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Mathew Ingram

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Out of time

Mathew Ingram

 

TORONTO (GlobeinvestorGOLD) — There are plenty of good reasons to buy retail stocks. Certain companies dominate their market niche in such a way that their profit margins are higher than average; others have a compelling product offering that is worth a premium; and some are excellent operators, and manage to make money even when others can't.

Unfortunately, none of those qualities applies to Hudson's Bay Co., the 235-year-old company formerly known as the Company of Adventurers Trading into Hudson's Bay. It may be older than Canada itself, and a former titan on the country's retailing scene, but over the past few years Hudson's Bay has looked more like a battered prize-fighter who has taken so many blows he can barely stand up straight.

As the retailing market has evolved over the past decade, Hudson's Bay has remained a dinosaur. While other retailers have focused on the Big Box, outlet-mall approach or the stand-alone, destination-shopper idea, Hudson's Bay has continued to lumber along as it always has, the king of a shrinking market niche: the old-fashioned shopping mall department store.

Although HBC has made several attempts over the past few years to revitalize its business under long-time chief executive officer George Heller, none of these attempts has really stuck. The department store chain has tried to focus on price, then selection, then branded deals with fashion designers, and more recently opened a chain of home furnishing stores called Home Outfitters. But none of these ventures have had much success boosting either its appeal or its bottom line.

Not that long ago, Hudson's Bay had a secret ace-in-the-hole — a subsidiary that kept producing great results despite its parent's woes. That unit was the Zeller's discount chain, and for many years it accounted for a large proportion of the value in HBC's stock. Unfortunately for Zellers — and for investors in Hudson's Bay — Wal-Mart came along, and tore a large chunk out of Zellers' business.

Like its fellow department store dinosaur, Sears Canada, Hudson's Bay Co.'s other secret weapon has been its credit card operation, which charges high rates of interest and has a relatively captive user base. In years where HBC's retail arm has underperformed — and there have been many of them over the past decade or so — its financial unit has often managed to keep the company in the black.

That ace-in-the-hole has also been weakened of late, however. The first quarter showed a decline in credit-card receivables for the fifth consecutive quarter, a trend some analysts said was disturbing.

When it comes to the retail operation, sales fell in the fourth quarter — normally a retailer's best — by 7 per cent to $2.2-billion, and while profit increased (by 2.9 per cent) most of that was a result of one-time items. For the full year, sales fell by 3 per cent to $7-billion and profit fell to 86 cents a share. In the first quarter of this year, the company had a $41-million loss, almost twice what it lost in the same period a year earlier and almost three times what analysts expected. The chain's sales fell by 1.4 per cent.

Those kinds of results would be a disappointment for any retailer, but they look particularly bad when compared with the five-year growth plan Hudson's Bay launched in late 2003. The plan predicted the company would triple its profit to $2.85 a share by 2008, and boost its sales by $1.5-billion. After the past six months of poor performance, HBC has admitted that its plan is behind schedule, but hasn't changed any of its goals.

So why, after all those poor results, has HBC's stock kept climbing to a recent 52-week high of $15.75? The main reason has been takeover speculation, a ray of hope that has been one of the few things holding Hudson's Bay shares up over the past year or so. The speculation got its start in late 2003, when it became known that a little-known U.S. financier named Jerry Zucker had accumulated a 10-per-cent stake in the ailing company.

HBC's stock kept climbing as Mr. Zucker increased his stake to almost 20 per cent, as investors got their hopes up about a possible takeover of the company. The fact that another U.S. financier, Edward Lampert, acquired Sears Roebuck & Co. and merged it with Kmart last year — in a deal based in large part on the value of Sears' real estate — helped fuel the idea that Mr. Zucker might either buy HBC or perhaps merge it with Sears Canada.

Not everyone has been won over by the idea of an acquisition boosting HBC's value, however. Cynthia Rose-Martel, a long-time follower of the company and an analyst with Jennings Capital, took a look at the takeover idea in a recent research report entitled: "Why has there been no takeover? Because the numbers don't work." According to the analyst's estimates, once the assets and liabilities of Hudson's Bay Co. were tallied, the company had a book value of negative $4.52 per share.

"The reason no one has acquired Hudson's Bay is because there is no hidden value that can be 'surfaced,'" she wrote. Even after making some more favourable adjustments to the company's asset base — such as adding back almost $1-billion worth of credit-card receivables the company had securitized — she only came up with a book value of $7.72 a share. Since this was about half the stock's trading price, Ms. Rose-Martel reiterated her "sell" recommendation and in fact dropped coverage of the company's shares.

Some analysts have said there is still a chance that Hudson's Bay could be acquired, or could create value by spinning off or selling its credit-card unit, something Sears Canada has said it is exploring. But finding value in HBC is easier said than done — and it's something investors have been waiting for now for several years, with little to show for it.

Even Mr. Zucker seems to have lost patience with his investment: he recently sold some of his shares, reducing his stake to 18.5 per cent from 19.9 per cent.

Mathew Ingram joined The Globe and Mail's online news team in June of 2000, after spending four years as the Western business columnist, based in Calgary.

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