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Hudson’s Bay Co. Is Facing a Potential Coup: Should Investors Stand Pat?

On July 31, an activist shareholder from the United States threatened to initiate a movement to remove board members of Hudson’s Bay Co. (TSX:HBC) if the company did not move to sell real estate and explore options outside its retail operations. The shareholder in question was Jonathan Litt, chief executive officer of Land and Buildings Investment Management, which last disclosed ownership of 4.3% of Hudson’s Bay shares. However, the investment management firm claimed it was close to the minimum 5% stake required to formally challenge the directorial board and promote replacements.

The share price rose 0.57% to $10.66 as of close on Monday. The stock has fallen 19% in 2017 and 35% year over year. Concerns over the long-term viability of the company revamping its retail operations has led to the current crisis. As this conflict bursts into the open, should investors remain on the sidelines?

Land and Buildings Investment Management is appealing for a new path forward

In 2016, Hudson’s Bay announced a 20-store expansion into the Netherlands. The company has seen its global store count more than double since 2012 to almost 500 outlets. In spite of this growth, same-store sales have declined, and the company has reported losses in all four quarters in 2016 and in the first in 2017. These developments have drawn concern from shareholders that Hudson’s Bay is going down the same path of other department store chains as the retail industry faces major challenges with the rise of e-commerce.

Jonathan Litt first pushed for Hudson’s Bay to transition into real estate — a move that, according to third parties cited by Litt’s group, could more than triple the valuation of the stock to $35. Estimates put the value of Hudson’s Bay buildings at more than the current market cap — $1.9 billion.

In its July 31 statement, Land and Buildings suggested that Hudson’s Bay redevelop its Saks 5th Avenue store with the addition of boutique retailers on the first three floors and the conversion of the remaining floors to luxury residential condos. Hudson’s Bay released an email statement which acknowledged substantial real estate assets and reiterated a commitment to creating value for shareholders, but it did not respond directly to the letter from Land and Buildings.

The head of RioCan Real Estate Investment Trust said in July that Hudson’s Bay is unlikely to into public into real estate any time soon, citing poor market conditions. During a conference call on June 9, Hudson’s Bay executive chairman Richard Baker said that the opportunity for a real estate IPO was still present, but recent developments were making it unlikely. Sales and prices have markedly declined in both New York and Toronto in the first half of 2017.

The triple valuation cited by Land and Buildings may leave investors licking their chops as Hudson’s Bay stock hovers around the $10 mark. Sentiment continues to darken for retail, and as pressure intensifies, the writing may be on the wall for the move to real estate. Investors should prepare accordingly and consider taking long positions.

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Fool contributor Ambrose O'Callaghan has no position in any stocks mentioned.

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