There are four growth forces we believe are constantly at work in the world: Mass Affluence, New Technology, Restructuring and Aging. Recently, I was reminded of restructuring, and of the role it plays in company longevity.
The holidays are here and shopping season is in full swing in New York. One of the more popular destinations is the Saks Fifth Avenue store on … Fifth Avenue. Right in the heart of Midtown Manhattan, between 49th and 50th Streets, next to St. Patrick’s Cathedral and across the street from Rockefeller Center, the store is in one of the most sought-after commercial venues on the planet. This was demonstrated in 2014 when the property was appraised at 3.7 billion – yes, billion – dollars.1
The owner of this property, and the Saks Fifth Avenue chain, is Toronto-based Hudson’s Bay Company. Founded in 1670, it is the oldest going concern in North America.
In addition to SAKS Fifth Avenue, Hudson’s Bay’s portfolio of retailers includes its namesake chain in Canada; Saks OFF 5th; Lord & Taylor; and Galeria Kaufhof, a high-end German retailer that it recently acquired.2 In most cases, Hudson’s Bay also owns the buildings in which its stores operate, and the land upon which they stand.
Over the past year, Hudson’s Bay3 has been taking advantage of relatively low interest rates to monetize their properties. It’s a classic case of financial restructuring.
Some properties have been injected into joint ventures in the form of real estate investment trusts (REITs) that Hudson’s Bay founded with other investors and operators of retail properties.4 Hudson’s Bay contributed the properties in return for cash and REIT shares and now receives income from the REITs as well.
Other properties have been sold and Hudson’s Bay is now leasing them back.
The company mortgaged the land of the iconic Saks Fifth Avenue store for $1.25 billion in 2014 and roughly a half dozen other flagship properties still on its balance sheet can be leveraged in the same way.5
Put simply, Hudson’s Bay is monetizing assets to cover the cost of upgrading and expanding its operations. Its goal is to widen margins by increasing sales per square foot, and by taking better advantage of scale. To accomplish this, the company is renovating its 10 largest stores by sales volume for each retail chain and investing in digital infrastructure across its entire fleet of stores.
The strategy is to make shopping at key stores like Saks Fifth Avenue an experience that casts a halo effect, and encourages shopping online and at other locations.
It remains to be seen whether this strategy will succeed.
The point is that Hudson’s Bay began operating trading posts in the 17th century, and is still doing so today; they just look different now.
Until now, Hudson’s Bay has been a classic example of how companies must repeatedly restructure and reinvent themselves to sustain competitive advantages, retain relevance and create wealth for investors if they are to be long-lived.
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2 Source: Wall Street Journal http://www.wsj.com/articles/hudsons-bay-co-closes-kaufhof-acquisition-1443624541↩
3 Source: SEC N-Q Filing, 11/20/15. As of 8/31/15, the Oppenheimer International Growth Fund owned approximately 11.5 million Hudson’s Bay Co. shares.↩
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