By  on January 27, 2014

The Saks expansion has begun.

Hudson’s Bay Co. is launching its prize acquisition, Saks Fifth Avenue, north of the border, and putting the first two stores in places where Nordstrom Inc. can’t miss them.

HBC will carve out about 150,000 square feet of its 750,000-square-foot downtown Toronto Hudson’s Bay flagship to open its first Saks store in Canada in fall 2015. In spring 2016, Saks will open a second Canadian unit, a 130,000-square-foot store at Sherway Gardens, also in Toronto.

The moves put Saks on a north-of-the-border collision course with Nordstrom, which two weeks ago divulged plans to open a 213,000-square-foot, three-level store just down the street from The Bay — at Toronto Eaton Centre, on the site of a shuttered Sears store — in fall 2016. It currently has plans for six full-line store openings in Canada, including a unit at Sherway set to open in spring 2017.

In plotting Saks’ entry into Canada, HBC agreed to sell its downtown Toronto Hudson’s Bay flagship and adjacent Simpson’s Tower office complex to Cadillac Fairview Corp. for 650 million Canadian dollars, or $611 million at current exchange, and lease back both properties. The Saks store will come out of the space currently operated as Hudson’s Bay at the corner of Queen and Yonge Streets.

Cadillac Fairview owns and manages not only Eaton Centre and Sherway, but also Chinook Centre in Calgary, where Nordstrom plans to open its first Canadian unit this fall; Rideau Centre in Ottawa, where Nordstrom is scheduled to open in spring 2015, and Pacific Centre in Vancouver, where Nordstrom has set a fall 2015 opening. Nordstrom’s sixth opening in Canada will be in fall 2016 at Toronto’s Yorkdale Shopping Centre, which is owned by Oxford Properties and Alberta Investment Management Corp.

HBC’s lease on the properties runs for 25 years and has a renewal option for an additional period of “just under 50 years,” the company said.

HBC completed its $2.4 billion acquisition of Saks Inc. last year, teaming it with Hudson’s Bay and its earlier acquisition of New York-based Lord & Taylor.

Richard Baker, chairman and chief executive officer of HBC, told WWD that Saks’ plans for seven full-line stores in Canada are likely to include units in Vancouver, Montreal and Calgary as well as Off 5th units and Canadian-based online businesses for its Saks and Lord & Taylor brands.

Borrowing a page from the playbook of Harrods, from which Baker lured Marigay McKee to become president of Saks, the two new Saks stores will both have food halls of about 25,000 square feet. “That is new to the Saks concept,” he said.

Baker said he wasn’t looking into other asset sales or sale-leaseback arrangements like the one struck with Cadillac Fairview. “But we continue to look at options to monetize real estate such as a REIT [real estate investment trust] like the one recently done by Loblaw Cos.,” he said.

Loblaw last summer raised $400 million in an initial public offering of its real estate assets. Simon Property Group is also planning to spin off its strip centers and smaller malls into a separate public company called SpinCo.

Baker noted that HBC and its predecessor companies have actively worked the real estate markets in recent years, including the sale of Zellers leases to Target Corp. in 2011 for $1.8 billion. The sale-leaseback arrangement, expected to close on or about Feb. 25, involves some but not all of the properties purchased by HBC for $1.2 billion in 2008.

“It’s a very accretive transaction,” Baker said.

Doug Stephens, founder of the consulting firm Retail Prophet in Toronto, has his doubts about the Saks move to Toronto’s Bay Street; many expected the retailer to first open on the city’s Bloor Street, generally considered “the Fifth Avenue of Toronto.”

“This makes some sense financially, but purely from a branding standpoint you would think they would go to Bloor Street and be in very direct proximity to other luxury players,” he said. “The Bay itself has a lot of baggage at Eaton Centre — some good, some bad — but you would think that if you’re bringing a new upscale brand into the Toronto and Canadian markets, you would want it to be your Holt Renfrew slayer and your Nordstrom slayer. My feeling was that it should be on Bloor, brilliant and very distinct.”

He said HBC needed to be wary of the fate that has befallen Target which, he said, had “overpromised and underdelivered” in its problematic Canadian entry, with assortments that haven’t matched consumers’ expectations and occasionally inventories that haven’t even met demand. Nordstrom, he noted, has an excellent track record of entering new markets in the U.S. “They don’t take things for granted or rest on their laurels, ever,” Stephens said.

Like Stephens, Antony Karabus, president of Hilco Retail Consulting and a resident of Toronto, sees a lesson in Target’s experience as Canadians prepare for an upscale invasion of retailers from the south.

“Canadians are very astute,” he said. “Unlike a lot of Americans who don’t shop outside the U.S., Canadian shoppers shop across the border constantly, and if the Canadian version of the store doesn’t meet the expectations they had from shopping that store in the States, there’ll be problems, as there have been for Target.”

He thinks Canadians will take well to both Saks and Nordstrom, however. “It’s like going from the wilderness of luxury to being like kids in the candy store,” he said. “There’s nothing but upside for the consumer, for developers and for the job market.”

In trading on the Toronto Stock Exchange Monday, HBC shares rose 1.2 percent to 16.89 Canadian dollars, or $15.88.

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