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What are we looking for?

Hudson’s Bay Co. shareholders recently voted to back a $54.8-million pay package for Richard Baker, the company’s executive chairman, despite opposition from very notable institutional investors including the Ontario Teachers’ Pension Plan, British Columbia Investment Management Corp., California Public Employees’ Retirement System and California State Teachers’ Retirement System. These massive institutional investors are often referred to as the “smart money” – for good reason – and beyond their overall investment prowess they are especially sophisticated when it comes to issues surrounding corporate governance (such as board member compensation schemes). Investors who hold Hudson’s Bay stock might want to look for alternative exposure to the retail sector where board member and executive compensation is more in line with shareholder interests.

The screen

  • First we look at “Salary Gap” which is the ratio of chief executive compensation to the average employee. Pay disparity can be infamously high in the retail sector. A good example being when the CEO of Target Canada, for failing spectacularly to expand Target’s operations into Canada, was awarded a $61-million severance package while the rest of the 18,000 laid-off workers shared $70-million. We screen for retail companies where the top executive earns no more than 200 times the average worker (the average for the TSX 60 is 682 times).
  • Hopefully, these companies that are more responsible with regard to executive pay can translate this into more money being reinvested into the business. We look at the reinvestment rate and require a ratio of at least 12 per cent.
  • HBC’s stock has struggled recently and the company has responded by selling a number of stores. Mr. Baker, whose background is in commercial real estate, has said that his focus is to use existing space better to squeeze more value out of it. We look at the Thomson Reuters SmartEstimate for company’s average net sales per square foot and screen for companies that are forecast to sell more per square foot in 2019 than in 2018.
  • Finally, we look at corporate governance best practices and require that at least one of the following conditions be met: 1) CEO compensation is linked to total shareholder return; 2) Executive compensation is partly tied to ESG (environmental, social and governance), or extra-financial performance; 3) The compensation committee is comprised of at least 80 per cent independent board members; 4) Shareholders are able to vote on executive pay. We also exclude any company that Thomson Reuters has identified as being the subject of a controversy surrounding executive compensation. This rules out companies such as Samsung Electronics Co Ltd., Wells Fargo & Co. and Valeant Pharmaceuticals Intl Inc.

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What we found

Retailers that show restraint, growth

CompanyTickerCountrySalary GapReinvestment RateNet Sales/Sq. Ft. GrowthExec. Comp. ESG-linkedCEO Comp TSR-linkedComp. Cmte. IndependenceShareholders Vote on Exec. Pay
Mr. Price Group Ltd.MRPLY-OTCSouth Africa76x14.1%6%NoNo80%No
JD Sports Fashion PLCJDDSF-OTCU.K.194x32.7%4%YesNo100%Yes
Ted Baker PLCTED-LDNU.K.45x12.0%1%NoYes100%Yes
Dunelm Group PLCDNLMY-OTCU.K.31x19.7%1%NoYes57%Yes
B&M European Value Retail SABMRRY-OTCU.K.126x13.3%2%NoYes100%Yes

Source: Thomson Reuters Eikon

No North American companies meet these requirements (the stock of every company in the table except Ted Baker PLC can be bought on a U.S. exchange). The company that will do the best at “squeezing more value out of existing space,” as Mr. Baker would put it, is the only non-British retailer, South Africa’s Mr. Price Group Ltd. Mr. Price’s stock price is up 44 per cent over the past year, showing strong long-term price momentum, but it has dipped recently, meaning it could be an opportune time to buy in.

Hugh Smith, CFA, MBA, works in the financial and risk unit of Thomson Reuters and specializes in wealth and asset management.

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