As pandemic hobbles retailers, HBC fights department store headwinds

Venerable retailers are falling victim to the industry shock from the COVID-19 pandemic. But Hudson’s Bay Co. vows it will be a survivor.

In the United States, several department store chains that were on shaky ground even before the pandemic, including Neiman Marcus and JCPenney, have filed for bankruptcy protection. In Canada, footwear retailer Aldo Group Inc. and struggling clothing chain Reitmans Canada Ltd. have filed for creditor protection. Industry leaders have cautioned that more bankruptcies could be coming in retail.

But HBC LP governor, chairman and chief executive Richard Baker, who took the company private earlier this year, insists his department store chains will not be among them.

"How stupid would we be to go private and run out of money three months later?” Mr. Baker said in his first interview since the privatization was completed on March 4.

Even so, North America’s oldest company is not immune to the challenges facing the industry. Before going private, HBC had reported three consecutive years of net losses. Like other retailers, it’s suffering from the effects of weeks of store shutdowns amid the pandemic. The company has delayed rent payments, triggering default notices from some landlords. HBC has also postponed its payments to suppliers to conserve cash.

HBC is hoping shoppers will feel safe enough to return to its Hudson’s Bay, Saks Fifth Avenue and Saks Off Fifth stores as they reopen. It must also manage its recovery while ensuring its department stores – an old retail model that has lost relevance to some shoppers – return to profitability.

To do that, Mr. Baker says he has restructured operations, is embarking on a US$380-million cost-cutting program, and will launch a new e-commerce offering that includes same-day delivery to better compete with Amazon.com Inc.

“I’m obviously bullish on the department store sector,” he said.

Some industry observers are not so bullish, as other chains have found the pressure of three months of closings too much to bear.

“The dinosaurs were already dying out, and the asteroid finally ended it. I think COVID is that asteroid,” said Eric Matusiak, a retail analyst at BDO Canada LLP. “I don’t think that department stores have much of a future in terms of their classic model.”

Mr. Baker says his department stores can evolve. While other chains are whittling down their bricks-and-mortar store numbers, Mr. Baker is instead rethinking the best use of space at the 89 Hudson’s Bay stores across Canada.

Aside from a pending shutdown of the downtown Edmonton Hudson’s Bay location, he is not planning major changes in his store count. "We aren’t closing stores,” he said.

Mr. Baker says a physical store presence is key to his ambitious goal to take on e-commerce goliath Amazon. Hudson’s Bay is planning a new service to ship online purchases to customers’ homes in approximately four hours.

Having stores within 25 kilometres of 90 per cent of the Canadian population will let Hudson’s Bay ”service our customers better than any other retailer in Canada. And that includes Amazon,” Mr. Baker said.

“Amazon can’t rent these distribution centres all over Canada, spend the money on delivery, do all the things that they do and actually make money,” he said. "We have the ability to leverage that store network in order to efficiently and economically provide our customers with same-day pickup in store or same-day delivery.”

Mr. Baker would not elaborate on the logistics of doing so – such as whether the company plans to contract out same-day delivery to third-party companies the way Amazon does. Offering those services will be costly, but may be necessary to attract customers.

Hudson’s Bay is also building an online marketplace to allow third-party sellers onto its site the way the likes of Amazon and Walmart do.

“Consumers are changing their behaviours at a much faster pace because of [COVID-19],” said Alex Arifuzzaman, founder of retail real estate adviser InterStratics Consultants Inc. “It’s not going to go back to where it was.”

But competition for online shoppers is steep. Many brands that used to depend on department stores have used e-commerce to build relationships directly with customers. And price competition is stiffer online.

“Department stores were the Amazons of their time,” Mr. Matusiak said. With the rise of e-commerce, “there’s a better endless aisle out there.”

Hudson’s Bay existed long before department stores did. The company, which celebrated its 350th birthday on May 2, started out as a fur trader and a colonizing force in Canada’s North.

Today, the department store sector is very different here than in the United States, where bankruptcies have ramped up more quickly during the crisis. Domestic chains such as Simpsons, Eaton’s and Sears Canada disappeared years ago. Many of their former shoppers have been drawn to Walmart, Costco and Amazon.

For the department stores that remain, one advantage is they generally pay cheap rent for their abundant square footage.

“Usually these are very long term leases [are] negotiated at sweetheart deals because, as an anchor tenant, they are supposed to be driving traffic to the rest of the tenants on the property,” said Roelof van Dijk, market analytics director at CoStar Group, a commercial property company.

But relations between landlords and tenants are fraying because of the pandemic. Landlords have begun sending out default notices to retailers that have not been paying rent, including HBC.

Mr. Baker says HBC has extended its payment terms with vendors and landlords to 90 days, and discussions have been productive. But he also says a government relief program proposed by a coalition of retailers and landlords, including HBC, would help to “prevent a whole series of litigations” across the industry.

As in-person shopping has become much more restricted and e-commerce continues to grow, it is in department stores’ interest to find alternative uses for their space. Curbside pickup has grown during lockdowns, and Mr. Baker believes the demand will continue.

"I personally believe the big winners in online are going to be the brick-and-mortar retailers,” he said. “We are bullish and long on stores, as long as we maximize our productivity of the stores and bring our stores together with our online offering.”

But all of those changes require investment.

At the time of its last public filing, HBC was carrying just over $7-billion in total debt, including $3.94-billion in operating lease liabilities. After selling its European business last year, HBC paid down $429-million in debt, which strengthened its balance sheet, Mr. Baker said.

“When we went private, we actually became a less leveraged company than we were as a public company,” he said.

The value of HBC’s real estate, including prized locations such as the Saks Fifth Avenue in Manhattan, is one reason Mr. Baker says it’s “totally gobbledygook illogical” to challenge Hudson’s Bay’s financial strength or to suggest it may be in the same danger as other department stores.

Mr. Baker has launched a sweeping cost-cutting program to slash the equivalent of more than $500-million in annual expenses. HBC also recently restructured, and is now 100-per-cent owned by a holding company based in Bermuda, a move it says was for tax purposes.

HBC now has four businesses – Hudson’s Bay, Saks Fifth Avenue, Saks Off Fifth, and a real estate and investment arm. Formerly centralized functions such as store operations and marketing are now handled by the chains themselves.

Hudson’s Bay is planning to “right-size and rethink” some of its real estate, including flagship stores in Montreal and Vancouver, “to create value beyond the store itself,” Mr. Baker said.

“One of the reasons we went private was because people didn’t understand that we are a real estate company that owns three strong operating companies,” Mr. Baker said. “We’re not a department store chain. We’re a holding company that owns many billions of dollars worth of real estate; and we own [department stores].”

With reports from David Milstead and Rachelle Younglai

Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.