for all of Saks in 2013 – has Baker’s company sitting on $800 million in excess value created from its prime Manhattan real estate.
 
Baker’s time in retail has been a profitable one.
 
First, he and his partners acquired Lord & Taylor in 2006 for $1.2 billion using just $25 million of their own money. Then they acquired Hudson’s Bay Company in 2008 for $1.4 billion, merged everything into one public company in 2012, and finally acquired Saks last year.
 
In the middle of all of this Baker managed to sell most of HBCs Zellers leases to Target for $1.8 billion, more than he paid for the entire company in 2008. He then sold the downtown Queen Street store and the attached office tower to Cadillac Fairview for $650 million.
 
According to Baker, HBC is sitting on more than $3.6 billion in real estate which excludes the $3.7 billion for its 660,000 square-foot Saks flagship in New York, which not so incidentally generates more than $600 million in revenue annually. With an impending $250 million renovation coming on Fifth Avenue it’s likely the revenue number will increase dramatically, not to mention the value of the property.
 
At the end of the day HBC has approximately $3 billion in short- and long-term debt. The company’s equity is currently valued at $4.2 billion. Add these together and it equals the value of its real estate leaving the operating business having no value whatsoever which we know isn’t the case. Not to mention Baker has more plans up its sleeve including a possible REIT.
 
Reaching out to Ottawa financial advisor Brent Vandermeer for his opinion on the stock, he commented, “Seems positive and a $28 target is good. Personally, I’ve liked HBC due to the REIT nature of it… and the turnaround has been amazing. It’s now an expensive store unlike when I was a kid… but I certainly like shopping there now more than ever…”
 
It’s definitely time for advisors to rethink their aversion to investing in Canada’s oldest department store.