Inside the Existential Crisis That Is Hudson's Bay
A look back.
Plummeting shares, a missed real estate IPO opportunity and two failed acquisitions leaves Hudson's Bay Company ( HBC)  with little choice but to make drastic changes, such as going private or selling Saks Fifth Avenue, or confront a proxy fight.

The Canadian retailer may be nearing a hostile takeover led by activist investor Jonathan Litt, who is urging the company to sell its real estate assets or consider privatization. The company is reviewing its options with Bank of America as an adviser, TheStreet reported last week. Shares have lost almost 40% in the past year. Litt owns about 4% of the company. 

Hudson's Bay posted second-quarter losses of C$1.10 per share on Tuesday, Sept. 5—below the $0.59 loss that Wall Street predicted. Net loss amounted to $201 million, and retail sales were down $61 million—or nearly 1%—from last year's.

"Creating shareholder value remains our top priority," CEO Jerry Stark said on Tuesday in the earnings release statement. "This includes assessing the best use of our retail and real estate portfolio, while making the right strategic and tactical decisions to improve performance in our retail businesses."

But Litt said so far he has not seen enough, and most shareholders agree with him more or less, according to a shareholder with a 4% stake in Hudson's Bay, who spoke to TheStreet on the condition of anonymity. He added that: "He, nor I, nor the shareholders would want it to come down to a proxy fight, but right now, I think it's a very real threat." 

"The status quo could simply not remain," the shareholder said, forecasting that the company's internal review of options, prompted by Litt, is a way to buy time. And when the time is up, Hudson's Bay, whose banners include Saks, Lord & Taylor and the Gilt Groupe, has no choice now but to make a "big, bold move."

But what that move looks like is unclear, and real estate could only be part of the immediate solution. The company offered minor strategies to monetizing real estate in its latest earning, including selling leases or leasing real estate that it owns, as well as driving traffic to existing stores.
 

Litt placed his bet on Hudson's Bay almost a year ago, when the prevailing outlook was that the company will thrive because of its real estate assets. In fact, Factset shows that between March and May of 2016, Hudson's Bay had a unanimously positive rating. That valuation, according to analysts, came from the prospect of an initial public offering of its real estate portfolio.

"I'm a real estate guy, and [Hudson's Bay] is a real estate company," Litt told TheStreet in a phone interview last week. "We invested into its real estate valuation, and we still believe that its real estate is worth more than what the stock is trading."

No one is refuting Litt's real estate claim--not even Hudson's Bay itself, which has reiterated that its real estate remains underutilized.

Mounting problems

"We are committed to our strategy of both operating leading retail banners and also creatively unlocking the value of our associated real estate holdings," the company said in an email, touting its joint venture real estate investment trusts with Simon Properties (HBS Global Properties) and RioCan (RioCan-HBC), valued at a total of $3.4 billion.

But the two JV REITs have not been enough to appease shareholders. In an April call with investors, chairman Richard Baker voiced regret over Hudson's Bay having missed its window of opportunity to go public with a REIT. 

"Maybe in hindsight, we would have been better off IPO-ing the portfolio six months ago or eight months ago," he said on the call. "What we should've done and what we should be doing as quick as possible is IPO-ing our U.S. real estate portfolio and/or IPO-ing our Canadian real estate portfolio."

Hudson's Bay had put off the IPO because it wanted to diversify its assets in order to maximize appeal. Then, before long, retail REITs began to slump because of rising interest rates and the overall loss of faith in retail. According to the National Association of Real Estate Investment Trusts, retail REITs slid 18% over the last 12 months as of late June, Forbes reported. Now, though it's still a faint possibility, "no one's really talking about the REIT thing anymore," the unnamed shareholder said.

Then in June, the company announced that it will eliminate 2,000 jobs after posting a first-quarter loss of $1.19 per share and a nearly 3% decline in same-store sales. Much of the decline can actually be attributed to the Gilt, which operates online.

"We know we can do better and we are taking bold, decisive action," CEO Jerry Storch said in a statement. So far, that action has yet to be seen.

For what it's worth to Storch and Baker, no one seems to blame the management, which has has to deal not only with a decline by luxury department stores but in retail as a whole.

"I would say that Hudson's Bay's issue is not so much rooted in the luxury sector, but in a larger trend that's affecting department stores all over," said Andrew Billings, a principal at retail consulting firm North Highlands Company. "It's that consumers now want to engage directly with brands they buy."

Richard Baker's father, Robert, also sits on the board. The elder Baker was a mall developer and principal of the National Realty & Development Corp., under which the Richard began his retail career. Together, the father-son duo owns over 9% of the company.

"At the same time when they bought Hudson's Bay, it was on the doorstep of bankruptcy. For a while, they couldn't do wrong, growing this mammoth company," David Tawil, president of hedge fund Maglan Capital, told TheStreet. "I don't think they anticipated--as everyone else--how quick, how swift the change in retail was going to be."

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