Is Hudson’s Bay Co. (TSX:HBC) Really Cheap?

Hudson’s Bay Co. (TSX:HBC) stock popped 5% after reporting its Q3 results. Is it time to load it up?

| More on:
Shopping card with boxes labelled REITs, ETFs, Bonds, Stocks

Image source: Getty Images.

Hudson’s Bay (TSX:HBC) stock trades at about 67% below its five-year high of roughly $28.50 per share and at about 21% below its one-year high of about $12 per share.

Actually, the stock just appreciated about 5% on Wednesday, after it reported its third-quarter results. Is the stock cheap?

First, let’s explore the company to see if it’s the kind of business you want to own.

A business overview

Hudson’s Bay is a global retailer with ancient roots going as far back as 1670; it’s, in fact, the oldest company in North America. It has more than 480 stores around the world. In North America and Europe, it operates under the banners of Hudson’s Bay, Lord & Taylor, Saks Fifth Avenue, Saks OFF 5TH, Galeria Kaufhof, the leading department store group in Germany, and Belgium’s only department store group Galeria INNO.

In Q2, Hudson’s Bay made a good move to discontinue its HBC Europe segment to combine its European business with SIGNA’s Karstadt to create Germany’s leading retailer, of which Hudson’s Bay owns a 49.99% stake, at the end of November.

business partnership

Together they formed a 50-50 real estate joint venture that values the German real estate assets at €3.25 billion. Hudson’s Bay will use the $631 million net proceeds from the transaction to help with debt reduction, which is another good move, although it still has lots of debt.

Q3 results

It was a positive to see Hudson’s Bay report sales growth of 5.6% to $2.2 billion with comparable sales up 2.9%, which was helped by strong comparable sales growth of 7.3% at Saks Fifth Avenue, a chain of luxury department stores in the U.S.

The retailer reported adjusted earnings before interest, taxes, depreciation, and amortization of $63 million, which was up from $40 million in 2017, thanks partly to sales growth and an improved gross margin. Unfortunately, it reported a net loss of $124 million.

At the end of Q3, Hudson’s Bay had about $2.75 billion of long-term debt, while for the quarter, it had net operating cash outflow of -$969 million.

Valuation and upside potential

At $9.49 per share as of writing, Hudson’s Bay trades at 0.14 times sales, 12.5 times cash flow, and 0.94 times book, compared to the five-year valuations of about 0.3, 32.4, and 1.4, respectively. So, the stock is relatively cheap compared to its historical trading levels.

The analyst consensus from Thomson Reuters has a 12-month target of $10.60 per share on the stock, which implies there’s more than 11% near-term upside potential.

Investor takeaway

Hudson’s Bay is cheap for a reason. At the current juncture, the company is a “show me” story. It needs to be profitable with its core retail business in order for its stock to trade significantly higher.

If you’re looking for a retailer, you’d be better off considering something like Dollarama, whose stock has shown signs of life in the last week.

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 Kay Ng has no position in any of the stocks mentioned.

More on Dividend Stocks