The venerable Hudson's Bay Co. is accelerating its makeover for 21st-century retail, with a public share offering that would value Canada's oldest company at up to $2.6-billion.
Much of the public offering, which sources say could raise as much as $400-million for roughly 20 per cent of HBC, would be used to pay down debt. That clean-up of its balance sheet comes as the retailer looks to also clamp down on operating costs as big U.S-based rivals, including Target Corp. and Nordstrom Inc., prepare to enter Canada.
Its public filing provides the first details of its financial health since the retailer went private in 2006. HBC paints a picture of a company that has made gains over the past few years, but that has a long way to go to catch up to North American rivals.
Richard Baker, the U.S. real estate mogul who bought HBC in 2008, has raced to install new executives at his chains, focus on high-profile brands and fashions and slash costs to bolster the business while ditching poor-selling lines. He had a head start with his revamping of U.S. Lord & Taylor, which he acquired two years earlier and whose performance is stronger than that of the Bay.
Mr. Baker is betting that giving Canadians back a piece of its heritage will help the company continue its transformation by allowing it to pay off debt and permitting him and his partners to lighten their holdings. He already profited from HBC by selling most of its Zellers leases to U.S. discounter Target for $1.8-billion.
But HBC faces stiffer competition in the coming years as new rivals set up shop here amid an uncertain economy.
"They have a lot of work to do," said George Hartman, an investment banker at Maison Placements Canada Inc. and a former retail analyst who covered HBC when it was public. "But they should be able to do it. There's scope to improve."
The company also is focused on squeezing costs from the company, including combining key operations of the Bay and Lord & Taylor. It has identified $60-million more that it believes it can take out of the business next year, chiefly as it winds down its Zellers operations, the filing says.
It says that most of the proceeds of the offering will go toward paying down debt. As of July 28, it had $439.5-million of short-term debt and $930.1-million of long-term debt. Sources said that the company hopes that $250-million of the proceeds will be used to pay down debt.
The shareholders of the company, which include Mr. Baker and an Abu Dhabi investment fund, also intend to sell some of their holdings for about $150-million of the potential proceeds, sources said. But they said Mr. Baker plans to keep a large chunk of his interest in HBC.
The HBC filing reveals that the retailer – consisting of the Bay (which will be called Hudson's Bay), Lord & Taylor and Home Outfitters – posted a profit of $57.3-million last year, a significant improvement over its $159.7-million loss two years earlier. Sales rose to $3.8-billion in 2011 from $3.6-billion in 2009.
However, in the 26 weeks ended July 28, the retailer's loss widened to $53.6-million from $34.4-million in the same period, although the latest period included a one-time $50.2-million charge for winding down Zellers and discounter Fields. Sales picked up to $1.76-billion from $1.65-billion.
The company still has a big challenge in improving its sales per square foot which, at $152 overall, are well below the North American department-store average of $240 (U.S.), even as they've improved since 2009, when they stood at $142, the document says.
Despite the hurdles, HBC outlines its goal of raising those sales in three to five years to between $170 to $180 at the Bay from $133 in 2011, and to between $240 (U.S.) to $250 at Lord & Taylor, from $210. "By leveraging our successful transformation and our competitive strengths, we believe we are well positioned to continue to increase sales productivity and earnings growth," the prospectus says.
It said that over the past two years, it has outperformed its competitors in Canada and the U.S. It generates a high proportion of sales in the fourth quarter – 33.6 per cent of the total in 2011. Fourth-quarter same-store sales grew by 8.7 per cent in 2011 and 8.6 per cent a year earlier at the Bay, and 6.6 per cent at Lord & Taylor last year and 11.4 per cent the year before.
"These fourth-quarter sales results have been significantly higher than the performance of our competitors in the same periods," the document says.