TORONTO – Canada’s oldest company, Hudson’s Bay Co. will soon be in public hands again after the storied retailer said Wednesday it is going to make a return to the stock market following an upscale makeover.
The owner of the Bay, Home Outfitters and U.S. retailer Lord and Taylor filed a preliminary prospectus for an initial public offering of its shares Wednesday after years of hinting that it is in the works.
HBC last traded on the Toronto Stock Exchange in 2006 before it was taken private by U.S. businessman Jerry Zucker, who later died unexpectedly. New York-based NRDC Equity Partners acquired the company in 2008 for $1.1 billion from Zucker’s widow.
Since then, the company has been working to transform stores that were “tired and in need of renovation” as well as revamp its image after losing “its fashion credibility,” the company said in its filings.
“Our investments in Hudson’s Bay since July 2008 have enabled us to add new, sought after brands and Hudson’s Bay is becoming a fashion authority in Canada,” it said.
The company, which plans to use the proceeds of the offering to repay debt, said it has improved sales productivity and earnings growth, partially through a capital investment of more than $420 million since 2009, but added it has more work to do.
The price and number of shares to be sold were not disclosed. However, HBC did say it plans to pay a quarterly dividend with a target payout ratio of 20 to 25 per cent of expected net earnings.
Jennifer Radman, a portfolio manager at Caldwell Investment Management, said a rare Canadian retail asset like HBC could fetch “huge demand” from investors, though stock markets are still volatile.
“A lot of investors, they buy stocks based on what they know, so I think from that standpoint there will be a lot of demand, regardless of the valuations that are placed on the stock,” she said.
In terms of an initial valuation, Radman looked at where some of its U.S. peers are trading, like Macy’s, which trades at 13.5 times earnings and TJX Group — owner of T.J. Maxx, Winners and Marshall’s stores — which trades at 18 times earnings.
She estimated HBC could get away with pricing itself at between 12.5 and 17 times earnings.
HBC had profitable years in 2011 and 2010 following a loss in 2009, according to financial statements included in the prospectus, accessed through DisclosureNet.
However, for the first 26 weeks of its 2012 financial year, which doesn’t include the important back-to-school, Christmas and New Year shopping periods, the company posted a total net loss of $147.8 million including $53.6 million from continuing operations.
In the similar 26-week period a year before, the company had a $13.3-million net profit, although its continuing operations had a $34.4 million net loss.
Retail sales have grown seven per cent year-over-year for the first 26 weeks of this year, with $1.76 billion in sales until July 28, compared to $1.65 billion for the period ended July 30, 2011, according to the filings.
The company has seen nine per cent sales growth at Hudson’s Bay stores and 20 per cent growth at Lord & Taylor from 2009 to 2011, higher than the 5.2 per cent average reported at its North American peers. However, sales per square footage still lag, with $133 per square foot at the Bay stores and US$210 at Lord & Taylor’s, compared with US$240 at its peers.
HBC said it wants to grow those sales to between $170 to $180 per square foot at Bay stores and US$250 at Lord & Taylor’s in the next three to five years as it continues to improve sales productivity.
It plans to focus on high-growth sales categories such as women’s clothing, men’s wear, handbags, jewellery, accessories, footwear and cosmetics by dedicating more floor space to those items, adding new brands and ramping up its own private label brands such as its HBC signature line — known for the iconic Hudson’s Bay stripes.
The company has sold leasing rights last year on more than 200 Zellers locations to U.S. retailer Target in a $1.8-billion deal that was seen by some as a prelude to an initial public offering.
HBC has made efforts to revitalize its Bay stores with the introduction of The Room boutique — a sleek space dedicated to luxury brands — at downtown stores, as well as obtaining the rights to produce uniforms and merchandise for Canada’s Olympic athletes.
The retailer also hired former Holt Renfrew executive Bonnie Brooks as president and chief spokeswoman for the Bay. She was in Vancouver on Wednesday for the launch of a Topshop boutique within a downtown Bay store.
Brooks — who was recently a guest judge on Project Runway — has overseen the transformation of the Bay into a shopping destination for high profile designers from Rachel Roy to Proenza Schouler.
Its aim is to position itself in between the low-end and high-end of the market, a segment that had largely been ignored in Canada, she said in an interview from the Vancouver store.
“We really are running the gamut from opening price point to really, underneath luxury I would say,” she said.
The initial public offering comes as HBC gets set to face increased competition, not only from Target next year, but also chic U.S. retailer Nordstrom, which is opening of its first four Canadian stores in Toronto, Ottawa, Calgary and Vancouver starting in 2014.
Brooks said she is not worried the Bay will be squeezed out by the arrival of low-end rival Target or upscale Nordstrom, which she said don’t have very much overlap with the Bay’s offerings.
Aside from plans to open more Topshops and The Room boutiques in urban locations like Montreal and Calgary, Hudson’s Bay has 16 million square feet of retail space and is looking to renovate much more of that square footage.
“While we have created a lot of buzz around what we’re doing, we’ve only just begun. We have traction which is terrific but we’ve got runway ahead of us that is staggering,” she said.
“We had a lot to do to get the company to a new level of standard so we’re now in a position to bring a new level of presentation and new products now to a lot more of our stores.”
Brooks would not comment on whether money raised in the IPO would help fund its growth plans.
The move by HBC back to the public markets follows the success of a pair of other Canadian retailers.
Both athletic clothing retailer Lululemon Athletica Inc. (TSX:LLL) and discount retailer Dollarama Inc. (TSX:DOL) have seen the value of their shares take off since becoming publicly traded companies in recent years.
HBC owns 91 Hudson’s Bay stores, 46 Lord & Taylors and 69 Home Outfitters.
Wednesday, October 17, 2012