In the decade after he bought Hudson's Bay (HBAYF) in 2008, company chairman Richard Baker spearheaded a global expansion for the Canadian department store chain. Unfortunately, this growth produced decidedly mixed results. Hudson's Bay acquired a number of desirable assets, but it also ran up a big debt load and has been unable to turn a profit in recent years.
Ultimately, Baker was forced to bring in a new CEO -- Helena Foulkes -- to clean up the mess he and his team had created. Since mid-2018, Foulkes has sold or closed underperforming businesses at a rapid pace. Last week, Hudson's Bay put the finishing touches on this project, finalizing its plan to exit Europe.
A budding multinational retail conglomerate retrenches
For the most part, Baker's expansion plan at Hudson's Bay involved buying department store chains that owned extensive troves of valuable real estate, such as Saks Fifth Avenue and Galeria Kaufhof. However, the company also ventured into more dubious projects like purchasing the Gilt flash-sale site in early 2016 and opening more than a dozen Hudson's Bay stores in the Netherlands beginning in late 2017.
This multinational expansion was too much for Hudson's Bay to manage, particularly in light of the tough competitive environment facing department stores. As a result, the company has been bleeding cash and posting sizable losses in recent years.
Since taking the helm in early 2018, Foulkes has rapidly undone most of the global expansion engineered by Baker over the past decade. Her goal is to exit underperforming parts of the business so that management can focus on maximizing the value of the company's two most successful chains: Saks Fifth Avenue and Hudson's Bay.
During 2018, the company sold its money-losing Gilt flash-sale site and sold a roughly 50% interest in its European operations to SIGNA Holding. Hudson's Bay has continued down this road in 2019. It has closed all of its Home Outfitters stores, reached a deal to sell the struggling Lord & Taylor chain to Le Tote (a fashion rental service), and announced that it will shutter some of its Saks OFF 5TH off-price stores.
The final piece of the puzzle
Last week, Hudson's Bay made its biggest downsizing move yet, selling the other half of its European real estate and retail joint ventures. It also recently announced that it will close its business in the Netherlands, completing its retreat from Europe.
The sale of the Europe joint venture stakes was quite lucrative, with a total consideration of approximately 1 billion euros ($1.1 billion). Hudson's Bay used part of the proceeds to permanently repay its 429 million Canadian dollar ($322 million) term loan.
The catch is that Hudson's Bay is retaking full ownership of its unprofitable business in the Netherlands in conjunction with selling the remainder of its joint venture interests to SIGNA. This has saddled it with substantial liabilities, offsetting the one-time cash windfall it has received from the joint venture sale.
Closing up shop could be very expensive
Last month, Hudson's Bay confirmed earlier rumors that it will shut down all of its operations in the Netherlands by the end of this year. All 15 Hudson's Bay stores in the country will close, along with the company's Dutch e-commerce site and its local headquarters.
Hudson's Bay has about eight years remaining on the 10-year leases for its 15 stores in the Netherlands. It pays about CA$75 million ($56 million) a year in rent for those stores. Thus, the remaining liability exceeds $400 million, although it's likely that Hudson's Bay will be able to mitigate that liability by subletting space in its buildings or negotiating buyouts with landlords. Hudson's Bay is also on the hook for severance payments for its workforce in the Netherlands.
It seems clear that the cost of exiting the Netherlands will total hundreds of millions of dollars, including severance payments, lease buyouts, and losses from the big markdowns needed to clear inventory. That will eat up much of the after-tax windfall from selling the rest of the company's European business.
Hudson's Bay also had to take on substantial liabilities in order to dispose of the Lord & Taylor chain. Simplifying the company and focusing on better-performing businesses is definitely a sound long-term strategy. Unfortunately, the cost of undoing Hudson's Bay's numerous strategic mistakes of the past several years could severely limit the upside for shareholders for the foreseeable future.