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Should You Buy, Sell, or Hold Hudson’s Bay Co. Following its Strong Q4 Earnings Report?

Hudson’s Bay Co. (TSX: HBC), one of the largest retailers in North America and the company behind retail brands such as Saks Fifth Avenue and Lord & Taylor, announced fourth-quarter earnings on the morning of April 7, and its stock has responded by rising over 5%. Let’s take a closer look at the results to determine if we should consider buying into this rally, or if we should wait for it to subside. 

The quality fourth-quarter results

Here’s a summary of Hudson’s fourth-quarter earnings results compared to its results in the same period a year ago.

Metric Q4 2014 Q4 2013
Earnings Per Share $0.61 $0.21
Revenue $2.63 billion $2.41 billion

Source: Hudson’s Bay Co.

Hudson’s earnings per share from continuing operations increased 190.5% and its revenue increased 9.3% compared to the fourth quarter of fiscal 2013. The company’s triple-digit increase in earnings per share can be attributed to net earnings from continuing operations increasing 200% to $111 million.

Its near double-digit increase in revenue can be attributed to two primary factors. First, digital commerce sales totaled $304 million in the fourth quarter, an increase of 35.1% compared to the year-ago period. Second, consolidated same-store sales increased 3.2% on a local currency basis compared to the year-ago period, including a 12.1% increase at Saks Fifth Avenue OFF 5TH stores, a 2.6% increase at Saks Fifth Avenue stores, and 2.3% increase at its Department Store Group stores.

Here’s a list of six other highly important statistics and updates from the report compared to the year-ago period:

  1. Adjusted gross profit increased 14.6% to $1.06 billion
  2. Adjusted gross margin expanded 190 basis points to 40.3%
  3. Normalized earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 25.7% to $318 million
  4. Normalized EBITDA margin expanded 160 basis points to 12.1%
  5. Operating income increased 3,900% to $240 million
  6. Ended the quarter with $168 million in cash, an increase of 700% from the end of the year-ago period

Hudson’s also provided its outlook on fiscal 2015 and is calling for the following performance:

  • Revenue in the range of $9-9.3 billion, an increase of 10.2-13.8% from fiscal 2014
  • Consolidated same-store-sales growth in the low single digit percentage range
  • Capital investments in the range of $350-400 million, a decrease of 6.1-17.8% from fiscal 2014

Should you buy shares of Hudson’s Bay today?

Increased customer traffic at Hudson’s Bay Co.’s stores led it to a very strong fourth-quarter performance and its stock has responded accordingly by rising over 5%.

Even after the post-earnings pop in Hudson’s stock, I think it represents an attractive long-term investment opportunity because it still trades at favourable valuations, including just 21.6 times fiscal 2014’s earnings per share from continuing operations of $1.31. I think Hudson’s stock could consistently command a fair multiple of at least 25, which would give it a fair value of about $32.75 today, meaning it trades at a discount of more than 15% at current levels.

With all of the information provided above in mind, I think Hudson’s Bay Co. represents one of the best investment opportunities in the retail industry today. Foolish investors should take a closer look and strongly consider beginning to scale in to long-term positions.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joseph Solitro has no position in any stocks mentioned.

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