No "retail apocalypse" in Canada right now

However, Hudson's Bay presents a canary in the coalmine, says DBRS' Stephanie Hughes

Ruth Saldanha 9 August, 2019 | 2:48AM

 

 

Ruth Saldanha: It's been a rough year for retailers with some reports estimating over 7,500 store closures so far in 2019. Though most of these closures have been in the U.S., Canada has also been affected. Earlier this year, Hudson's Bay decided to close 37 Home Outfitters stores and in June announced a plan to go private, a plan which has since seen some opposition from groups. DBRS Business Writer, Stephanie Hughes, published a report on the company and is with us today to share her point of view. Stephanie, thank you for being here today.

Stephanie Hughes: Thank you for having me.

Saldanha: First up, do you genuinely believe that there is a retail apocalypse in North America right now?

Hughes: When we look at the proverbial term retail apocalypse, we mostly look at this trend that's happening in the U.S. where a lot of these companies are filing for bankruptcies and they are shuttering stores. And that's causing this rift in the retail real estate scape where there's a lot of vacancies. So, because the U.S. has so many big box department stores and malls, we see it as an apocalyptic trend in the U.S. In Canada, however, we see smaller stores, we see less malls. So, when a company does file for a bankruptcy, or decides to cut a few assets here and there, it's not quite as severe. So, when we say retail apocalypse in North America, it's mostly a U.S.-centric issue. That said, Hudson's Bay has signaled some late cycle dynamics this year. So, it's kind of presenting this canary in the coal mine for retail in Canada.

Saldanha: What do you see as some of the larger risks for Canadian retail right now?

Hughes: Some of the larger risks include taking on a little bit too much debt a little bit late in the cycles. So, Hudson's Bay just started snapping up real estate here and there, and they just don't have the revenues to cover it. Some of these revenue-cutting new trends that companies are faced with include ecommerce. So, a lot of people are spending money online. And that's an issue that companies haven't been faced tens of years ago. So, it's that and it's the fact that consumers are spending less in department stores and the costs of operating a store are just exponential. So, it goes beyond paying rent per square foot. It actually goes into funding your staff, paying with utilities and distribution cycles and whatnot.

Saldanha: For Hudson's Bay, in particular, how are you viewing their new restructuring plan?

Hughes: The restructuring plan has effectively identified the strengths and weaknesses. So, some of the weaknesses included Home Outfitters, which they've got rid of all of those stores, and they're actually performing the store reviews for Saks OFF 5th and Lord & Taylor. We're even getting some reports that they're looking at some of their Hudson's Bay flagship locations. So, it's a full restructuring on a real estate perspective. So, they're looking at which stores aren't generating those sales per square foot, and they're taking those sales, and they're trying to structure it so that customers that would have been spending money there are now going to the stronger locations, especially if it's in the same geographical area.

Saldanha: What kind of ripple effect do you see based off of this on the rest of Canadian retail and real estate?

Hughes: Well, it puts mall owners at risk, in particular, because – especially, if it's a big box department store. All of a sudden, they have a large vacancy to fill. We've seen a few cases of mall owners and not specific to these loans here, they take these large spaces, and they'll segment it and have two smaller tenants. So, that presents less of a risk. Or they'll actually take that space and do something interesting, like make a communal space where live events can happen. So, it can either be a VR showcase, or it can be a live band playing. So, it brings families in to try out this new thing. And while they're here, they say, well, let's go for a Booster Juice, or grab some lunch, and you know what, Timmy needs some new shoes, so let's actually spend some more money. So, you get that chance to bring in the foot traffic and then subsequent sales happen through that strategy.

Saldanha: Thank you so much for joining us with your perspectives, Stephanie.

Hughes: It's been a pleasure. Thank you for having me.

Saldanha: For Morningstar, I'm Ruth Saldanha.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Hudson's Bay Co9.08 CAD-0.60

About Author

Ruth Saldanha  Ruth Saldanha is Senior Editor at Morningstar.ca