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Lord & Taylor the jewel in Hudson’s Bay’s IPO

Hudson’s Bay owner Richard Baker at the Lord & Taylor store on 5th Ave in New York City.

Michael Falco/The Globe and Mail

The U.S. economy may be on a loose footing, but you'd never know it from a look at the numbers returned by Lord & Taylor in Hudson's Bay Co.'s prospectus. The high-end U.S. retailer's sales figures and growth expectations exceeded those of HBC's flagship Canadian brand, the Bay.

In preparation for its initial public offering, the company's documents revealed that sales at Lord & Taylor amounted to $210 (U.S.) per square foot, compared to $133 (Canadian) at the Bay. Same-store sales in the U.S. also beat Canada – especially in 2010 when Lord & Taylor grew by 12.4 per cent, as compared to the Bay's 2.2 per cent.

It may come as a surprise, considering the general view that the U.S. economy was pounded harder during the recession, where Canada has experienced comparative strength, but the IPO that could raise as much as $400-million is really all about Lord & Taylor. This also takes some shine off Canada's best-known retail banner – with roots that date back to 1670 – which encouraged the growth of the fur trade along Canada's river networks, and took the country's retail options from trading posts to shops.

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HBC said Wednesday that it was preparing for an IPO despite relatively quiet equity markets. As well as the two department stores, the company also controls the Home Outfitters brand, with stores that sell kitchen, living and bathroom stuff.

Within the prospectus, HBC concedes that when private equity firm NRDC Equity Partners bought the company in July of 2008, the Bay stores (which will be renamed Hudson's Bay) looked tired, needed renovating and weren't modern enough to attract fashion-conscious customers. As the 90 Bay locations revitalized, and the 48 Lord and Taylor shops kept updating, both stores attracted more shoppers. But where last year the company's U.S. EBITDA (earnings before interest, taxes, depreciation and amortization) margin was 10.1 per cent (as a percentage of sales), in Canada that margin was 4.5 per cent.

Looking ahead, the five-year sales-per-square-foot target is an ambitious $240 (U.S.) to $250 at Lord and Taylor. If the U.S. retail engines can keep powering the sector the way they have over the past few months the company might just meet that target. September retail sales, for example, rose by 1.1 per cent south of the boarder. The expectation for the Bay is to rise to $170 (Canadian) to $180 per square foot, which is also a significant increase.

HBC estimates that sales in the department store segment generated $212-billion (U.S.) last year in North America alone – accounting for almost 9 per cent of all retail sales in 2011. In Canada that market share is a little higher at 14 per cent.

For the first half of this year (the period ending July 28), the company is seeing a net loss of $148-million (Canadian). But a big chunk of that loss has come as a result of the closing of the company's Zellers stores, and of the discount department store called Fields. HBC has now shuttered all of its 169 Fields locations, and most of the 275 Zellers locations will be gone by March next year – the company sold 189 Zellers leases to Target for roughly $1.8-billion last year.

Retail sales increased to $1.76-billion from $1.65-billion for the same 26-week period the year before.

By the end of the company's 2014 fiscal year, it believes it can make changes to significantly reduce operating costs to the tune of $60-million (although some reductions will be visible by the end of 2013). To get to that point, potential future investors should expect that restructuring costs will reach upwards of $25-million.

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In October of last year the company called off its efforts to pursue an IPO, but about a month ago reports surfaced indicating that bankers once again had their nose in the numbers. The deal will be led by RBC Capital Markets, BMO Capital Markets, CIBC and BofA Merrill Lynch.

Editor's note: An earlier version of this story incorrectly stated HBC's earnings margin increased in the U.S. and Canada by 10.1 per cent and 4.5 per cent, respectively. This version has been corrected.

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About the Author
Financial Services Reporter

Jacqueline Nelson is a financial services reporter at the Report on Business. Prior to that she was a staff writer at Canadian Business magazine, covering news and writing features on a wide variety of subjects. More

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