The company made its public market debut last month and serves as an interesting option for investors looking for differentiated retailers.
A full transcript follows the video.
This video was recorded on March 20, 2018.
Vincent Shen: We have Hudson Limited, ticker HUD. I mentioned that frequent travelers are likely familiar with this company, because Hudson operates 1,000 newsstands, bookstores, duty-free shops, and other retail storefronts in North America with 95% of its revenue generated at airports.
Hudson priced its IPO at $19 per share at the beginning of February. The deal raised $750 million, and at its debut, the company had a valuation of close to $1.8 billion. But, shares have declined in their first month and a half of trading. Before we came into the studio, the stock was right around $15 per share, giving Hudson that $1.5 billion market cap.
There's a lot of variety in its retail footprint, which is really interesting, because Hudson stores can range from minimalist 200 sq. ft. to 10,000 sq. ft. They come under the company's own banners like Hudson and Dufry, but they also partner with third-party brands like Coach, Tumi, and Dunkin' Donuts.
Airport concessions are the name of the game for this company. I'll pause there and swing to you, Asit. What jumped out to you for this business?
Asit Sharma: A bit a background on the business that shareholders or prospective shareholders should know really jumped out at me, and that is that this IPO was conducted by Hudson's parent company, which is Dufry AG. This is a European company. It's one of the largest global airport concession retailers in the world. They have about 2,200 stores in 64 countries. They took all the proceeds from the IPO to pay down their debt. Hudson didn't receive any of the proceeds for its own purposes.
The other thing to be aware of this, this is still going to be a company which is controlled by Dufry. They have stacked the board with their own members, they have the control of the voting interest. Just a quick explanation, the IPO created two classes of stock: A shares and the B shares. The A shares are what shareholders will buy, the common stock. B shares are all retained by Dufry. B shares have voting rights of 10:1 over A shares, so basically, Dufry has all the control.
Having said that, this is a very interesting company. I'll give a few statistics on revenue and earnings. We can delve into this a little further. Last year, in 2017, Hudson retail generated $1.8 billion of revenue. That's about a 7% improvement over the prior year. It had a really healthy gross margin of 62%, which helped it generate before-tax profit of $32 million, which is about double the prior year. So this is a profitable company. It's growing at a reasonable clip.
Net profit was actually a loss of roughly $11 million, and that was due to a one-time tax adjustment. Those of you who are following the effect of the recent U.S. tax legislation on the companies you own have often seen benefits for companies which are U.S.-based and do business globally. But since Dufry is sort of the opposite -- it's partially owned by an overseas entity and does business primarily in the United States -- it got the reverse end of the stick in that it has some net operating loss carryforwards that it could have used in the future to offset some future income tax liability. It had to take a hit this year, but it got that out of the way. This is a healthy company.
One more thing to note globally about it, and then I will flip it back to Vince. Let's talk about the revenue composition, because this is important. About 76% of the company's revenues are duty paid, and about 24% are duty-free. The duty-free revenue comes from brands that it licenses from the parent company, Dufry. If you've been traveling in the past few years anywhere in the world, you've probably seen brands like Dufry, Nuance, World Duty Free, those shops that you walk in to maybe to buy some duty-free liquor, it licenses those brands. The rest of its revenue is duty-free.
Eighty-one percent of sales come from the United States and about 19% from Canada. Let's slice the revenue one more way -- 94% of its revenue, as Vince said, is derived from airports. The balance is hotels, train stations, and in New York City, those kiosks that residents are very familiar with, the Hudson News brand, which is something I was very familiar with when I was in grad school in New York in the mid-1990s.
Of what it sells, food and beverage is the largest category at 35%, and that's followed by perfume and cosmetics at 14%. Literature, meaning news and books, at 12%. Fashion, so, clothing items, at 11%. And other revenue is 11%. Then, it breaks down into some smaller categories. So this is a global view of what the company sells, how it sells, and where it sells.
Shen: Thanks, Asit. I'll touch on a few additional details, especially on some of those product categories that you mentioned. I mentioned before that Hudson has a lot of different retail concepts and store formats. Think convenience stores, duty-free, electronics, book stores, and food and beverage as well. The company has over 200 concession agreements, but its key locations aren't that much of a surprise, given its concentration in airports. If you think about Chicago O'Hare, where it has 49 stores; JFK International, another 40 stores; Vancouver International, 43 stores; Los Angeles International, 48 stores; and then McCarran in Las Vegas, another 33 stores. Just those five airports account for over 20% of the company's total store base.
Among that store base, Asit, you broke down some of those product categories, like food and beverage, perfumes and cosmetics, and fashion making up a lot of that top line. But something that's interesting, I think, about this is, you have kind of a traditional brick-and-mortar retail operation, but the company mentions in some of their filings unique influences on its customers. Due to the concentration of Hudson's concessions in airports, the company gets a relatively stable and predictable flow of customer traffic. Unlike traditional brick-and-mortar, like the shopping malls and shopping centers of the world, air travel is actually growing more popular, which means more passengers and potential customers wandering around airport terminals.
Along with that, a lot of travelers will build potential shopping time, or what the company calls "dwell" time, into their travel plans. Fools who have flown before are familiar with the idea of arriving at the airport two hours or more before their scheduled flight time in case the check-in or security lines are particularly packed. But at larger airports, dwell times are estimated to be well over an hour. So if you get through with all that time to spare, for Hudson, that's basically a window before you board your flight where it's an opportunity for them to tempt you into making some sort of purchase, often times an impulse purchase.
Then, you add to that the fact that flyers tend to come from higher income demographics, that travelers are often rushing, a lot of airlines are reducing their in-flight services like meals to offer cheaper airfare, and there's more spending taking place at airports themselves. Overall, I think it's important to note that the market for airport concessions in North America comes out to over $9 billion annually, so a rather significant market for Hudson to tap into.
Asit Sharma has no position in any of the stocks mentioned. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.