HBC Should Benefit From Sears Canada's DemiseHudson's Bay Should Benefit From Sears Canada's Demise Oct. 22, 2017 4:47 PM ETElephant Analytics Long/short equity Marketplace Distressed Value Investing https://seekingalpha.com/article/4115308-hudsons-bay-benefit-sears-canadas-demise?auth_param=15ov:1cuq0v4:e5165557ca1dcf56949a8839f6b6acf7&uprof=11 Summary Target Canada's exit appeared to boost Hudson's Bay's Canadian sales by around 5%. Sears Canada's closure should have a similar impact, which would be around 1% of Hudson's Bay's total sales. There will be a lot of retail space becoming available in Canada. The effect on Hudson's Bay's Canadian real estate should be minimal though as it has locations in most of the top malls. Sears Canada already sold off many of its top mall locations in previous years. This idea was discussed in more depth with members of my private investing community, Distressed Value Investing. Become a member today >> Hudson's Bay (OTCPK:HBAYF) should benefit from Sears Canada's (NASDAQ:SRSC) (OTCPK:SRSCQ) demise as its Canadian operations capture a share of the spend that went to Sears Canada before. Based on what happened with Target Canada before, Hudson's Bay could see a 5% boost to its Canadian sales over the next year, although the effect on its overall net sales would be closer to 1%. There will be a significant amount of retail space becoming available once Sears Canada vacates its stores, but I think the effect on Hudson's Bay's real estate will be pretty marginal. Effect Of Target Canada's Bankruptcy The last major department store bankruptcy in Canada involved Target's Canadian operations, which shut down in early 2015. Target Canada's 2014 sales were approximately $2.1 billion CAD ($1.9 billion USD at the time). Target Canada's exit appears to have resulted in a noticeable short-term boost in sales for Hudson's Bay. Hudson's Bay's DSG segment (composed of Hudson's Bay, Lord & Taylor and Home Outfitters) saw its comparable store sales increase by around 3% upon Target Canada's bankruptcy. Canadian operations account for roughly 60% to 65% of DSG's revenues, so the impact on Hudson's Bay/Home Outfitters was roughly +5%. Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 DSG Comps 2.6% 1.1% 1.4% 2.5% 4.9% 4.9% 5.1% 4.0% Sears Canada still reported $2.614 billion CAD (around $2.1 billion USD at the current exchange rate) in revenue in 2016 despite years of decline. Sears Canada's revenue continued to decline into 2017, but I'd expect Sears Canada's pre-liquidation sales level to be roughly similar to Target Canada's 2014 performance. Therefore, the impact on Hudson's Bay will probably be similar (+5% to Hudson's Bay/Home Outfitters) over the next year. The impact on the DSG reporting segment would be around +3%, while overall total company sales may benefit by 1%. The impact on overall sales is more limited due to Hudson's Bay's various acquisitions making its Canadian operations a smaller contributor to the overall company. Effect On Real Estate Value While Hudson's Bay may benefit from Sears Canada's bankruptcy through increased store sales, there could potentially be a negative effect on its Canadian real estate value due to the large amount of supply entering the market. I think that the negative impact on Hudson's Bay's total Canadian real estate value may be fairly limited, though. Real estate property values are typically concentrated heavily in top locations, and Sears had already vacated many of its top locations previously, so there isn't any additional supply becoming available in many top malls. For example, Hudson's Bay has a store in 23 of the top 30 Canadian malls (ranked on sales per square foot). Sears only has a store in 11 of the top 30 Canadian malls. As well, the top malls will probably be able to find new tenants for the Sears locations in relatively short order. The difference between Sears Canada and Hudson's Bay widens for the top 15 malls. Hudson's Bay has a store in 13 of those malls, compared to only 3 for Sears Canada. Rank Name Metropolitan Area Province Sales Per Sq. Ft ($ CAD) Hudson's Bay Sears 1 Yorkdale Shopping Centre Toronto Ontario $1,651 Yes 2 Oakridge Shopping Centre Vancouver BC $1,537 Yes 3 CF Pacific Centre Vancouver BC $1,523 Yes 4 CF Toronto Eaton Centre Toronto Ontario $1,488 Yes 5 Southgate Shopping Centre Edmonton Alberta $1,155 Yes Yes 6 Royal Bank Plaza Toronto Ontario $1,078 7 CF Chinook Centre Calgary Alberta $1,057 Yes 8 Metropolis at Metrotown Vancouver BC $1,035 Yes Yes 9 CF Rideau Centre Ottawa Ontario $1,016 Yes 10 Square One Shopping Centre Toronto Ontario $1,014 Yes 11 CF Sherway Gardens Toronto Ontario $989 Yes 12 Complexe Les Ailes Montral Qubec $940 13 CF Richmond Centre Vancouver BC $928 Yes 14 CF Maisonville London Ontario $923 Yes 15 CF Fairview Toronto Ontario $917 Yes Yes 16 CF Polo Park Winnipeg Manitoba $916 Yes Yes 17 Market Mall Calgary Alberta $898 Yes 18 Mapleview Centre Toronto Ontario $874 Yes Yes 19 Holt Renfrew Centre Toronto Ontario $872 20 Conestoga Mall Kitchener-Waterloo Ontario $854 Yes 21 Guildford Town Centre Vancouver BC $844 Yes Yes 22 Bayview Village Toronto Ontario $841 23 Toronto Dominion Centre Toronto Ontario $830 24 CF Carrefor Laval Montral Qubec $822 Yes Yes 25 Scarborough Town Centre Toronto Ontario $820 Yes Yes 26 Halifax Shopping Centre Halifax NS $809 Yes 27 Coquitlam Centre Vancouver BC $785 Yes Yes 28 CF Markville Toronto Ontario $780 Yes 29 West Edmonton Mall Edmonton Alberta $777 Yes Yes 30 Vaughan Mills Toronto Ontario $771 There are six Sears locations that share the mall with properties included in the RioCan-HBC JV. However, those are all pretty strong malls, so I think that Sears Canada's exit may be considered primarily an opportunity there. The JV already is repurchasing Sears Canada's lease at Oakville Place, while the Devonshire Mall wasn't concerned about the impact of Sears Canada leaving. Lord & Taylor Partnership In other news, Lord & Taylor is reportedly going to partner with Wal-Mart (NYSE:WMT) and sell product on Walmart.com. This should be beneficial for Lord & Taylor since it doesn't have a strong internet presence (website is ranked around 13,000 globally), while Wal-Mart is second only to Amazon (NASDAQ:AMZN) in terms of North American e-commerce sales. Wal-Mart reportedly does around $15 billion per year in online sales and is forecasting 40% growth for the next fiscal year. The exact impact for Lord & Taylor will depend on various items such as how prominent or accessible its placement is on Walmart.com. As well, Lord & Taylor is considerably more upscale than Walmart, although Wal-Mart is attempting to develop more upscale offerings and partnerships. Lord & Taylor's success on Walmart.com will also depend on how well Wal-Mart can attract more affluent customers. Conclusion Sears Canada's closure should benefit Hudson's Bay based on the past experience with Target Canada's exit. I believe that its Canadian operations may see its comparable store sales go up by around 5% over the next year, which would benefit total sales by around 1%. While there is also a lot of retail real estate hitting the market, I don't believe the effect should be that negative for Hudson's Bay. Its Canadian real estate includes locations in most of the top malls and those malls should be able to find new tenants and continue thriving.