HBC CEO’s exit deepens retail fears

Stock continues descent amid departure of fourth top executive in six months

The pending departure of Hudson’s Bay Co. CEO Gerald Storch will do little to reassure investors nervous about the future of department store retailing.

Coming in the same week that Sears Canada began a countrywide liquidation in the lead-up to closing stores, Storch’s announcement late Friday made him the fourth high-profile executive to leave HBC in six months, and happens as the retailer heads into the busiest period of the year.

In June, HBC laid off 2,000 employees and announced a vast restructuring of its North American operations after grappling with inconsistent performance across its divisions, aimed at realizing more than $350 million in annual savings by the end of fiscal 2018 even as it opens stores in Europe.

And while others in the department store market are going through similar struggles, Toronto-based HBC has been targeted by an activist investor who says the retailer is not doing a good job of providing value to its investors.

“It is typical for undervalued and struggling companies such as Hudson’s Bay to try to position the exit of top executives as a reason for investors to give them more time to right the ship while choosing to ignore the fact that the true decision makers and those at the board level who have been complicit in the decision-making remain in power,” activist investor Jonathan Litt, founder of HBC shareholder Land & Buildings Investment Management, said in a statement Monday.

The other departures at HBC include chief financial officer Paul Beesley, who left in May and was succeeded in August by Edward Record; president of HBC real estate Brian Pall left in June, and Don Watros, president of international operations, left in September.

Litt, who called for a special meeting of HBC’s shareholders following the news about Storch, has been putting pressure on Canada’s oldest retailer since June to pursue options for its real estate, such as redeveloping or selling it. He has also encouraged a managementled buyout of the business.

HBC’s executive chairman, Richard Baker, who reportedly has been in talks with private equity firms in a bid to take the company private, will assume the role of interim CEO when Storch leaves on Nov. 1 to return to his own consulting firm, Storch Advisors.

Lenders have become increasingly skittish about financing leveraged buyouts of retailers in a fasttransforming sector where returns are getting harder to estimate in the era of Amazon.com Inc.

And while HBC has been bullish about opening new stores in markets where it sees an opportunity — the first of 20 Hudson’s Bay stores opened in the Netherlands last month and Saks Off Fifth opened five stores in Germany — the broader market has been less confident about bricks and mortar retail.

Last week, the founding family behind U.S. retailer Nordstrom put its own attempts to go private on hold for the remainder of the year, finding it a challenge to raise debt financing ahead of the holiday season. After that news, HBC’s shares slid as much as five per cent. The company’s shares have fallen more than 30 per cent over the last year.

For his part, Litt says Nordstrom’s inability to borrow capital at reasonable interest rates can’t be compared to HBC’s situation. “Nordstrom is a retailer with real estate representing only a fraction of the current stock price, and thus would have any go-private transaction be based on financing the retailer.”

HBC has a rich real estate portfolio, he notes, but its shares are trading at about a third of the company’s real estate value per share, estimated at $35. The stock stood at $11.75 at close on Monday in Toronto, a 1.8-per-cent decline.

During HBC’s second-quarter conference call on Sept. 6, Baker and Storch told industry analysts that despite the retailer’s weak performance in the first half of the year, they remained optimistic about the company’s third and fourth quarters. The two also addressed multiple concerns voiced by Land & Buildings, noting it was on track with its real estate strategy and continues to develop its properties to their best advantage.

Hong Yu, director at Ted Rogers School of retail Management, said it’s rarely a good sign when a CEO steps down and predicts a shift in strategy is coming. “HBC has done a good job in the last 10 to 15 years to reposition and transform the brand,” she said. “But in recent years, everybody has talked about the challenge from Amazon; there is competition from anywhere.”