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Friday's analyst upgrades and downgrades Add to ...

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Inside the Market’s roundup of some of today’s key analyst actions

Calling it “a flotilla trying to raft up in stormy seas,” Credit Suisse analyst Christian Buss lowered his rating for Hudson's Bay Co. (HBC-T).

“In light of underlying demand weakness across the department store landscape, concerns about integration risk, and questions about the square footage expansion and acquisition strategy going forwards, we are downgrading shares,” said Mr. Buss, moving the stock to "neutral" from "outperform.”

Mr. Buss said the retailer’s fourth-quarter financial results, released on April 4, accentuated the challenges it faces across all banners. The company reported normalized earnings per share of a penny, in comparison to 79 cents for the same period a year earlier.

“While we view the comprehensive review of each banner to improve productivity as well as the announced $75-million annualized cost savings as positives, we remain worried about the company's ability to drive revenue absent capital intensive square footage growth or acquisitions,” he said. “By banner, the DSG [Department Store Group] continues to suffer from both cyclical and secular challenges facing the North America industry with comps for the quarter up a modest 0.6 per cent. Saks remains weak, with comps flat and down 3 per cent for the year. Within off-price, the company is experiencing delays in improving the business with comps down 5.9 per cent for the quarter. Its European business posted worse than expected results with comps down 2 per cent and we continue to expect delayed leverage as the company expands its footprint.”

Mr. Buss added the “challenging” environment faced by malls is also troubling.

“Given our concerns about the underlying growth potential of the North American and European department store environment, we take a cautious stance with respect to revenue growth potential across banners,” he said. “Our long-term model is predicated on comps at DSG up 0.5 per cent, at Saks down 0.5 per cent, at Off 5th up 1.5 per cent and in Europe up 0.5 per cent with benefit from ramping operations in the Netherlands. This drives total comps up for HBC up 0 per cent to 1 per cent over the long-term challenging leverage of fixed expense given a continued focus on square footage expansion and acquisitions. Absent a meaningful driver of merchandise margin from improved negotiations with suppliers on increasing scale, or a more meaningful cost restructuring we view EBITDA growth potential as limited.”

“We view execution risk associated with integration of disparate global operations combined with continued focus on expansion and acquisitions as substantial. In short, we think Hudson's Bay may have bitten off more than it can operationally chew, limiting the ability to recognize revenue, sourcing, and SG&A synergies that could come from consolidation of the department store landscape. We note the recently identified $75-million in cost savings represent a modest 50 basis points benefit to operating margins. Our long-term model has operating margins remaining negative over the next five years, with a five-year adjusted EBITDA growth CAGR of 3 per cent.”

Though he called the company’s real estate assets “compelling,” he said it's unclear “how to untangle from operating company.”

Mr. Buss lowered his fiscal 2017 revenue projection to $14.693-billion from $15.098-billion. His EBITDA estimate dropped to $688-million from $859-million, while his earnings per share expectation fell to a 96-cent loss from a 16-cent profit.

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