Hudson’s Bay (HBC) is Slumping: Avoid

Canadian retailer, Hudson’s Bay (HBC), is a classic value trap. Similar to Macy’s, Kohl’s, and J.C. Penny struggling in the United States retail market, Hudson’s Bay continues to underperform the broader market.

Investors should not be surprised that the retailer is trading at new lows. The only time the stock traded lower was a decade ago, before the company was taken private. HBC has a big problem: malls are not the best way to grow sales. Online retailing is grabbing a bigger part of the market share. HBC previously had a high net book value from holding real estate. In 2014, the company completed a $650 million leaseback program. This raised its liquidity but lowered its asset value. Now, the stocks value will depend on the company growing profits.

On December 6, 2016, the company reported its third straight quarterly loss despite sales rising 29%. The culprit: SG&A expenses going up to 38.9% of sales, up from 35.3%. This cost is now $1.3 billion. Earnings fell sharply:

“Adjusted EBITDA was $89 million, a decrease of $81 million compared to $170 million in the prior year.”

The cash-strapped Canadian consumer will only tighten its purse, further pressuring profitability for HBC.

Investors should avoid this retailer.