consumer goods

HBC fights competition with IPO

How the Bay's IPO will help it fight off Target's Canadian debut.

Many were surprised by the recent announcement that Hudson’s Bay Co. plans to go public before the end of the year—but not retail insiders. The company and its owners, NRDC Equity Partners, have little choice. If HBC waits any longer, it could lose both shopping and investment dollars to U.S. discount giant Target, which opens its doors north of the 49th parallel in March.

Ed Strapagiel, a retail industry consultant, says HBC has to list now for two reasons. If Target steals away market share, the venerable Canadian retailer will look less attractive. It also plans to use the $400 million or so it expects to bring in to pay down some of the money it owes—as of July 28, it had $439.5 million in short-term debt and $930.1 million in long-term debt. That will help cushion the blow from losses or reduced growth. “A better balance sheet gives it some downside insurance,” he says.

A successful initial public offering, however, won’t keep bargain-hungry Canadians away from Target. “It’s a new store, and it has a cachet,” says Robert Gibson, head of research for Toronto investment dealer Octagon Capital Corp. What matters is how HBC uses the money it raises from shareholders.

Reportedly, only $250 million of the IPO money will go toward debt. The rest, says David Ian Gray, founder of retail trend-watchers DIG360, had better go to improving the many stores that haven’t been given the same chic makeover treatment as its agships. He points out that while the once staid company has spruced up many of its big-city buildings and introduced higher-end brands, its other locations still harken back to its pre-private equity days. “When Bonnie Brooks does her dog-and-pony show, she tends to focus on the Vancouver and Toronto stores,” he says. “But things are still stale in suburban areas and smaller towns.”

The Bay’s comeback will only be complete once it renovates all its locations, he says. Otherwise, it’ll continue to compete with lower-end retailers such as Target and Sears. The company’s sweet spot, says Gray, is in the middle, between Target and Nordstrom, a popular—and pricier—U.S. department store that’s coming to Canada in 2014. Since most companies don’t want to be in the middle, he says, HBC has an opportunity to be the only department store that services both budget-conscious and budget-busting consumers.

Potential HBC investors as well should hope the Bay moves more to the middle. High-end businesses are suffering thanks to a still-sluggish economy, says Strapagiel, and there are too many entrants in the cheap aisle. He likes what the Bay has done so far, and “they seem to have a good plan going forward,” he says. The chain appears ready to take on the new U.S-based competition, which also includes J. Crew, Marshalls and more Walmart stores.

What’s not yet clear is whether the 342-year-old company’s earlier money-raising move, selling the leases to its money-losing Zellers stores to Target for $1.8 billion, will come back to haunt it. “They’re going to be aggressive,” Strapagiel says. “It’s going to get competitive as soon as Target enters the marketplace.”