While there’s big money to be made in retail, some companies in the sector can actually make more money by focusing on real estate.
Saks rounds out a Hudson’s Bay portfolio that already includes a chain of Canadian department stores, along with the higher-end U.S. brand Lord & Taylor.
Talk of such a move has been floating around for more than a month, but the deal finally broke this morning. The Wall Street Journal reports that Hudson’s Bay is paying $2.4 billion in cash — at $16 per share, that’s a 4.5% premium to SKS’ Friday close, and a profit of nearly 50% for anyone who bought in at Saks’ lowest point this year.
One retailer at the other end of the spectrum — Sears Holdings (SHLD) — should be watching carefully.
Click to Enlarge Both Saks and Sears, which cater to vastly different customers, have been far off their pre-recession peaks, as seen in the accompanying charts.
Click to Enlarge Of course, it’s important to note that much of Saks’ more recent upward trajectory came largely on buyout speculation, while Sears spun off Orchard Supply Hardware (OSHWQ) in December 2011, then Sears Hometown and Outlet Stores (SHOS) in October 2012 — part of the reason for the falling value.
Nonetheless, the Saks move highlights Sears’ potential salvation: namely, through realizing that while it could be waiting a long time for an economic recovery to boost spending enough to save its fortunes, real estate is valuable right now.
As the WSJ noted, the Saks deal “not only adds a high-end luxury chain to (Hudson Bay Co.’s CEO Richard Baker’s) collection of brands but also gives him a lot of real-estate options.” Someone close to deal explained part of the real estate’s appeal:
“Saks still has a number of stores in unprofitable locations. By swapping Saks Fifth Avenue stores in lower-end malls for the more moderately priced Lord & Taylor, (CEO) Baker could alleviate Saks’s real-estate problems at little cost. (It could also) expand the Saks chain to Canada without signing expensive new leases by putting it into Hudson’s Bay real estate.”
Tally it all up, and Saks currently operates 42 Saks Fifth Avenue stores and 66 outlet stores, which were valued at $1.5 billion by Citigroup analyst Deborad Weinswig last year. Sears has an even higher pile of real estate, which, if used properly, could make an ever heftier profit.
In fact, late last year, InvestorPlace contributor Will Ashworth pointed to Hudson Bay Co.’s leasing of its real estate assets as a prime example of what Sears should be doing. He added that Sears “can repurpose its properties into some sort of multi-use redevelopment by subletting the space or selling the leases as the Hudson’s Bay Company has done.”
He added: “Between Sears and Kmart, the company has 241 million square feet of retail space, 37% of it owned and the rest in long-term, below-market leases.” Fund manager Bruce Berkowitz valued such real estate at $160 per share, or $17 billion, at the time, while Sears CEO Eddie Lampert (of course) valued the property higher as of May, giving it a price tag north of $20 billion.
Considering Sears’ entire market value is currently around just $4.6 billion, you can imagine what unlocking that real estate value would do.
As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities.