Hudson's Bay Co. T.HBC

RE:TD Maintains $30 Target

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Hudson's Bay Co. (HBC-T) C$18.05 Q2/F16 Results - Operating Leverage Prevail Event Hudsons Bay Co. (HBC) reported Q2/F16 Adjusted EBITDAR of $263mm, exceeding our $225mm estimate. The guidance range for F2016 Adjusted EBITDAR and Adjusted EBITDA has been maintained, albeit HBC anticipates results to trend toward the bottom-end of its outlook range. This note provides an overview of the results. We highlight that a conference call is scheduled to be held this morning. Should further information be provided on the call that varies from our preliminary review, we will update our estimates and target price as necessary. Impact: SLIGHTLY POSITIVE Despite leaving our financial forecasts and target price unchanged, we view these results as slightly positive. We say this as we have long awaited positive operating leverage to be achieved within the Retail operations - and although it is masked to a degree in the quarter by the acquisition of Kaufhof and this being the seasonally weakest quarter, it appears to have driven the Q2/F16 outperformance. We believe that increasing contributions from the recent acquisitions and the opening of new stores should improve the top-line in H2/F16 and accelerate into F2017/ F2018. This, combined with the realization of benefits from cost-cutting initiatives and economies of scale, should lead to improved financial performance in H2/F16 and drive momentum in the outlook for F2017. TD Investment Conclusion HBC's Q2/F16 results exceeded our expectations due to a lower SG&A rate relative to our forecast. This, in our view, is encouraging as cost-saving initiatives and economies of scale appear to be taking hold that should be magnified in seasonally stronger quarterly periods - in addition to top-line growth from the recent acquisitions and the increasing contributions from new store openings driving further scale. Our view remains that an improving financial performance in H2/F16 and beyond should lead to the valuation shifting from a consolidated applied multiple approach to one focused on its SOTP inclusive of its attractive real-estate portfolio. We maintain our BUY recommendation and $30.00 target price.