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

Where American department store chains such as Target and Sears have been struggling, Hudson's Bay has shown it is definitely possible to turn a profit in Canada.

Jun 7, 2014 at 10:00AM

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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Daniel James has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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