Hudson’s Bay Company

HBC : TSX : C$16.89
BUY 
Target: C$22.50

COMPANY DESCRIPTION:
The Hudson’s Bay Company is a leading North American department store retailer, operating stores under the Hudson’s Bay and Home Outfitters banners in Canada, and under Lord & Taylor in the United States.
All amounts in C$ unless otherwise noted.

Consumer & Retail — Merchandising
ANNOUNCES FLAGSHIP LOCATION SALE & LEASEBACK TRANSACTION
Investment recommendation
Hudson’s Bay announced the sale of its downtown Toronto location, along with its ownership of the ~400,000 square foot Simpson’s Tower to Cadillac Fairview for $650 million. Hudson’s Bay will lease the location back for a base term of 25 years, with renewal options for just under 50 years. After incorporating the transaction into our valuation, we are maintaining our BUY rating and increasing our target price to C$22.50 from C$21.00.
Investment highlights
 Utilizing an average $25 rent per square foot implies a 4.75% cap rate for the transaction. Incorporating the $650 million sale price, as well as the aforementioned increase in rent against our annual EBITDA estimates, our sum-of-the-parts valuation increases from C$20.33 to C$22.79.
 Assuming all proceeds are initially directed toward debt repayment, our fiscal 2014 year-end net debt/ebitda estimate falls from 3.9x to 3.2x, leaving Hudson’s Bay much more latitude to pursue Saks-related expansion plans and pursue additional growth opportunities.
 Concurrently, the company announced the locations of the first two Saks stores in Toronto. A full-line, multi-level Saks will be co-located with the current Hudson’s Bay location at Queen/Yonge and is planned to open in the fall of 2015. Also, the company plans to open a location at Sherway Gardens.
Valuation
Our target price reflects our updated sum-of-the-parts valuation and represents 8.5x our F2014 EBITDA estimate of $$643 million. Although Q4/F13 appears challenging given both a heavily promotional environment and very unfavorable weather, HBC remains committed to reducing excess SG&A costs and leveraging the recent acquisition of Saks. Meanwhile, we believe investors will be rewarded through further monetization of HBC’s significant real estate assets during F2014