In the last year one of the better performing TSX stocks has been Hudson’s Bay Co (TSX:HBC).
Canada’s oldest company has come a long way from its fur trading roots in the 1600s. These days the company is one of North America’s premier luxury retailers. Besides its presence in Canada under the Hudson’s Bay and Home Outfitters banners, the company also owns Lord and Taylor—a luxury department store chain in the U.S.—as well as Saks Inc., the iconic chain known as one of the great brands of the fashion world.
Last year was a good year for the company. Same-store sales grew nearly 3% in local currency, buoyed by success from online sales and from Saks Off-Fifth. Normalized EBITDA grew to $612 million, an increase of more than 50% compared with last year. The future looks good as well, with the company planning to introduce Saks stores into Canada within the next year.
In response, shares have surged. A year ago HBC shares traded hands at $17 each; these days, they are above $27. And yet, I think a price of $40 is possible in the next year, even if operational results get worse.
How it will happen
Without getting into too much detail, let me explain the real estate wizardry HBC’s Governor and Executive Chairman Richard Baker has pulled off.
In 2013 the company acquired Saks for $2.9 billion. The purchase included a bunch of Saks’s real estate, including a building in Beverly Hills, as well as the iconic Saks Building in New York City.
Late last year HBC decided to take out a $1.1 billion mortgage on the Saks property for renovations and to partially pay down other debt. As part of the deal, the lender insisted on getting the building appraised. It turns out the Saks Building is worth $4.1 billion. That’s $1.2 billion more than HBC paid for the entire company just over a year ago. Needless to say, the mortgage was approved.
The Saks Building is just the crown jewel of other great real estate properties. HBC owns terrific buildings in the downtown areas of many major Canadian cities, including Calgary, Ottawa, Montreal, and Winnipeg. It also owns the Lord and Taylor building in New York City, as well as other locations scattered around the U.S.
Altogether, that real estate is worth about $8 billion, or more than $40 per share. If you combine that with a retailer that is able to generate more than $3 per share in EBITDA, we have a company that could easily be worth $40 per share. Even at that level, shares would just reflect the value of the real estate, while investors get the profits from the retailers for free.
How it will unlock value
Management is well aware of what shareholders want. It’s only a matter of time until the real estate assets are fully monetized.
Back in February the company entered into two separate transactions—one for its Canadian properties, one for the U.S. ones—where it provided property into a joint venture in exchange for an ownership stake in two new companies. Once these new joint ventures make a few acquisitions to diversify away from being so HBC-centric, they’ll be ready to IPO. Look for that to happen sometime in 2016 or 2017.
The company has already received $600 million in cash from the two joint ventures, but that’s just a drop in the bucket. Collectively, both new companies are worth nearly US$4 billion, and will likely be worth more when it comes time to make the IPOs official. Even if HBC retains a high percentage of ownership in these new joint ventures after they officially trade on the market, there’s still the potential to raise more than $1 billion from the IPO transaction.
HBC’s real estate is incredibly valuable and the company is taking steps to extract that value and give it to shareholders. So, even though shares have done well in the last year, we could pretty conservatively be looking at another 50% increase between now and a year from now.
