At the Hudson’s Bay Co., the ardor over retail is cooling in the wake of some deals gone sour. As a result a strategic shift could be in the making, with an increasing focus on real estate, where HBC’s governor and executive chairman Richard Baker began his career.
It’s been difficult in Europe, where HBC established retail operations over the last three years by purchasing Galeria Kaufhof in Germany and opening Hudson’s Bay and Saks Off 5th stores in Germany and The Netherlands. It’s also been difficult in the U.S., with Lord & Taylor being downsized and Gilt just sold to Rue La La, though Saks Fifth Avenue and Hudson’s Bay in Canada are steadier. HBC, which reported a loss of 581 million Canadian dollars last year — or $443.6 million at current exchange — and earnings before interest, taxes, depreciation, amortization and rents of 1.13 billion Canadian dollars, is working with consulting firm AlixPartners LLP to cut costs and reshape its business.
On Friday, HBC confirmed reports that it is considering a joint venture between Kaufhof and Signa Holding GmbH, owner of Karstadt, Germany’s other major department store chain. “HBC believes it is prudent to advise stakeholders that it is in discussions with Signa Holding GmbH and has signed a nonbinding letter of intent with respect to the exploration of a potential joint venture,” HBC said.
Though specifics of any joint venture weren’t disclosed, it’s expected to lead to a merger of Germany’s Kaufhof and Karstadt department store chains, with Karstadt operating the combined entity and HBC selling at least half of its stake in the retail operations of Kaufhof and retaining at least 50 percent of the Kaufhof real estate, though nothing is determined yet.
Such a deal is complicated. It’s a multinational agreement, there are union concerns over layoffs and wages being lowered, and Germany’s Kartel bureau would have to analyze any antitrade issues and approve the deal. “Any potential transaction is subject to further review and analysis by HBC, approval of HBC’s board of directors, as well as many conditions, including due diligence and third-party consents, that are outside of HBC’s control,” HBC said.
There’s also the question as to what happens to the 13 Hudson’s Bay stores in The Netherlands and the eight Saks Off 5th stores, six in Germany and two in The Netherlands.
Signa, founded by Austrian real estate investor René Benko, has been holding talks with Kaufhof on and off for years.
“Benko is looking to create the dominant German department store — a combination of Karstadt and Kaufhof,” said Walter Loeb, the retail consultant. “I would expect the resulting company to be run from the Cologne headquarters of Kaufhof, where there is more space.”
Combining two companies, Loeb suggested, won’t be easy. “They are two different cultures.” Loeb also said that he expects the Off5th operations in Germany and Hudson’s Bay stores in the Netherlands would be part of the package for Signa to operate.
Hudson’s Bay rejected Signa’s 3 billion euro bid for Kaufhof earlier this year. HBC bought Kaufhof as well as its Belgian subsidiary Galeria Inno and related real-estate assets for 2.8 billion euros from German retailer Metro AG in 2015. It was the Toronto-based HBC’s first foray into Europe.
“It’s very clear there have been conversations to get out of the European retail operations and that Richard is trying to move away from managing difficult retail operations and instead take a minority position without being the operator and still have control of the real estate,” said one former retail ceo. “That plays to what Richard does well — run a property company.”
From an overall perspective — despite the transactions for Gilt, Kaufhof and Fortunoff, which was shut down — Baker still has a savvy track record of retail and real estate deals with inventive financing. Saks was purchased for $2.9 billion in 2013, and in 2014, the 646,000-square-foot Saks flagship by itself was valued at $3.7 billion and HBC took out a $1.25 billion, 20-year mortgage on the ground underneath the flagship. HBC also agreed to sell its Zellers locations in Canada to Target for 1.8 billion Canadian dollars in 2011.
Lord & Taylor was purchased in 2006 for $1.2 billion, and Baker is expected to conclude a deal this year with WeWork to sell the retailer’s Fifth Avenue flagship for $850 million. At one time, Baker had plans drawn up to build a tower above the flagship. Now there’s a letter on the facade from Lord & Taylor’s president informing the public that the flagship will close early next year. Up to 10 other Lord & Taylor stores will close through 2019.
“I wouldn’t be surprised if one day Baker shrunk the footprint of HBC back down to just Hudson’s Bay in Canada,” said one retail executive, speculating on the future.
Not so fast with Saks Fifth Avenue. There has been speculation that for the right price, the luxury retailer would sell, though that doesn’t seem likely anytime soon. HBC is spending $250 million to renovate the Manhattan flagship, and the air rights were sold to Swiss Bank in the mid-Eighties, which built a 50-story tower. With development rights gone, that limits the appeal of the property. Other HBC-owned retail properties are being marketed, including the Hudson’s Bay flagship in Vancouver, Canada, which would be leased back. Certain Saks locations, including those in San Francisco and Beverly Hills, could be marketed too.
Selling off property helps reduce debt. As of May 5, Hudson’s Bay, which last year generated more than 14 billion Canadian dollars, or $11 billion, had 3.8 billion Canadian dollars, or $2.85 billion, in loans and borrowings on its balance sheet. Its debt-to-profit levels have been higher than the industry average and activist investor Land & Buildings has been critical of the company’s strategy, urging it to extract more value from its substantial real estate. But selling off store property means rents are assumed on stores continuing to operate, eating into profits. It’s noteworthy that the decision to shut the Lord & Taylor flagship was predicated on avoiding paying rent after initially contemplating a scaled-down flagship, and that the flagship has long lacked traffic and productivity.
There are several cases of retailers and developers buying retail chains to create large multibillion-dollar retail empires with synergies between divisions, that ended up getting dismantled. Robert Campeau, George Herscu, Edward Lampert, and the Ascena Retail Group come to mind.
“There is a long history of these rollups, and while they are appealing in concept, the execution has never been successful,” observed Arthur Martinez, the former executive chairman of Abercrombie & Fitch and former chairman and chief executive officer of Sears.
Execution has been an issue at HBC, mostly with its offprice and overseas operations. Now it’s a question of whether HBC is changing its strategy for growth and making money and whether Baker sticks to what he does best — acquisitions, creative financing and real estate.
Three years ago, not long after Kaufhof was purchased, Baker told WWD: “We are a global business that focuses on operating retail companies, acquiring and managing real estate, and mergers and acquisitions. We’re a company that has three major focuses.”
But last October, at the WWD CEO Summit, just after disclosing the deal to sell the Lord & Taylor flagship, Baker said, “Being a retailer, that is too tough. Man that is tough.” Regarding the real estate business, “That’s not as tough. It’s a place where we can make a lot of money.”