A Thursday evening in Toronto, the lingering days of autumn. On the fourth floor of the Bay at Yonge and Bloor the housewares department appears lonely, unloved. A display table bears a small sign for Anthropologie Home, one of the new lines brought into the company by its newish leader, part of the spark that is meant to reignite the connection between consumer and retailer. Fifteen alphabet coffee mugs have been placed upon the table. A single set of pretty measuring bowls. One tea set. C’est tout. The word forlorn comes to mind.
Perhaps, the lovely saleswoman says with a sliver of hope in her voice, more items will be brought in after Bay Days, the nationwide sales extravaganza that kicks off tomorrow.
Perhaps the selection at Yorkdale would be better. “I’ve heard they’ve put thousands of dollars into that store,” she confides. There is not a single customer to be seen. It is 7:05 p.m.
A Saturday afternoon in Toronto, the Thanksgiving long weekend. Glide through the in-store Hudson’s Bay-branded boutique at the company’s brightly refreshed Yorkdale store. Note the canoes suspended from the ceiling. Observe the generous display of signature-striped HBC items, from just-launched Le Creuset casserole dishes to just-arrived Hunter candy-striped wellingtons to creamy made-in-Scotland 100-per-cent cashmere scarves to an excitement of Hudson’s Bay baby wear. A scatter of voices: “I love the Hudson’s Bay colours!” “I love the sweater — don’t you love it?” “I really think they hit the mark.” The shoe department looks as though it has been hit by a bazooka: a mass of shoppers appears to have decided that today is the day one simply must purchase a pair of winter boots. It is 1:25 p.m.
Each image tells a story of the fraught, bifurcated reality of the Hudson’s Bay Co., with its inconsistently performing chain of 90 Bay stores necklaced across the country, its eye-popping financial losses (close to a billion dollars in the quarter ended Aug. 3) and its on-and-off-again plans for global retail domination (Saks Fifth Avenue still in, the Netherlands out, Lord & Taylor half in half out, Germany out).
As it struggles with its go-forward strategy under the prying eyes of the public markets — the company’s shares were nosing to $10 at time of writing — a take-private offer, at $9.45 a share, was tabled in June. Groups of shareholders rose up in opposition, champing for a higher buyout price. On Monday of this week, the company announced that the special committee of the board of directors, which assessed the previous offer as inadequate, had unanimously approved a sweetened offer, at $10.30 a share, which will be put to a vote in December. The approval of a majority of the minority shareholders must be won in order for the transaction to proceed. Should that happen, the oldest company on the continent, which will celebrate its 350th birthday on May of the coming year, will draw the veil on the current crop of adventurers, led by a real estate operative by the name of Richard Baker.
York University’s Richard Leblanc, a noted governance expert, cites the standard reasons why any company would attempt this course of action. “To avoid the constant scrutiny of the public markets,” of course, “of earnings pressure, of compliance obligations.” This evokes courtly words and imagery: time and patience, studied analysis and a belief, or hope, that this gambit is all about securing the Bay’s legacy for the long term.
Some observers might allow their minds to skeptically charge down another tunnel: what are the chances that the ultimate end game will be a bust up of the company, a selling it off for parts, or at a minimum, a raft of Bay store closings?
“You want the company to survive,” Leblanc says of the storied merchant, an old-style department store that occupies a special place in the hearts of Canadian shoppers who lost Woodward’s (Westerners) and Eaton’s (all of us) and Simpson’s (lament for the lost lunch counter in the lower level of the Queen Street store). “This is one of Canada’s most iconic companies, going back to the 1600s. I’m not sure that Americans, American directors, based on my experience, that they really appreciate the importance of that.”
Delving deeply into the company’s future with the American chair, or the American chief executive officer, Helena Foulkes, is not to be. Interview requests were declined. As a result, pushing through the Bay saga feels like kicking one’s way through the box and tissue detritus that litters Yorkdale’s shoe department.
On June 19, Hudson’s Bay Co. held its annual general meeting in the Arcadian Loft, on the eighth floor of the HBC building in downtown Toronto. While the grand old building came into the corporate fold years ago via the acquisition of Simpson’s, it quickly secured its position as the flagship of the Bay, an historically fitting display case for those coveted point blankets in scarlet or grey or winter white. And while the Arcadian Court, “the place where Toronto does lunch,” has been re-purposed as an event space and no longer welcomes the day-to-day shopper, the name still evokes bygone grandeur, a sort of dowager gentleness above the hurly-burly of Bay Street.
And so it was unbecoming that the American-controlled Hudson’s Bay Co., led by a U.S.-resident chief executive officer, barred the media from attending the annual meeting, giving the Bay more the image of a upstart mining outfit on the run than a historic purveyor of fine goods to the Canadian consumer. A reasonable assumption could be that HBC wanted to keep private any investor discussion of, say, compensation to its CEO. A reasonable criticism could be that the company, at least in this instance, failed to comport itself in the manner of a Canadian institution answerable to a Canadian public.
Two and a half weeks prior to the meeting, Glass Lewis, a proxy advisory firm, issued its analysis on HBC. Based in San Francisco, Glass Lewis is owned by the Ontario Teachers Pension Plan, which, at the time of the report, owned approximately seven per cent of the company’s stock, making it the fourth largest shareholder. Glass Lewis flew two red flags. The first concerned the high percentage of affiliates and insiders on the board, raising significant concerns about the board’s ability to perform its oversight role. And then, as if by example, a related party transaction between board member Robert Baker, father of Richard Baker, did not meet the test of good governance. Robert Baker is chair and CEO of National Realty & Development Corp. (NRDC). Richard Baker is a principal of NRDC. The Bakers are New York real estate folk. An affiliate of NRDC-leased office space to a subsidiary of HBC in 2018 for $440,000.
On the matter of compensation, or pay-for-performance, the company was given an “F” grade. Helena Foulkes’s total compensation of $29.2 million, including $21.3 million in equity awards and $3 million in cash at time of sign-on, was assessed against a peer group of 15 retailers. “Overall, the company paid more than its peers, but performed worse than its peers,” Glass Lewis concluded, adding that the company had been “deficient” in meeting the modern standard in executive compensation. To quote the proxy paper: “Shareholders should be concerned by the repeated and significant disconnect between pay and performance.” Addressing the sign-on payment specifically, the advisory firm urged shareholders to question whether such a payment represents the best use of the company’s capital. “The fact that the Company feels such a payment is necessary to recruit an external executive can be an indication of poor succession planning by the board.”
Glass Lewis’s voting recommendation on executive compensation: against.
The company’s approach to executive compensation passed, with 73.54 per cent of shareholders voting for and 26.46 per cent voting against. While Baker and crew won the day, any supporting vote under 90 per cent is considered, in governance circles, a serious slam against the company. “We think that it’s best practice for a company to engage with its shareholders regularly, but particularly following less than 90 per cent support,” says Valeriano Saucedo, senior analyst at Glass Lewis and author of the proxy paper’s compensation section. “Any support below that we expect to see the company make changes to the compensation program.”
Teachers was a voting participant at the annual general meeting. Barely. Five months earlier, the retirement fund, which invests on behalf of more than 320,000 active and retired teachers, agreed to sell its stake to Richard Baker’s Rupert of the Rhine LLC, a name that nods either to the beginning history of Hudson’s Bay Co. as it stretched across Rupert’s Land, or, who knows, colonial conquest. A private company, Rupert of the Rhine held 7.64 per cent of the company’s stock at the time of the Glass Lewis analysis. On June 10 Baker’s take-private proposal was unveiled. On June 18, Baker announced that the deal with Teachers was off.
At the annual meeting, Teachers voted against Foulkes’s compensation. The following day it unloaded the bulk of its investment, selling into a broker’s offer shares for which it had paid, at minimum, $17 a piece. The closing price that day was $9.46. “They are supportive of good governance,” says Leblanc of Teachers’ reputation. “When they exited that was a strike against them,” he says, noting the lack of transparency around the going private transaction and that the fund could have brought “heft” to the discussion of ongoing governance.
Teachers would not expand beyond a flaccid boilerplate statement that the company regularly trades in and out of companies to ensure the right asset mix.
Richard Baker outlined his rationale for plotting his exit from the public realm in a letter to the special committee of independent directors. Acknowledging the company’s sustained depressed share price — his words — Baker expressed the view that the market had “failed to appreciate the Company’s progress and lacks confidence in its forward-looking outlook.” Going private would provide HBC shelter from the market storm.
York University’s Leblanc has some sharp words about Baker. “I find it anomalous from a governance point of view that the chair of the company is also representing the shareholder who is intended to buy out the minority,” he says. “Is that a conflict of interest? It absolutely is.” The Baker-led group controls approximately 57 per cent of the shares.
Shoppers at Penticton’s Cherry Lane Shopping Centre or the Mayflower Mall in Sydney, N.S., or at Bloor and Yonge for that matter, may be confused by the story line. It was, after all, fewer than seven years ago that Baker brought HBC back into the sphere of publicly traded retailers. In its 2012 prospectus — Baker purchased control in the summer of 2008 — it was noted that the company had increased its sales per square foot at the Bay to $133 from $122. Sales at Lord & Taylor, which had initially been acquired by the Bakers’ NRDC Equity Partners before being folded into HBC, performed even better.
The go-public strategy then championed “500 years of combined iconic department store banner heritage.” Those iconic banners were Hudson’s Bay and Lord & Taylor, the rich retail history of L & T dating back to 1826. More than 900 brands had been discontinued in the reshaping of the two chains. More than 330 new brands had been added. The Hudson’s Bay image had been polished to such a degree, the prospectus noted, that brands that previously would not have agreed to a partnership had signed on. UGG, Coach and Burberry were among the mentioned. “Hudson’s Bay is becoming a fashion authority in the Canadian retail industry by offering our customers sought after brands and styles they desire,” the prospectus stated, adding that a complete omni-channel platform reaching beyond the company’s e-commerce site to mobile devices was in process of being launched. Sunny days lay ahead.
Hold that thought.
On the morning of Sept. 12, 2019, Hudson’s Bay held its second quarter analysts call in which it reviewed the financial results for the 13-week period ending Aug. 3 — that near billion-dollar loss — and the latest iteration of promises for the future. CEO Helena Foulkes addressed the positives and negatives of the company’s two cornerstones, they now being Saks Fifth Avenue and the Bay. HBC acquired Saks in 2013 as a way to take a commanding position in luxury retail, to expand the marque into Canada seeking the standard efficiencies and synergies. The plans for Canada were ultimately reined in, but noted advances included reshaping the Queen Street store into a Bay/Saks combination and a massive $250-million (U.S.) investment in the Saks flagship store in midtown Manhattan. With its iridescent pop-colour Rem Koolhaas escalator, its jewelry “vault” and its Parisian-style dining at the Philippe Starck designed L’Avenue, Saks Fifth aims to be to New York what La Rinascent is to Milan or Le Bon Marché to Paris.
The good news: Digital sales for HBC overall were up 19.3 per cent. Saks Off 5th reported a 3.4-per-cent increase in comparable sales — that is, sales compared with the same reporting period in the previous year. Saks Fifth Avenue reported a bare increase of less than one per cent from 2018, and the trend line for the quarter has declined markedly. But Christmas, conventionally the richest retail season, is just around the corner.
The negative standout was the Bay, with comparable sales declining 3.4 per cent. The company deemed this a “sequential improvement” over its first quarter, which, year on year, had declined by 4.3 per cent. Regardless, it’s a worrying trend line.
But what about that other iconic banner, Lord & Taylor?
In late August, HBC announced a deal with Le Tote, a subscription service retailer in the U.S. that charges a monthly fee to consumers who receive a rented “tote” of chosen clothing, which they then return and cycle on to new duds for the month ahead. Call it the end of ownership, which is precisely what California-based research outfit Zuora dubbed it in a recent report. “I think people are hacking their status by renting rather than owning,” says Zuora chief data scientist Carl Gold. Shoppers are saying, “Hey, I don’t have to spend so much time wandering around department stores. I can customize my choices from the comfort of home. So it’s really transformative to the consumer.”
Here’s a statistic from that report: 57 per cent of adults, surveyed internationally, wish they could own less stuff. But Gold also makes the point that the very structure of the subscription model is that it offers the company in question the opportunity to establish or keep affirming a long-term relationship with the customer. Knowing your customer, satisfying your customer, creating ease of service with your customer, are key attributes.
The agreement with HBC has Le Tote acquiring the Lord & Taylor brand, as well as operational responsibility for the 38-store chain. That’s right: the online subscription service is betting that a tie-in with bricks-and-mortar stores will enhance its overall performance. HBC takes a 25 per cent equity stake in Le Tote. The ownership of the real estate remains with HBC and its real estate joint venture partner. That deal has not yet closed.
In her remarks on the analysts’ conference call Foulkes addressed how her team had shut the entire Home Outfitters chain of 37 stores, a swift execution. On Oct. 1, the company announced the final exit from its European foray, four years after entering Germany through the acquisition of that country’s number 1 department store. In just 24 months, HBC had gone from being a “global aggregator in the retail sector,” with a self-proclaimed “track record of successful acquisitions based on disciplined criteria,” to a company hyper-focused on North America.
This shifting iconography, from two venerable retailers to three venerable retailers back to two venerable retailers in a different combination has consistently emphasized that the most vulnerable venerable of all is the Bay.
But are we talking about chains of stores? Or should HBC be assessed as a collection of real estate pieces on a Monopoly board?
Jonathan Litt’s Connecticut-based Land and Buildings Investment Management — yes, it’s really called that — believes the latter. Litt has been agitating for the company to “monetize” the company’s real estate. “Hudson’s Bay is a real estate company, full stop,” he said in a letter to the HBC board in June, 2017. “If there is a smarter and better use of any or all of the locations, stores should be closed and redeveloped and put toward optimal use.”
Litt pointed out that the company’s shares had declined under Baker to, then, just under $9 from a high of nearly $30.
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HBC itself had provided Litt with some effective artillery. In an investor presentation that same month the company quoted a $6.4-billion valuation on its real estate portfolio, translating to $35 a share.
Litt did not respond to a request for comment on the latest development: an independent valuation of the real estate portfolio that sets the value at a bracing $8.75 a share. Citing a deterioration of real estate market conditions and the never-ending risks of the retail industry, among others, the committee recommends that the minority shareholders accept that offer of $10 and change. The grim assessment from the special committee of the board: 10 bucks “is expected to be higher than that realizable in the foreseeable future.”
Bay shoppers may be interested to know that only one wholly owned Bay store remains in the portfolio, the once-upon-a-time flagship in downtown Winnipeg. Some Bay shoppers may be too young to recall that the retail history of the Bay was driven through 19th-century expansion west and north, with Winnipeg as its headquarters. It wasn’t until the 1960s that HBC became a significant player in the east, through the acquisition of Morgan’s. Plans to establish a downtown Toronto store, at Yonge and Bloor, were announced in December 1971.
Today, 10 Bay stores are rolled into a joint venture with Rio Can Real Estate Investment Trust, a joint venture that was to focus first on real estate growth opportunities and, ultimately, a public listing. So, yes, a real estate company first in which HBC has an 87-per-cent stake. Four of those stores had been wholly owned flagships: Vancouver, Calgary, Ottawa and Montreal.
The vast majority of Bay stores are leased.
And present a merchandising challenge. Helena Foulkes has been busy correcting what she called missteps. “We went a little too downscale as we chased the Sears customer,” she said of the ill-considered strategy to try to capitalize on Sears’ closure.
The remedy, in part: to exit more than 300 unproductive brands, bring on 100 new and emerging ones and seek exclusivity. Broadly, the newly defined merchandising strategy sold to Bay Street sounds a great deal like the old strategy outlined in 2012. Specifically, Foulkes talked up a pivot to Scandinavian style, to ethically and sustainably minded clothiers and a number of signature stripe collaborations, as in those Hunter rain boots. A new app makes it easy for Bay shoppers to tap-tap-tap their way to purchases.
The company doesn’t break out the financial performance of individual stores, so how the Lime Ridge Mall store in Hamilton performs against the Woodgrove Centre in Nanaimo — the stores are of comparable size — can’t be reported. Will all those stores be receiving those fresh fashion lines? One might think “No,” but the Bay won’t say.
Retail adviser Bruce Winder imagines the ongoing drama in movie terms. “The first movie is [Foulkes] cleans up the place, sells the unproductive assets, reduces debt, refocuses the business again. I watch that and I think, that’s great. I think she’s doing a good job. I clapped.”
Then he reaches for a tree analogy instead. “Part one is done. She’s pruned the tree. She’s taken all the bad branches off. They’re at the curb. They’re gone. But now what’s she going to do with the tree?”
Without equivocation, Winder expects a rationalization of the Bay stores. “Oh, 100 per cent. Without having any data, I’m going to say they’re going to close at least 30 per cent over time. Thirty to 40 stores. … And then they’re probably going to reinvest some capital into the ones they have.”
The Harvard-educated Foulkes arrived at HBC following a quarter century at Woonsocket, R.I.,-based CVS Health Corp., where she rose through the marketing side to become executive vice-president and head of CVS’s pharmacy business. Signal achievements included launching CVS’s loyalty program in 1997, but in an interview at a Fortune women’s summit she offered that by the time she was headhunted for the HBC job, in the fall of 2017, she needed a change. “The company knows it needs a turnaround,” Foulkes said then of HBC. She was struck by the kind of “radical” moves HBC was making, including selling the flagship Lord & Taylor building to WeWork, the shared workspace startup, for $850 million (U.S.). She said she liked the fact that HBC was the type of company that embraced out-of-the-box thinking. Quickly under Foulkes’s watch HBC ditched the online retailer Gilt Groupe taking at least a $150-million (U.S.) bath on what had been a $250-million all-cash acquisition just 18 months before.
Pushing beyond decisions made by the prior leadership is one thing. Setting the go-forward strategy is quite another.
There’s a long list of reasons to sympathize with the operational challenge. Nick Egelanian is president of SiteWorks, a real estate consulting firm based in Maryland. “You need to get about 10 disciplines right to be good at department store retail,” he says. “You have to get real estate right. You have to get finance right. You’ve got to be adept at buying. You have to operate stores well. You have to adapt technology. You have to have great banking relationships. You have to be able to source — and manufacture in some cases — goods. You take all those skills and it’s very hard to assemble a group of people who can work together applying all those skills to one thing, and that is offering something that is compelling to the customers at the right place at the right time.”
The further complication with HBC is that the company is controlled at the top not by retailers, but by private equity guys. “My view is that they simply don’t understand the companies,” Egelanian says, speaking about private equity players generally. “They don’t understand the risks they’re taking. They don’t understand where we are in the natural cycle.”
With Richard Baker as the lead hand, the company of retail adventurers announced in the spring of 2016 that it would grow its European presence, already staked in Germany and Belgium, by making a hard push into the Netherlands. HBC would open as many as 20 Bay stores across a two-year period, with a hoped-for launch in the spring of 2017. “This is an extremely compelling opportunity to invest in the Dutch market, leverage the iconic Hudson’s Bay brand and introduce what will be the only nationwide all-channel premium department store,” Baker said at the time. Leading the day-to-day advance was then CEO Jerry Storch.
The compelling opportunity that Baker described was presented via Vroom & Dreesman, the largest department store chain in the Netherlands. In its latter years V&D, with more than 60 stores serving a mid-market clientele, had gone a couple of rounds with private equity owners before filing for bankruptcy at the end of 2015.
Frank Quix, managing partner at retail consultancy Q and A based in Amsterdam, provides helpful insights as to what HBC was getting into. The retail market was soft, Quix says, consumers’ pocketbooks had been squeezed by new mortgage financing rules that had been adopted in the wake of the financial crisis, and the sales tax had increased. Still, there was potential in the mid-market. V&D had been over-stored and too expensively staffed, but that didn’t preclude a nimble player doing well with a smaller footprint. “I think 25 to 40 (stores) would have been sufficient with a good online operation,” he says.
But HBC went small in footprint and high in target market, cherry picking select real estate locations vacated by V & D. “I think their positioning was wrong because they were too high a position, not servicing the mid market,” Quix says. “And they got too close to Bijenkorf in those cities where Bijenkorf was also active. Why should you go to Hudson’s if you could go to Bijenkorf?” (Bijenkorf is part of the Selfridges Group, which is owned by the Westons.)
Last December the Dutch daily De Telegraaf reported that internal HBC documents showed an 80-million euro loss for the Dutch operation, which had plateaued at 15 stores. Quix compares the reported loss to V & D’s bankruptcy filing, which showed a 49-million euro loss across 60-some stores and more than 10,000 employees. “If you would make the math on loss per staff member, loss per store, loss per square metre, it is incredible,” he says of HBC.
Jerry Storch was long out the door, having suddenly exited the company in October 2017. Richard Baker held the reins until Helena Foulkes landed as the new CEO in February 2018.
At the end of August of this year Financieele Dagblad reported on leaked documents revealing a plan of closure for the Dutch stores by Dec. 31, putting 1,400 people out of work. Are there plans to leave the Netherlands, one analyst asked Foulkes on that September conference call with analysts? The company’s “no firm decisions” response, delivered by its investor relations spokesperson, was followed eight days later by the announcement that the Netherlands operation would close on or before Dec. 31.
“If you were in the stores only staff members were in the stores,” Quix says of his own visits to the Bay stores in his part of the world. “It’s very sad. It’s very painful also for the city centres.”
V&D, founded in 1887, was as rich a part of the retail heritage in the Netherlands as the Bay continues to be for Canada. Failing in his global conquest, Richard Baker turned his ships for home. Thousands of kilometres across the Atlantic Ocean, HBC-striped baby blankets at the Yorkdale Bay store are stitched with the address label where they began their journey, in a once stately V&D store in Leiden, South Holland.
That sounds like the doom and gloom final chapter to a very sad story. But SiteWorks’ Nick Egelanian says that with the right leaders a department store chain here faces better odds than in his home turf of the U.S. “You have 40 per cent less square feet of retail than we have,” he says, using per capita statistics. “It means that we have done a more thorough job of destroying our department stores than you have,” adding that the 40 per cent “is in the stuff that destroys department stores.” That would be what Egelanian calls “commodity retail” — Walmart and the like — versus specialty retailers like the Bay.
Egelanian equates the challenges the Bay faces here to the challenges faced by Macy’s in the U.S., where comparable sales are flat. During Macy’s most recent quarterly conference call, in August, analysts were told that the company does 50 per cent of its business in 150 of the chain’s 680 stores. “They have a lot of stores doing $30 million and under (in sales),” Egelanian says of Macy’s. “Those cannot be fixed by having a better merchandise selection. The sooner these companies get rid of those stores the better because those are dying stores that are no longer needed. It’s excess supply.”
So too the Bay. “Some large portion of their 90 stores probably will need to be jettisoned at some point,” Egelanian predicts. “Of those that are not jettisoned, those that are properly nurtured as higher end specialty stores, more like Nordstrom, than the every day Bay store — those will have a better chance of surviving.”
That’s a widely held view. Ron White, the shoe guy, has been in the shoe business for a quarter century and sells his pumps and boots at the Bay. White believes the company is heading in the right direction. “There was a little bit of rose-coloured glasses,” he says of the time before now. “Oh let’s go do this, let’s go do that. Let’s take over the world.”
With the global domination plan a bust, and with the acknowledgment that going after the Sears customer was a killing mistake, White thinks the retailer has found its focus. It’s not Holt’s. It’s not Winners. It’s $200 and up, defining the mid-market price point. “They will expand in that area, for sure. Guaranteed. I know for a fact they will,” he says, commending the company on its success in the online world. Even White expects a rationalization of the chain. “Do they need to close stores? One hundred per cent.”
But will it survive? “If you think of a fashion department store in Canada, who’s left? The Bay. It’s theirs to lose. I think they’re going to win. How could we not have a national department store chain?”
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