The first quarter of the year has deepened a period of bloodletting in the retail industry: Over the last few months, nearly a dozen retailers have filed for Chapter 11 bankruptcy protection and many more have announced major store closure plans and financial restructuring efforts.
As retailers slim down their store counts — and in some cases buckle under mounting debt burdens — analysts anticipate a period of consolidation for the industry, in which similar retailers will merge in order to survive. Retailers that position themselves as conglomerates stand to gain, making Hudson’s Bay Company’s growth strategy — leveraging the prime real estate of luxury department stores — particularly intriguing.
“We do view ourselves as a global consolidator,” Richard Baker, executive chairman of Hudson’s Bay, told analysts on a conference call in early April, highlighting acquisitions as a key piece of its growth strategy.
Neiman Marcus, a luxury department store saddled with nearly $5 billion in debt, may be next on the Canadian department store’s wish list. Sources told The Wall Street Journal in March that Neiman Marcus’ private equity owners were in talks to sell to the Canadian retailer, and analysts say a buy falls in line with Hudson’s Bay’s acquisition history, which over the years has included a number of high-profile, luxury U.S. department store chains such as Saks Fifth Avenue and Lord & Taylor.
Neither Hudson’s Bay nor Neiman Marcus would comment to Retail Dive on whether they are in discussions over a deal, but the rumor gives insight into what Hudson’s Bay is looking for in an acquisition and which types of retailers may be next on its shopping list.
Time for an acquisition
Amid 2017's difficult retail environment — with stores shuttering by the hundreds and retailers cutting costs left and right — department stores have struggled to adapt to declining foot traffic and rising e-commerce demand. Hudson’s Bay itself has not escaped completely unscathed from the bloodbath, posting a $114.5 million loss in the first quarter of 2017.
“The market in the U.S. in particular continues to be challenged. And so… we’re planning as if the environment is not going to improve,” Hudson's Bay CEO Gerald Storch said on a recent call with analysts, highlighting the retailer's cost-reduction efforts.
But Hudson's Bay has largely avoided the more severe impacts ailing major department stores like Macy’s, Sears and J.C. Penney. All those retailers contributed to a massive, nationwide department store expansion in the late 1990s and early 2000s, but have since announced widespread closures of many of those locations: Macy's in August announced it will shutter 15% of its stores, Sears in January said it will close 150 Sears and Kmart stores and J.C. Penney in March reported it will pull the plug on 138 stores.
Unlike these department stores, Hudson's Bay did not over-expand, retaining a relatively small fleet of stores in profitable locations. As the company prepares to not only survive but thrive in the new age of retail, a strategy of buying up struggling retailers is one way to grow, Michael Brown, a partner in the retail practice of strategy and management consultancy A.T. Kearney, told Retail Dive.
"Where there is weakness in the market, there is opportunity for any strong retailer to strike and leverage their strength at this time," Brown said. "This is an opportunity for store retailers to make acquisitions, leverage their strength, increase their portfolio and their reach in the market while others are suffering. And from that hopefully get the cost synergies that come with it."
The department store conglomerate has a history of slimming down department store chains and helping them regain profitability after taking over. Hudson's Bay reportedly made a bid for beleaguered department store chain Macy's earlier this year, unnamed sources familiar with the situation told the New York Post. But those talks fell through, with insiders telling the Post that Macy’s' asking price was too steep.
“Hudson’s Bay has been building a global department store conglomerate focusing on marquis names with a core real estate portfolio with significant value,” Brown said. “They’ve been really looking at those opportunities where there is a strong retail opportunity and presence in luxury department stores around the world backed by strong real estate holdings that present additional opportunities for monetization.”
Hudson’s Bay has a rich history reaching back to its roots as a fur trading company founded in 1670. The company began to modernize in the late 20th century as it went on a buying spree of Canadian retailers, including Zeller’s, Simpson’s, Tower Department Stores and Kmart Canada — quickly earning itself the title of the largest Canadian department store retailer.
But it wasn’t until 2012 that Hudson’s Bay expanded internationally, entering the U.S. market through its acquisition of Lord & Taylor's small collection of 46 stores across nine states. The company invested $427 million in Lord & Taylor, which used the proceeds entirely to reduce corporate debt. Just a year later, Hudson’s Bay made a much bigger move — snapping up prestigious luxury department store chain Saks Inc. for $2.4 billion.
These deals enabled Hudson's Bay to gain footholds in premier corners of the U.S. retail market, including prime pieces of real estate along highly-trafficked avenues in major metropolitan cities such as New York City and Chicago. The deals helped establish the company's reputation for luxury real estate plays.
Hudson’s Bay’s growth strategy is squarely pegged on its ability to grow and diversify the holdings in its portfolio. “When we look at businesses where they can leverage digital platforms, supply chain, buying power in the marketplace — these become valuable reasons for making acquisitions and building a portfolio of companies,” Brown said. “I think retailers with the single banner are struggling these days to invest everything they need to invest to compete physically and digitally. The larger the portfolio, the more leverage — the more you can get out of the portfolio. This is the key to success going forward for many retailers.”
Last year, Hudson's Bay entered the world of e-commerce with the $250 million acquisition of flash sales website Gilt Groupe, which it aimed to integrate with its Saks Off Fifth unit. A year after the acquisition, executives now acknowledge that it’s taking longer than expected to smooth out issues with inventory and technology.
“It’s not that we don’t think it’s going to work, or that we aren’t still very excited about it,” CEO Jerry Storchold told analysts on an earnings call this month, according to a transcript from Seeking Alpha. “One of the biggest changes is being able to put the two websites, SaksOff5th.com and Gilt, on the same platform. That will enable complete merchandising integration, which is really critical for capturing many of the benefits we talked about when we did the acquisition.”
Despite corporate optimism, the company announced earlier this month that it wrote down $116 million on the deal, although the website was once valued at more than $1 billion, according to Fortune.
“[This] is one of those unfathomable acquisitions,” Mark Cohen, director of retail studies at Columbia University's Graduate School of Business, told Retail Dive. “It’s dead — flash sales. The business has no forward momentum.”
Neiman Marcus fits the mix
Setting the Gilt Groupe deal aside, analysts say traditional brick-and-mortar chains with a luxury appeal are a complement to Hudson's Bay's existing portfolio — and with retailers struggling left and right, now may be the right time to strike a deal. That makes Neiman Marcus, a luxury department store with highly-valued real estate holdings and a strong brand name, an attractive buy for Hudson's Bay.
The rumors of a deal come as Neiman Marcus finds itself in a pinch. The department store is working with investment bank Lazard Ltd on a plan to restructure its massive $4.9 billion debt load, which has been built up by declines in every quarter since April 2015. But the department store retailer's troubles only go back about two years, Philip Emma, analyst at Debtwire, told Retail Dive — a sign that it's not too late for the business to be turned around.
“The Neiman Marcus name still has value. It has deteriorated, but it’s still substantial,” Emma said. “There’s a revenue stream to buy at a discount — that’s an intriguing possibility. In a low growth environment for retail, the ability to add sales cheaply could be viewed as compelling.”
Unlike many retailers that have been cornered into a bankruptcy or sale, Neiman Marcus doesn’t have any major debt maturity until October 2020, meaning a sale isn’t absolutely necessary. But consolidation between Hudson’s and Neiman Marcus could bolster both businesses, Emma said. “From a business perspective, merging with Saks presents an opportunity for both chains in a challenging environment,” he said. “Neiman Marcus has a large presence in Beverly Hills, New York City and Chicago.”
The downside? A complementary match could cannibalize sales with a similar customer base, Cohen told Retail Dive. “Saks and Neiman go head to head fighting for substantially the same customer, “ he said. “So what often happens is you get formerly hyper-competitive players who continue to be hyper-competitive and are a part of the same company.”
Who's next on the shopping list?
As Hudson's Bay seeks growth, its track record suggests it will look at luxury chains similar to Neiman Marcus that hold desirable real estate.
"[CEO Jerry Storch has] made noises about further expansion through acquisition in Europe, and he may have the capacity to do more deals in Europe, but capacity to run a business in Europe? The answer is not with the team he has now in charge," Cohen said.
In early April, Hudson's Bay tapped former Toys "R" Us European President Wolfgang Link as CEO of HBC Europe to lead the company's push into the region, including the expansion and growth strategy of Galeria Kaufhof, Galeria Inno, Hudson's Bay and Saks Off Fifth stores. The company has held a presence in the region since 2015, when it closed a $2.8 billion deal to acquire German department store Galeria Kaufhof and its Belgian subsidiary Galeria Inno.
Hudson's Bay Company plans to open at least 20 stores in the Netherlands by the end of 2017. "Our DNA is that we experiment and we try things," Baker said of the European expansion in an interview with Canadian television station CP24 last year.
Mergers and acquisitions aren't simply about injecting innovation or expanding into new markets through a buy. When retailers like Hudson's Bay consider a deal, they need to think about synergies as well as the possible disruption that picking up a new business could have on its existing portfolio, Cohen said.
"Why do at least 50% of all mergers and acquisitions fail?" Cohen asks. "It's because they’re built on toothpicks, the foundation of these deals. The synergy is the savings that foretell what will be realizable when they put organizations together. Most [deals] are wildly optimistic, and they need to create rationality for a deal."
While the company appears to pursuing more deals, Cohen said, Hudson's Bay may be better off bolstering its existing businesses. "This is a movie that a lot of us have seen before and it has the same crappy ending," Cohen said. "It's a real estate play lend by a speculator... If [Baker] keeps the music playing through these deals, he keeps building out his business without regard to performance."