By David Moin
with contributions from Evan Clark
 on March 28, 2018
The sun shines through flags on the facade of Saks flagship store on New York's Fifth Avenue, . Saks Inc. agreed to sell itself to Hudson's Bay Co., the Canadian parent of upscale retailer Lord & Taylor, for about $2.4 billion in a deal that will bring luxury to more North American localesSaks Acquisition, New York, USA

Hudson’s Bay Co. has no “sacred cows,” continues to look to monetize its valuable real estate and has a new chief executive officer taking a deep dive into all of its businesses.

“I’m six weeks in. I’m listening. I’m learning. I certainly would tell you there are no sacred cows. We’re looking at every part of the business to improve performance and everything is on the table,” Helena Foulkes, HBC’s ceo since Feb. 19, said Wednesday after the company reported fourth-quarter net profits of 84 million Canadian dollars (U.S. $65 million) aided by a $181 million tax benefit, and disappointing sales results at most divisions.

All remaining HBC numbers are in Canadian dollars.

HBC’s fourth-quarter earnings before interest, taxes, depreciation, amortization and rent came to $528 million compared to $564 million in the year-ago period. Comparable sales declined 2.4 percent. Total sales in the quarter rose 2.1 percent to $4.7 billion, helped by an extra, or 14th week, in the last quarter.

In particular, HBC was hurt by weak performances at the Gilt, Saks Off 5th, Lord & Taylor and Galeria Kaufhof operations, while Saks Fifth Avenue and the Hudson’s Bay chain in Canada performed better. Further hampering the business, last year there was a poorly executed streamlining involving 2,000 layoffs, as well as job reassignments, all geared to create a nimbler business and reduce costs.

Amid the challenges, speculation about a Saks Fifth Avenue-Neiman Marcus Group tie-up persists. HBC governor and executive chairman Richard Baker has kept the possibility alive by talking with NMG even though NMG was officially taken off the market in June.

But now, in a twist in the scenario, sources tell WWD that Ares Management, a coowner of NMG along with the Canada Pension Plan Investment Board, is entertaining the idea of buying Saks Fifth Avenue to create a luxury giant with a larger cash flow, synergies and cost-cutting opportunities. The strategy would be to get the NMG debt holders to agree to a restructuring plan extending out loan maturities. Neiman’s has about $4.4 billion in debt that starts coming due October 2020 with a $2.8 billion term loan. “Ares could say to the lenders: here’s the pro forma [earnings before interest, taxes, depreciation and amortization, making it less risky for you guys. But in order for us to do this, we need to renegotiate our terms and punt out the debt,” said a financial source.

“We don’t talk about any actions we may or may not be contemplating,” said an Ares spokesman.

It wouldn’t be the first time Ares has shown interest in Saks. Ares, as well as Catterton, Starwood Capital and Sycamore Partners, considered buying the retailer around 2013, before it was sold to HBC.

“The rumblings are out there. There is logic to it,” said another industry source about Ares’ purported interest in Saks. “This would be no different from Saks buying Neiman’s, but in either case it would be a very complicated deal because of the debt. It’s possible that Richard would sell the Saks retail operating company, and not the real estate.” A lot of Hudson’s Bay Co. real estate is tied up in ventures with Simon Property Group, but not the Fifth Avenue flagship in Manhattan.

Neiman’s wouldn’t gain much in back-office synergies since HBC last year conducted consolidations with Saks and other divisions. But there could be better pricing coordination so both chains don’t beat each other down with promotions, and some increased buying clout and pricing leverage over suppliers, although designers and brands are less dependent on Neiman’s and Saks nowadays due to the advent of their own stores and the Internet. A Neiman’s-Saks combination could also eliminate some merchandise duplication with each chain working together to differentiate the assortments.

Selling Saks would be a windfall for HBC, considering the group had the Fifth Avenue flagship appraised at $3.7 billion in 2014, which is more than the $2.9 billion HBC paid for the entire Saks business in 2013.

Talks between Neiman’s owners and Saks have been off and on for years. “The inertia of 10 years of discussions point toward a merger. The writing is on the wall,” said the industry source. With Neiman’s recently showing improved results for the past few quarters, “This may be a moment where Ares feels buoyant and maybe getting more comfort from lenders.”

It should be noted that in 2012, Ares and CPPIB took 99 Cents Only Stores private, buying all of its stock for $1.6 billion. That investment, like the Neiman’s one, didn’t go as planned, but the financial sponsors added to their bet and acquired $130 million worth of the term loan at 99 Cents Only. The investors cut a deal late last year to extend the dollar store’s term loan by three years, pushing its maturity back to 2022, and rolling its $130 million over into a new second-lien term loan facility. One debt expert noted that the deal worked, in part, because the sponsors telegraphed their commitment to other investors by taking second-lien debt. The deal demonstrated Ares’ readiness to stand by an investment and restructure it, but a Saks deal would obviously be a much bigger bet.

Still, it’s no secret that Baker has long wanted to bring NMG into the HBC portfolio. In addition, HBC is overhauling the Saks flagship for $250 million, has about $125 million left to spend on the project over the next three years, and would want to enjoy the fruits of the labor. The next phase in the renovation is creating a beauty floor on two and an accessories destination on the main floor. While Baker is under pressure to monetize assets and improve HBC’s performance, a sale of Saks means giving up the Toronto-based company’s best-performing asset.

Last year, HBC sold the Lord & Taylor flagship in Manhattan to WeWork for $850 million and received a $500 million minority stake investment by Rhone Capital, improving HBC’s liquidity and the balance sheet. To further shore up the business, HBC is trying to sell the huge Hudson’s Bay flagship in Vancouver.

“We are living in a very dynamic retail environment and the world is changing rapidly,” Baker said during a conference call Wednesday, along with Foulkes and Edward Record, chief financial officer.

“We have been experimenting and positioning ourselves with new ways of doing things,” Baker continued, citing the addition of food halls, Topshop, Sephora, Kleinfeld’s bridal and WeWork at select HBC retail locations. “Helena in this new environment has a whole group of options to look at space and concepts in different ways.” She established a track record of transformational change while executive vice president of CVS health and president of CVS Pharmacy, where she banned tobacco products from the shelves and spotlighted beauty imagery unaltered by air brushing.

During the call, Foulkes said she spent the past six weeks visiting HBC stores and offices around the world and was impressed with the selling culture. “It’s clear to me that there’s a significant opportunity to build upon our solid foundation to realize the full potential of our business.”

While highlighting recent gains at Saks, Foulkes said, “Performance at our other North American banners, Lord & Taylor and HBC Off Price, have clearly not met expectations, and I’m diving deeper to better understand those businesses in the best course of action to improve performance, heighten accountability for near-term business results, improve our culture and develop a long-term strategic plan for the company.”

In 2017, HBC opened 29 stores, including 12 in the Netherlands. The company closed 17 stores in Europe and nine in Canada, mostly discontinued operations like Sports Arena and Home Outfitters.

This year, the company will open 10 stores and close nine, including four Lord & Taylor sites, including Annapolis, Md., and Skokie, Ill., in April. The Oakbrook, Ill., store will close in January 2019.

The fourth site was not disclosed. Previously, HBC said it would downsize the L&T flagship to 150,000 square feet, representing three floors, though there has been speculation that L&T could abandon the site to avoid paying any rent there, and leave the entire building to WeWork, which is planning a dramatic retail and restaurant experience there. HBC had no comment on the latest thinking for the L&T flagship.

“It is clear that things do need to change,” Foulkes said, referring to the total HBC business. “And I feel like we have a very good road map for delivering better results in 2018. But it’s also allowing us an opportunity to step back and say ‘what’s our long-term strategy to grow and put the company in a better cash position.’

“So, overall, I’m encouraged and we’re going through [the company] banner by banner. But I would say it’s too early to comment specifically on each of the banners.”

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