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Hudson’s’s Bay Shows That Growth Is Possible in Canada

Canada, ever regarded as a slightly peculiar place by most Americans, can also be said to have a different retail environment than the United States. Several American retailers have already run into this fact. US retail giants such as Target (NYSE: TGT  ) and Sears Holdings (NASDAQ: SHLD  ) Canada have been struggling to grow sales in the area.

However, a homegrown department store chain is showing foreigners how it's done. Hudson's Bay (TSX: HBC  ) , North America's oldest continually operated company, is managing to deliver solid growth in Canada. How is it succeeding where others fail?

Struggling up north
Both Target and Sears Canada have been experiencing serious trouble turning a profit in the Canadian market, each with their own set of problems. Let's take a look at Target first. In its first year of operations in the area, Target managed to lose $941 million. It is estimated that the company is on track to lose some $2 billion in the first two years of operations.

According to some, this may be due to the company's aggressive rollout in the area, having opened 124 stores in only 10 months. Moreover, the rollout was plagued by other problems, including empty shelves and a lack of selection in many store locations. It is speculated that the company's Canadian woes may have contributed to the decision by ex-CEO Gregg Steinhafel to leave the company. Under a new CEO, the company may even decide to leave Canada altogether.

Sears Canada is in even worse shape, the company having posted some startling figures for its first-quarter report. The quarterly net loss swelled to $75.2 million from $31.2 million a year ago, with comp-store sales dropping a huge 7.6% and overall revenue falling by 11%. While low-cost private-label items continued to see strong demand, this was apparently not enough to offset the decline in other sales.

Moreover, the company is up for sale. However, much of Sears Canada's most valuable assets have already been sold by CEO Eddie Lampert, with much of the profits going to Sears' parent company. The question is then very much who will be willing to buy second-rate retail locations in bulk, as several US companies have already mulled over purchases and decided to pass on them.

Saks fueling growth
All of this contrasts sharply with Hudson's Bay's performance in the area. If the company's most recent report is anything to go by, the company is doing well by most metrics. In the first quarter, Hudson's Bay saw consolidated same-store sales grow by 2.8%, with recently acquired Saks Fifth Avenue leading the way. Due to the inclusion of Saks, revenue more than doubled to approximately $1.8 billion from $884 million a year ago, while gross profit grew similarly from $356 million to $716 million.

While these results would suggest that all the growth is coming from the Saks acquisition, this is not the case. The company's own department store group delivered comp-store sales growth of 2.5%, which is solid. Moreover, the company is seeing fairly strong growth in its e-commerce segment and has reaffirmed its full-year guidance for comp-store sales growth in the low- to mid-single digit range.

The bottom line
It's clear by now that several major US department store chains are having a tough time breaking into the Canadian market. Target and Sears have both stumbled in the area and are considering pulling out of Canada altogether. On the other hand, Hudson's Bay, a local department store chain, is doing perfectly well, with results gaining a significant boost from the acquisition of Saks. Moreover, its own department stores are also delivering solid growth, making it a compelling play in the Canadian market.

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  • Report this Comment On June 07, 2014, at 10:36 PM, utern wrote:

    I think that your correct the retail environment is different in Canada than the US, but I don't think that your use of Sears Canada or Target as the retail loser is incorrect.

    It has been reported many times that the Sears US operation is using the Canadian Sears to get cash to prop itself up. They have been selling off all their prime Real Estate and have been closing stores and selling the leases, as this report points out

    "Struggling with falling sales, Sears has been divesting what it calls non-core assets and letting thousands of staff go, helping to bolster its bottom line and focus on suburban, small town and rural markets. But the massive changes raise questions about the ultimate plans of Sears, whose ailing U.S. parent Sears Holdings Corp. is controlled by hedge fund billionaire Edward Lampert. It has been reaping the rewards of the Sears Canada selloffs through bigger dividends from its Canadian unit."

    The store Sears gave up in Vancouver BC is getting a makeover into a Nordstrom's.

    As for Target they opened too many stores too quickly (124 in a year) and forgot to stock them, the reason Canadians loved Target is because of what they know of the US Targets, a great selection of inexpensive items for the entire family. When Target opened in Canada they had nothing on the shelves and the prices weren't comparable. They just haven't been able to deliver on their Hype.

    Finally, you forgot to mention that the Hudson's Bay Co is owned by a US retailer, in July 2008, the company HBC, after a series of change of ownership, was eventually acquired by the American private equity firm, NRDC Equity Partners, which also owned department store chain Lord & Taylor. So Hudson’s Bay has 90 full-line locations

    So I am not disagreeing with your discourse, I am just pointing out the fact that Hudson's Bay is doing well because they are a good retailer and that Sears and Target are having retailing problems that they have manufactured for themselves and aren't a good comparison

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Daniel James

I'm primarily a value and fixed-income investor with a background in cultural anthropology. As a writer for the Fool, I focus mainly on the consumer goods sector, also dabbling in technology occaisionally. When not pouring over the world's stock markets, I like to read, travel and make music.

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