Hudson's Bay Co. T.HBC

Nesbitt Maintains $35 Target

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Hudson's Bay (HBC-TSX) Rating: Outperform Target Price: $35.00 Total Return: 140% Price (13-May): $14.68 May 13, 2016 Research Comment Summary Wayne Hood 404-926-1590 BMO Capital Markets Corp. [e-mail] Brian Welsh 212-885-4089 BMO Capital Markets Corp. [e-mail] Diversity Benefits 1Q16 Sales at Hudsons Bay Event Hudsons Bay reported 1Q16 constant-currency comparable store sales declined 1% from last year (BMO +1.6%) mostly on weak sales among its U.S. mid-tier and luxury department stores. Strong results in Canada and Europe served to buffer weaker results in the U.S. leading to a 2.3% increase in comp-store sales in the Department Store Group versus our 2.5% forecast. Comp-store sales at Saks Fifth Avenue declined 5.7% compared with our 2% estimated decline and exceeded Nordstroms full-line store comp-store sales decline of 7.7%, and was consistent with Macys 5.6% decline. Comp-store sales within HBC Off Price (Saks Fifth and Gilt) declined 4.1% against LYs 10.3% and compared with Nordstroms Rack 0.8% decline. SSS at HBC Europe were up 0.7% and digital sales growth slowed to 7.4% on slower growth at Gilt. Impact & Analysis The 1Q16 sales results are not that surprising in view of what other retailers in the U.S. have reported. Its worth noting that the companys diverse operating and geographic segments (49% sales in U.S., 31% in Germany and 20% in Canada 20%) are benefiting results when compared with U.S. retailers. That said, we expect higher-than-planned merchandise markdowns within the U.S. to align inventory with sales trends to pressure gross margin. Accordingly, we reduced our GM forecast to 40.63% from 40.93%, which in turn reduced our EBITDA and EBITDAR forecasts to $96 million and $286.7 million, respectively. The estimated 1Q16 EPS loss widened to $0.29 from $0.25. We expect the company to report 1Q16 EPS after the market closes on June 9, 2016, with an analyst call on June 10 at 8:30 a.m. EST. We are not expecting material changes to the companys 2016E EBITDAR $1.5-$1.7 billion (BMO $1.6 billion) outlook owing to its diverse segments and relatively lower contribution quarter when compared with the fall season. Valuation & Recommendation Rating and price target are unchanged as we see a four-pronged value-creation strategy that is not fully reflected in the common shares of the company.