Little for investors to like in HBC public offering

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Retail giant Hudson's Bay Co. was a lumbering underperformer until it was taken private by U.S. interests in 2006. Now that its owners have filed to take Canada's oldest company public again, has anything changed? Yes – but not enough to make this a compelling investment.

The HBC of 2012 includes the 48-outlet U.S. department store chain Lord & Taylor and the 90-store Hudson's Bay. It is closing its moribund Zeller's discount chain after selling its best leases to Target Corp., and has shut its marginal Fields chain.

The prospectus highlights the performance of the past three years, which shows sales and earnings growth at the Bay and Lord & Taylor. But that reflects a climb out of a deep recession. Prospective investors would instead be better served by focusing on data from when both retailers were previously owned by public companies.

The historical comparisons are not flattering and reinforce the impression that the best days of the department store are well past. Sales at Bay stores increased to $133 per square foot last year from $122 in 2009, the prospectus says – but filings by the last public HBC reveal that the chain did $165 per square foot in 2005, when the Bay was considered a moribund loser that a string of accomplished CEOs couldn't fix.

Management says it can get sales up to between $170 and $180 per square foot within five years by focusing more on women's apparel, mens' wear, shoes and accessories. But that's the same strategy the Bay has been trying to build out for years. Meanwhile, Canada's lagging e-commerce retail market is bound to pick up in future years. That's not good news for department stores, which still have a much higher share of overall Canadian retail sales – 13.7 per cent – than their U.S. peers.

Elsewhere the numbers are underwhelming. The Bay's big box housewares chain Home Outfitters sells an anemic $123 per square foot and accounted for less than 10 per cent of HBC's $3.85-billion in sales from continuing operations in 2011. Lord & Taylor sales per square foot have grown in the past three years to $210 (U.S.) from $175 in 2009, but it, like the Bay, lags its peers.

Meanwhile, the best potential trade for HBC is now behind it – the sale of 189 Zellers leases to Target Corp. last year for $1.83-billion (Can.) (HBC's highly profitable finance division is long gone, sold in 2006.) An amount equal to more than half of the aftertax proceeds from the sale to Target has already been paid out to the company's current owners in dividends and capital returns. They've done well on their investment.

The only way incoming shareholders seem likely to do as well would be for management to blow up the Bay chain as well, selling the best leases to U.S. chains such as Macy's and Kohl's. At this point that seems to be the best opportunity for value creation, but it isn't a convincing reason to own the stock.