One of the most common comments we get from our shopping centre clients is: what do you think about HBC?  This unease was not helped by HBC’s June 6 release of their first quarter results showing that their loss doubled from $200 million to $400 million.  It should be noted that losses in the first quarter are not uncommon for retailers who often experience their slowest time of the year and are taking additional markdowns to clear holiday merchandise.  We thought it was time to take a dispassionate look at HBC starting with the negatives but also include some of their strengths.

Negatives

It is easy to list off HBC’s negatives—some of which are unique to them and some are just part of being a department store retailer.

• Generally unproductive stores – same store sales are generally declining especially in the off price division and in Europe. Where retailers like Apple and Lululemon can generate upwards of $5,000 per square foot, these stores are lucky if they are doing $175 per square foot.
• Management has been focused on real estate rather than fixing the merchandising problems – this was something that we saw with Sears Canada and now we are seeing with HBC, which has sold off its Lord and Taylor store on Fifth Avenue and its Downtown Toronto store. If the company is to survive, it will first benefit by serving customers with something they really want and items they cannot find elsewhere.
• Expanding into Europe before it is strong in North America – taking on an old department store chain in Germany and opening stores in the Netherlands in an already crowded market is not sound business. This is a whole set of new customers who HBC executives do not understand.
• Lord and Taylor is battling to have relevance – Lord and Taylor as a department store is facing both Macy’s and JC Penney as they turnaround their businesses.
• Expanding with too many divisions that are very different – the current HBC lineup has stitched together some very different operations—department stores in multiple countries, luxury fashion stores, and off price stores, but can centralized management really respond effectively to very different challenges in these divisions, where each should be driven by a different culture and operating style?

Positives

Despite these many negatives, there are some positives that should be considered.

• Richard Baker has put a real merchant, Helena Foulkes, in charge—this is a retail executive who actually has a track record of success. She has recognized some of the mistakes of the past and has acted to close stores, sell Gilt (an online flash sales site that was just a distraction), and realign management.  Recognizing that it cannot be business as usual at HBC and that massive staff cuts in the same old businesses will not cut it is refreshing and a step in the right direction.
• Saks actually had an increase in same store sales of 6% in the first quarter, but last year Saks had a decrease of 4.8% during the same period, so they are ahead but not as much as it appears. Understanding how to use this iconic store—where it should be and where it should not be will be important to the future of the whole business.
• While their online sales are growing at a 7.7% increase, this part of the business is not keeping up with the growth in this sector—which is closer to 14%. However, this still remains a huge opportunity for HBC.

The Future

The future for HBC is challenging at best.  Some of the opportunities that we see for this business include the following:

• They need to focus in on making stores successful—not just harvesting real estate. With some notable exceptions such as their real estate on Fifth Avenue in New York; the value of the real estate really depends on the strength of the stores.  Stores must reflect the market that they are in, which is the challenge of running so many different businesses.  Success will start with excellent merchants overseeing each business and making the hard decisions such as selling, reducing footprints, or closing down divisions where they cannot be competitive.
• They need better omni-channel integration. This is a huge area of opportunity, but one which has a long hard road given that the Chairman is a real estate guy not a digital guy.  Their online business is really not reflected in the store.  While other merchants are erasing the lines between channels, HBC is still operating separate channels.  HBC needs to take a leaf out of Sephora’s and Best Buy’s playbooks and use their real estate as a distinct advantage for a rejuvenated digital business.

There is still a big question about the role of a department store in the 21^st century.  While there are ones that are experiencing success (and HBC has seen some improvements in the past) this question still remains. Until HBC answers this question, the risk of becoming the next Sears Canada is real.