Hudson’s Bay explains weak second-quarter earnings as U.S. investor cries foul

TORONTO —Hudson’s Bay Co. is better off than some traditional department stores as it cuts costs, revamps its stores and invests in its expanding web operations, company executives told investors made skittish by widespread industry weakness.

A day after Canada’s oldest retailer released weak sales results and faces ongoing pressure from activist investor Jonathan Litt, the company reiterated its belief Wednesday in the strength of its multi-banner bricks and mortar network around the globe, even as rivals have closed hundreds of department stores across the U.S.

Hudson’s Bay chief executive Jerry Storch cited a pervasive market narrative “that the Internet is killing department stores,” he told analysts on a second-quarter conference call Wednesday.

While acknowledging that retailers face a general threat from the internet, “the answer to that can’t be to disinvest from the business,” Storch said. “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.”

After falling more than six per cent on Tuesday before the release of second-quarter results, HBC’s shares recovered on Wednesday, ending the day 8.12 per cent higher to $12.19.

Retailers such as Macy’s, JC Penney, Sears and Kohl’s have closed poorly performing stores this year, and though HBC was rumoured to be interested in acquiring Macy’s and Nieman Marcus, executive chairman Richard Baker said the company is not presently “focused on any retail acquisitions, or frankly any large acquisitions” despite an established track record as a retail consolidator.

Litt, whose Land & Buildings Investment Management owns 4.3 per cent of the company’s shares, has been vocal about his desire for HBC to pursue options for its real estate, including selling off some of its assets or finding more productive uses for its store space.

Baker told analysts that HBC was one of the first retailers to repurpose its stagnant store space, having put upscale restaurants, food halls, Kleinfeld Bridal and the U.K. chain TopShop into stores in Canada and Germany. The company has also secured the exclusive rights to open Sephora, the highly productive cosmetics retailer, inside its German department stores, he added.

At the same time, HBC has poured millions into its online operations, which now account for 20 per cent of its overall retail sales, and initiated a massive restructuring of its store-based business in June, cutting 2,000 jobs and streamlining operations in a bid to save $350 million a year by the end of fiscal 2018.

Late Tuesday, the retailer missed analyst estimates and announced a net loss of $201 million in the period ended July 29, or $1.10 per share, compared with a net loss in the same period last year of $142 million (78 cents). Its normalized net loss was 90 cents. Analyst estimates were calling for a loss of 60 Canadian cents per share.

Sales rose 1.2 per cent to $3.29 billion hurt by high competition and lower customer traffic across multiple store banners. Comparable store sales, a key measure of retail health, rose just 0.4 per cent.

After the analyst call on Wednesday, Land and Buildings issued a statement reiterating Litt’s frustration with HBC’s management, calling out the company for expressing a “vague commitment …to address its deep undervaluation” and a “continued lack of transparency” with shareholders.

Litt argues that HBC’s shares are trading at a fraction of the value of the company’s real estate, pegged at $35, according to third-party valuations, and the company’s response “demonstrates a lack of urgency given the rapidly changing retail landscape.”

Industry sources, the statement said, have bolstered reports that the HBC board is evaluating a potential go-private offer from management, and added that there is an alleged potential buyer willing to pay $10 per share for the company’s European business. “The time has come for Hudson’s Bay to be more open with shareholders about its plan for delivering value and to take decisive action in the near-term,” Land and Buildings said.

Financial Post

Rack Attack hitches itself to private equity firm for the long haul

Don’t wish to be too Toronto-centric, but in certain parts of this city it seems that their products – which allow users to carry their gear in equipment attached to their cars — are everywhere. Especially so, when the driver is on vacation and hauling a boat, transporting bicycles, lugging skis or with a luggage box on top.

Those pieces of equipment carry the label of Rack Attack, a Canadian company that started in Vancouver more than two decades ago and which has since expanded to three cities in and around Toronto and to six cities in the U.S.

The company – which doesn’t manufacture its own products but rather installs racks and hitches made by others onto cars – is in the news because it is the latest investment by private equity firm, Banyan Capital Partners, a unit of Connor Clark & Lunn Financial Group (CC&L).

Terms were not disclosed but Banyan is acquiring majority control from the 55-year-old founder Chris Sandy who is about to put Freedom 55 into action and bow out. It’s understood that Rack Attack – whose key suppliers are outdoors equipment suppliers Thule Group and Yakima Products Inc. — generates annual revenue of about $20 million.

So why buy control?

Jeff Wigle, a managing director at Banyan, said the business is resilient, with “growth every year” that has occurred across different economic cycles and different geographical areas, “which is appealing to us.”

The demographics of the customers of what is a premium product are also “quite attractive. We see a very niche retailer that is underdeveloped.”

“The service offering has been proven out,” he said adding installation of the equipment is a key part of that offering.

Wigle, who had a connection to a colleague of Sandy and who received a phone call last spring from the founder, said the sale occurred when Sandy decided to leave and invite in a new partner, who will now grow the business in various cities in North America with the existing management team.

“There is a number of locations that are underserved from a rack specialty retailer perspective. Our vision is to come in, help the management team prepare for expansion and to open a number of new stores and in-fill where we have stores but think there could be (more growth.)”

In Canada, Wigle mentioned Montreal and Calgary, two markets it could enter through an acquisition. In the U.S. —Rack Attack already has stores in Boston, Denver, Portland and Minneapolis — growth will mostly likely occur in cities on the Pacific and Atlantic oceans.

As a result of Banyan’s investment, four of Rack Attack’s management team are now shareholders. Graeme Paterson, the new president, said expansion, when it comes will not be through franchising. In this way, he said “we get to control what goes into the stores, the service, the culture and the offerings we have.”

As a private equity firm, Banyan is a little different from the norm. For starters it doesn’t raise capital from external investors and run a fund with term limits. Instead it sources an investment, funds it with capital from CC&L and then offers the investment opportunity to CC&L’s high net worth clients.

The main difference is that it doesn’t plan to, or is not required to, sell the investments by a certain date. Instead its runs the business on the ‘forever principle,’ a rule it has adhered to given that it has only made one sale: its investment in Party Packagers was acquired by Party City, a U.S. company that wanted to expand into Canada. Banyan’s web site lists five other investments that it still owns.

Financial Post

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