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Value Vault: Archived Analysis
NOTE: This page has been archived and the commentary, data, and links on this page are current as of the last date indicated.
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Hudson's Bay Company (TSX:HBC) |
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| ABOUT THE COMPANY |
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Having just celebrated its 330th anniversary, Hudson’s Bay
Company is the country’s oldest corporation. Beginning as a fur trading
business, it was not until the 20th century that Hudson’s Bay turned to
retailing. Hudson’s Bay now runs Canada’s largest retail-department store
chain under the well-known banners of The Bay and Zellers. It operates 99 Bay
stores, 300 Zellers stores and 28 Best Value stores across the country, as well
as 105 Fields stores in Western Canada. Most recently, the company has begun to
penetrate the big-box home decorating market with its three Home Outfitters mega-stores.
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| FINANCIAL DATA |
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1998 |
1999 |
2000e |
| Earnings per Share ($) |
0.57 |
1.17 |
1.50 |
| Price to Earnings (times) |
29.8 |
14.5 |
11.3 |
| Dividend ($) |
0.36 |
0.36 |
0.36 |
| Dividend Yield (%) |
2.12 |
2.12 |
2.12 |
| Book Value ($) |
27.00 |
30.60 |
31.75 |
| Price to Book Value (times) |
0.63 |
0.56 |
0.54 |
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| PRICE GRAPH |
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| WHY ABC FUNDS BOUGHT THIS COMPANY |
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The strong economy over the past year has been fuelled, in part by robust
consumer spending and confidence. Unfortunately, this strength has not been
reflected in the stock prices of Canadian retailers until recently. The current
focus away from technology has begun to benefit the retailing sector.
Reflective of the current environment, Hudson’s Bay hit an all-time low of
$12.50 in March 2000. Since that time it has rebounded to over $17.00. In spite
of this price recovery, Hudson’s Bay is still an excellent value play, trading
significantly below book value of $30.60. Supporting its low valuation is a
dividend yield of 2% and the company’s improving balance sheet. With the help
of strong cash flows, the company’s debt has declined to $852 million in
fiscal 2000 from $1.4 billion in fiscal 1999.
Both of Hudson’s Bay key divisions, The Bay and Zellers, are in a
battlefield full of intense competition. Led by President and CEO, George Heller,
the company is implementing new strategies for its divisions. The Bay’s major
competitor, Sears has gained a strong foothold in the marketplace, especially
with the demise of Eaton’s last year. The Bay has also benefited from the
Eaton’s sell-off by purchasing nine Eaton’s stores and switching to four new
locations. Recognizing the needs of its customers, The Bay’s approach has been
to focus on customer service. It has begun converting its stores to a
centralized checkout format, freeing up staff for customer service. By the end
of summer 2000, 48 Bay stores should be converted to this new prototype.
Zellers has been competing for market dominance with Wal-Mart since Wal-Mart
entered the Canadian market six years ago. Zellers has repositioned itself
through its logo of, "Great brands, great prices". This innovative
strategy is consistent with its numerous newly introduced private brands such
as, Martha Stewart, Cherokee and its Truly brand. To promote its fresh image, it
has upgraded its stores with enhancements such as wider aisles and brighter
lighting. Zellers has built a competitive advantage through its use of private
brands, and promoting itself as "mom’s" store with "one stop
shop" capability.
Hudson’s Bay is not only attempting to improve its stance with its current
banners, but has also begun building a niche in the home decorating market with
its new Home Outfitters mega-store. This tactic is in line with the current
trends of shoppers spending more on home decorating than on clothes. Hudson’s
Bay currently operates three of the big-box style stores with a 50 outlet
objective by 2003.
While Hudson’s Bay’s stock price has been under severe price pressure in
this difficult retailing environment, its strong fundamentals and aggressive
strategies for The Bay and Zellers will assist in its stock price recovery.
Though competition is fierce, HBC has taken the opportunity to enter the home
decorating market which it believes will provide strong growth. Moreover, with
no controlling shareholder and the potential for U.S. entry into the Canadian
retail market, we believe that another potential catalyst for share price
improvement is a corporate takeover.
ABC Funds
May 2000
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| UPDATES |
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September 22, 2000
In the second quarter of 2000, Hudson's Bay Company, faced with a
difficult fashion season due to bad weather, managed to report a 4.8%
increase in revenues over the comparable quarter of 1999. Reported
earnings per share were $0.19 versus $0.12, representing a 58% increase.
This contributed to the best first half performance in six years.
Showing significant improvement was The Bay division, while Zellers,
albeit improving, continues to lose market share to Wal-Mart.
Clearly, the underlying strength behind Hudson's Bay is The Bay.
While the demise of Eaton's has proven to be beneficial, its new store
prototype with centralized checkouts and decreased discounting is key to
The Bay's future. During the second quarter The Bay opened seven
prototype stores and converted 50 floors in 33 stores to the new
centralized concept. Another major aspect of its restructuring program
is Hudson's Bay discount division, Zellers. Selling private label
merchandise that is not available anywhere else, including Wal-mart, is
part of Zellers' unique marketing strategy. In the quarter Zellers
opened one store and renovated and expanded another 12 locations to its
prototype model.
Not only is Hudson's Bay restructuring its two main retail divisions
but it is also introducing many innovative business concepts. For
example, in early November the company plans to launch a new e-commerce
site, hbc.com that will carry up to 4,000- 5,000 items. In addition,
Hudson's Bay continues to penetrate the home decorating market with the
opening of three Home Outfitters stores in the quarter.
In light of its operational strategies and steady progress, Hudson's
Bay remains extremely undervalued. It is presently trading at only 0.5
times its book value with a 2% dividend yield. The company has
recognized its low market valuation and as a result has instituted a 3.5
million or 5% share buyback plan. To date Hudson's Bay has bought back
2.51 million shares. These purchases, at a huge discount to book value
are anti-dilutive and will increase Hudson's Bay's $31.02 book value.
Hudson's Bay's overall corporate debt now stands at $962 million, which
is $69 million less than last year.
In a nutshell we believe that Hudson's Bay's current management plan
is progressing well in an extremely difficult and challenging retail
market. With continued concrete signs of improvement we expect this very
undervalued retailer's share price to come back into favour with
investors.
February 16, 2001
Despite a slowing economic environment and fears of diminishing
consumer confidence, Hudson's Bay recently surprised investors with
better than expected earnings. Hudson's Bay reported third quarter 2000
earnings of $0.24 versus $0.16 in the same quarter last year. This
improvement is largely attributed to The Bay division's increase in
comparable store sales of 6.9% in third quarter relative to one year
ago. Zellers however, continues to struggle with comparable store sales
down 0.8%.
We believe that Hudson's Bay will continue to improve at both its Bay
and Zellers divisions. At some point investors will take notice of this
extremely undervalued stock and we expect the share price will
appreciate considerably at that time. In the meantime, the uncertain
economy may create a great deal of price volatility and test investor's
patience. We expect the company to continue to buy back stock as it
trades at a deep discount to book value.
April 20, 2001
We recently sold our position in Hudson's Bay
Company between $17.50 and $18. While we still favour the company over
the longer term, we have a number of short-term concerns. They include:
- The negative consumer wealth effect caused by a
declining stock market.
- The impact of a softening economy on the
merchandising sector.
- Increased competition with the introduction of
Old Navy into Canada.
- The recent poor performance of its competitor,
Sears Canada, could foreshadow Hudson's Bay's prospects.
Hence, we feel that this was a timely sale based
on the current economic environment.
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| INVESTOR RELATIONS CONTACT INFORMATION |
| Address : |
401 Bay Street, Suite 500, Toronto, Ontario, M5H 2Y4, Canada |
| Phone : |
416-861-4587 |
Web Address : |
www.hbc.ca |
| Fax : |
416-861-6248 |
Email : |
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