Hot Stock: Hudson's Bay Company

Analysts agree: shares will go up

(Norm Betts/ Bloomberg News)

(Norm Betts/ Bloomberg News)

It’s hard to believe that the Hudson’s Bay Company, which was a passé Canadian retailer only a few years ago, is now one of the hottest companies in North America. While its store revamps did wonders for its brand, its biggest move came in late July, when the Toronto-based company announced it was buying Saks Fifth Avenue for $2.9 billion.

The move immediately sent the company’s stock price, which had been floundering since its IPO last November, up 6% to an all-time high of $17.90. While it’s come down a bit since, many analysts think that more capital gains are coming in the months ahead.

Currently, 77% of the analysts who follow the stock think it’s a buy and the consensus 12-month price target is $19.44. Derek Dley, an analyst with Canaccord Genuity, is bullish on the stock. He thinks HBC can realize $50 million worth of synergies at the EBITDA level in the first year of the deal and $100 million annually in the three years after that.

He also likes the company’s portfolio of stores. Combining its HBC, Lord & Taylor and now Saks locations, it runs 320 stores in North America. That should expand, especially in Canada, where the company plans to open up seven Saks operations and 25 outlet stores.

You might think HBC is at risk of competing with itself, but Dley says that isn’t so. “Canada is already the number one international ship-to-market for Saks, providing solid rationale for the proposed expansion of Saks’s omni-channel presence in Canada,” he says. “In the U.S., it appears that there is limited overlap between Saks and Lord & Taylor from both geographic and product perspectives.”

Patricia Baker, an analyst with Scotiabank, points out that the deal will put a lot of cash on the company’s balance sheet—it plans to use $1.9 billion in senior secured term loans—but she thinks it can reduce that leverage to current levels within four to five years.

With the Saks purchase, HBC becomes a “much more important and formidable play in the North American retail space,” says Baker. It also sets the stage for its real estate to be spun off into a REIT.

“With the inclusion of Saks’s 6.2 million sq. ft. in owned and ground leased locations, HBC will have a broad, high-value real estate portfolio consisting of over 17-million sq. ft.,” writes Baker. “The company indicated its immediate intention to analyze strategic alternatives for their real estate portfolio, including the potential creation of a REIT to help unlock the inherent real estate value and accelerate deleveraging.”

The company isn’t cheap, trading at 29 times earnings, but its growth prospects are significant. Dley thinks it can increase EBITDA by a whopping 107% in fiscal year 2014 over fiscal year 2013, while adjusted earnings should jump by 76%. Baker thinks it can increase adjusted earnings per share by about 15% in 2015 over 2014.

Baker and Dley have $20.50 and $19 price targets, respectively, on the stock, but other analysts think the share price will get as high as $23 over the next 12 months.

Clearly, it’s not just shoppers who should be excited about Saks’s arrival. Investors should be thrilled too.