It may be time to bid farewell to North America’s oldest company from the stock market. Since the year 1670, Hudson’s Bay Co (TSX:HBC) has survived colonization, multiple wars, bank crisis, the great depression, and the industrial revolution. Today, the company is shedding assets and fighting off a low $10.30 takeover offer spearheaded by the current executive chairman, Richard Baker.
Brick-and-mortar retail chains like Hudson’s Bay Company are in deep trouble with the growing popularity of e-commerce, hence the disappointing takeover premium above the current share price of $8.92. Many famous department stores such as Barneys New York have filed for bankruptcy. As sales take intense dives, the stock prices are falling along with the profits for many well-known and admired retailers.
Every segment from fast fashion to luxury retailers are struggling to compete with the leaner online e-tail shops. Improved shipping efficiency only makes it more convenient for once-loyal department store customers to switch to e-commerce options. The market will only become more competitive as drones reduce shipping time to under one day.
Stock market investors should always analyze profit margins
Everyone, including Canadian retirees, millennials, and mid-career professionals, should check to see if their retirement portfolios contain any dying retail stocks. These investors can protect their wealth by buying stock in enterprises with higher profit margins.
Hudson’s Bay is no longer cost-competitive with a negative profit margin of -6.28%. Moreover, the retail stock can barely afford the $0.0125 dividend per share. The company needs to diversify away from conventional retail to compete against the higher-margin e-commerce market.
Many shareholders, like those in the budding cannabis industry, will tolerate negative profit margins to compete for market share. For established retail brands like Hudson’s Bay Company, negative profit margins inform investors that the organization has become operationally inefficient.
What’s the difference between operating and free cash flow?
The operating cash flow is a better profitability measure than free cash flow in the case of Hudson’s Bay Company. Unlike free cash flow, operating cash flow does not take into account net capital expenditures. When companies have been busy selling assets like Hudson’s Bay has done in the past year, the positive credits to capital expenditures reduce the usefulness of free cash flow as a means to estimate market value.
Income from asset sales show up as positive capital expenditures in free cash flow, but not operating cash flow. Hudson’s Bay has sold its European retail and real estate holdings, including the Lord + Taylor’s operations. The income from these European asset sales boosted the free cash flow, making it look like the business is profitable when it is not.
Hudson’s trailing 12-month operating cash flow is negative $483 million while its levered free cash flow is a positive $1.25 billion. Although operating cash flow is negative, Hudson’s positive free cash flow may mislead inexperienced investors into thinking that it is a profitable investment. If you ever see a negative operating cash flow accompanied by positive free cash flow, the company is likely a net seller of capital goods.
Too many traders taking short positions in retail stocks
Too many traders are predicting the death of retail for Canadians to go long on these stocks safely. You should avoid both discount and luxury retail brands in the stock market until it becomes more clear which brick-and-mortar enterprises, if any, will prove to be sustainable. Once this decade’s creative destruction is done testing the prior century’s most recognizable fashion institutions, we will have a better idea about which brands can survive these changes in consumer preferences.
Joseph Schumpeter first coined the term creative destruction in an economics context. It is the idea that innovation replaces old products, services, and means of production with new, more efficient markets.
For example, Schumpeter might tell you not to worry about the rise of artificial intelligence (AI) stealing your job, because it will just make you available to perform more efficient functions.
Thus: Don’t fret about retail’s demise or the rise of AI, and instead adapt by buying shares in these next-generation technology stocks.
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Fool contributor Debra Ray has no position in any of the stocks mentioned.