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The Globe and Mail

Despite Saks deal, HBC stores still in need of a serious makeover

In pure New York fashion, Richard Baker is now boasting a $2.4-billion smile.

The 47-year-old businessman has every reason to be triumphant. In the past six years, he accomplished what many retailing experts deemed impossible: He resurrected the Hudson's Bay Co., which looked as doomed as the Eaton department stores that never made it past the 20th century.

Now, he is set to acquire the prestigious Saks Inc. chain. Long past is the shock that Canada's oldest retailer has fallen into the hands of Americans, first of the late Jerry Zucker, then of Mr. Baker. The Bay's white throws with the bright green, red, yellow and blue stripes are now being waved on Fifth Avenue like Canadian flags.

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With this unexpected change in fortune, Mr. Baker is now portrayed as the saviour of the Canadian department store, long considered an endangered creature. The designation is seductive, but still quite premature.

Mr. Baker is first and foremost a real estate dealer – and a clever one at that. He acquired full control of HBC in 2008 for $1.2-billion, chiefly through the assumption of its debt. Three years later, he made a killing when he resold most of the Zellers store leases to incoming Target Corp. for a whopping $1.8-billion.

Like the skeptics of 2008, some are now fretting over the $2.4-billion (U.S.) price tag for Saks – which rises to $2.9-billion when the retailer's debt is included. That's almost nine times Saks' operating earnings, compared with a median multiple of eight for similar deals, according to data compiled by Bloomberg. But when you deduct Saks' property value, which one Citigroup analyst pegs at $1.5-billion, including $805-million for its flagship New York store alone, then the department store chain no longer looks as expensive as a pair of Manolo Blahnik satin pumps.

Even if real estate investment trusts are not as glitzy as they were when long-term interest rates were lower, you can bet all your Bay paraphernalia that Mr. Baker will cash in on the money that sleeps under his stores.

Evidently, however, such a deal can only be struck once. After that, HBC can only be the savviest retailer in what is becoming a very crowded market for upscale shoppers in Canada.

Canadians are getting richer, and retail sales have been holding up surprisingly well, notably in May, but Canada is not going to create more of what are euphemistically called "high net worth individuals" by spontaneous generation. Behind the dressing rooms of hushed stores, the commercial rivalry is bound to get nasty, if not bloody.

How has HBC fared so far? It depends on how you look at things. Considering where the Canadian retailer started, it has made considerable progress under the direction of Bonnie Brooks and other smart retail executives, although the flagship city stores have received much of the attention. The rejuvenation of the other department stores still leaves much to be desired.

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At the Bay's flagship Montreal store on Saint Catherine Street on Monday, there was none of the ragbag of yesteryear, even if the store was deep into its summer sale. Past the Chanel counter and the new Coach boutique, branded bags were neatly aligned. On the second floor, the trendy Topshop clothes attracted the twentysomething crowd. Close by is Maje, a French retailer that a fashionista friend of mine puts on her must-see list of Paris stores, with a section almost as big as the one at the Galeries Lafayette.

The sales clerks anticipate your wishes and inquire about your needs instead of ducking behind a high stack of sweaters, as they seemed to do in the past. But the extra attention also highlights the fact that there aren't that many shoppers around. Granted, it's summer and the tourists don't replace all the vacationers who have left town. But the hard numbers don't lie.

The HBC chains have been playing catch-up in recent years, and there is still a long way to go. The Bay's sales in 2012 stood at $140 per square foot, a far cry from the average $250 per square foot of its North American peer group, which includes Saks. The U.S. chain also owned by HBC, Lord & Taylor, also lags behind its peers, with sales of $218 per square foot.

The Bay still has an excess of retail space on its hands, and adding Saks boutiques within existing stores or converting stores to Saks' Off Fifth sister discount chain won't use it all up. HBC still needs to rethink its retail space, given its store locations and their markets, as well as its online shopping sites.

This will require a makeover, not just a brush of powder. Which is not to say it cannot be done. Mr. Baker could well tailor himself into a successful retailer. But until HBC's chains attract crowds of shoppers and sales, he will remain what he has always been: a real estate dealer.

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