SEEKING DEALS IS PART OF HUDSON BAY CO.’S ‘DNA’
Market skeptical over reported interest for retailers, writes Barry Critchley.
For Hudson’s Bay Co., it appears the shopping never stops.
Minutes after Dallas-based luxury retailer Neiman Marcus told the world Tuesday that it was “undertaking a process to explore and evaluate potential strategic alternatives,” it was reported that Toronto-based HBC was in talks to buy the struggling chain.
A few weeks back, it was reported that HBC was in talks to buy Macy’s, a much larger and less luxurious U.S. retail chain that’s embarking on a restructuring aimed at reducing debt, cutting staff and closing stores.
“Rumours that HBC has been looking at Neiman Marcus have been around for a while,” noted one veteran observer. “You name something and the rumours will come that they are looking at it. It’s ridiculous.”
Even so, HBC, which over the years has done a series of acquisitions — including Saks Fifth Avenue (in 2013 for US$2.9 billion) and Lord & Taylor in the U.S, and Germany’s Galeria Kaufhof (in 2015 for $3.9 billion) — would be expected to have a look.
“It’s part of their DNA,” added one analyst, cautioning that “there’s a big gap between maybe looking at it and doing a deal.”
And that would seem to be the case with Macy’s, where HBC either backed out of a deal because it couldn’t arrange the necessary finance or because it was the only potential buyer and wasn’t interested in bidding against itself.
Wayne Hood, an Atlanta-based analyst with BMO Capital Markets, expects HBC to take a look a Neiman’s, which was acquired by the Canada Pension Plan Investment Board and Ares Management LLC for US$6 billion in the fall of 2013. But Hood argues that Neiman’s US$4.4 billion in debt, 7.3 per cent decline in comparable same-store sales, and steep decline in EBITDA make a “potential transaction unlikely.” He has a $35 target on HBC.
Part of the market’s skepticism arises because the gloss seems to have gone off HBC’s strategy of buying high-profile retailers as much for their operations as for their valuable real estate. The shares, which traded near $30 in the middle of 2015, are now much lower, closing Tuesday at $11.75. In 2012, it was taken public at $17 a share. It cut its dividend to $0.05 a quarter in late 2013.
“From a market perspective, everybody knows HBC has real estate, everybody has done the analysis. But the market doesn’t seem to care,” said one analyst who says the market wants “an improvement in the company’s operating performance from the assets that it already has.”
So will HBC take the plunge? Despite the “doubling down” on high-end retail, one analyst declined to rule out such a purchase given HBC’s penchant of getting involved with what’s on offer.
“I wouldn’t be surprised if they bought it but I don’t think it’s a good idea,” said the analyst, who is not enamoured with the strategy whereby HBC “levers” itself to the department store industry and to the associated real estate.
Another observer said combining Saks and Neiman Marcus could lead to considerable cost savings. “We can make all that work on a spreadsheet,” they said, but in reality it could be more difficult. “The timing is not great to double up on luxury retailing.”
That point was made clear when Neiman Marcus released its second quarter financials Tuesday.
For the sixth consecutive quarter, the company, which has US$4.4 billion in long-term debt, reported a decline in revenues. Over the past six months, on a 6.7 per cent drop in sales, it posted a net loss of US$140.6 million mostly on account of a large writedown. That compared to a net loss of US$2.7 million one year earlier.
Neiman Marcus, which recently hired a debt-restructuring officer, also made some changes to its corporate structure designed “to enhance its financial flexibility with respect to some of its assets.”
In an email response, an HBC spokesperson said that as a matter of company policy, “we do not comment on rumors or market speculation.”
“Generally speaking, as we have previously stated, we selectively evaluate opportunities to accelerate the company’s strategic growth while maintaining or enhancing its credit profile.”