Hudson’s Bay Co (TSX:HBC) fell a whopping 7.02% on Tuesday after reporting a very disappointing quarter for the books. Shares of the company are the lowest they’ve ever been, and investors in the stock are quite worried about the future of the retail giant.
As the brilliant billionaire investor Warren Buffett used to say, “…be fearful when others are greedy and greedy when others are fearful.” Investors in the stock are very fearful right now, and if you’re a contrarian investor, then Hudson’s Bay Co. may be a value pick that’s on your radar. Let’s figure out what happened in the company’s latest earnings report and see whether the company is a value play or if the stock is heading lower from here.
Hudson’s Bay Co. reported a net loss of $125 million, which works out to be $0.69 per outstanding share in Q3. This was very disappointing; in the same quarter last year it had positive net earnings of $7 million, or about $0.04 per share. The company saw weakness across the board as same-store sales dropped 4%.
The management team also cut the future guidance by reducing its annual sales estimate from between $14.9 billion and $15.9 billion to between $14.5 billion and $14.9 billion. The upside of the estimate was trimmed by a whole $1 billion, and the low end of the estimate was just trimmed by $0.4 billion. I believe this is being optimistic and the low side actuals may actually be quite a bit lower.
The management team also made it clear on the conference call that the company is looking to cut costs in order to boost profitability, but this will have a very minimal impact on future quarters considering the large downward spiral the company is falling into.
Should you avoid the stock given the disastrous earnings?
Hudson’s Bay Co. is one of Canada’s oldest companies and one of the most well-known retail businesses this side of the border. Sure, the quarter was bad, but it pays to take a step back to truly look at the big picture.
Retail stocks have been showing weakness all year, and Hudson’s Bay Co. is not immune to this, especially since the company is heavily involved with fashion, which is a risky industry for anyone to invest in. Will Hudson’s Bay Co. bounce back or will it suffer the same fate as Sears Holdings Corp.?
After the sell-off, the stock is ridiculously cheap, and the management team has a proven track record of growing the business for the long term. However, keep in mind that there are still huge risks involved with an investment in this company. In addition to being a falling retail play, Hudson’s Bay Co. also owns a large amount of Canadian real estate, which many pundits believe could experience a correction in the next few years.
I believe the stock offers a considerable margin of safety at current levels and is definitely worth looking at after the horrendous sell-off. The stock trades at a one price-to-book multiple with a 0.2 price-to-sales multiple. If you’re a contrarian investor, then pick up shares and collect the 1.4% dividend yield while you wait for the company to be great again. I believe this weakness will only be temporary, and the management team will get things back in order over the next few years.
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 Joey Frenette has no position in any stocks mentioned.