© 1992 Laurie A. M. Ashton
Table of Contents
Hudson's Bay Company Analytical Stock Report
1.0 Introduction
Profit Incorporated made a net profit of $100,000 after taxes for 1991 and is looking for secure investment options. The Hudson’s Bay Company stock, listed on the Toronto, Montreal, and Winnipeg Stock Exchanges, is evaluated in this report as a possible investment.
1.1 Objective
This report will determine whether investing $100,000 in Hudson’s Bay Company Stock is a secure investment choice.
1.2 Scope
The report will give background information on the Hudson’s Bay Company, including history and companies owned. The company’s financial position will be analyzed using audited financial reports obtained from annual reports, and future plans will be reviewed. Lastly, a recommendation will be made on whether to invest in Hudson’s Bay Company stock.
1.3 Limitations
Audited financial statements are currently available until the 1991 fiscal year end, year ended January 31, 1992. The focus will be on financial reports to the end of the 1991 financial period. Due to space limitations, this report will not include details on technical analysis of stock trends.
2.0 Background Information
The Hudson’s Bay Company was chartered on May 2, 1670 under the title “The Governor and Company of Adventurers of England Trading into Hudson’s Bay” and is the “oldest incorporated joint-stock merchandising company in the English-speaking world.” (The Canadian Encyclopedia, p. 1022.) The company traded primarily furs in the first two centuries, moving towards the centre of Canada in a network of forts. It merged with the North West Company, its rival, in 1821. The company did not turn to retail trade until after 1870, when Rupertsland, the company’s chartered territory, was transferred to the government of Canada in exchange for farm land, which was then sold to settlers over the next 85 years. Today, it is the largest retailer in Canada, operating through three retail groups: The Bay, Zellers, and Fields. The Hudson’s Bay Company nationwide is responsible for about eight percent of retail sales, excluding food and autos. The company, in all its divisions, employs over 40,000 people.
2.1 Operations
The Hudson’s Bay Company buys merchandise for sale in its department stores across Canada. With its three major divisions, the company covers a wide price zone coast to coast.
In the last five years, the Hudson’s Bay Company sold some of its so-called non-strategic interests, such as oil and gas, real estate, northern stores, and its wholesale and fur division, to reorganize operations and eliminate some debt.
2.2 Recent Accomplishments
Markborough Properties Inc. was spun off in August 1990 after almost 17 years as a subsidiary of the Hudson’s Bay Company. Towers was purchased in November 1990 and integrated with Zellers, bringing the company closer to its goal of becoming the largest retailer in Canada.
The prime lending rate fell from 11.75% on February 1, 1991, to 7.5% on January 31, 1992, providing the company with the opportunity to refinance a portion of its debt at reduced interest rates. This refinancing activity reduced interest costs by $10.6 million. As well, $97.9 million in outstanding shares were retired as being more economical than servicing them.
2.3 Effects of the Recession
Like many corporations in the 1960s and 1970s, Hudson’s Bay Company “embarked on a program of acquisition and diversification that took it outside the world of retailing and into unchartered territory. This left the organization ill-prepared to effectively respond to the turbulent economic climate of the 1980s.” (Robert Caravella, p. 19) In early 1985, after continued erosion in the market share and a quarter of a million in earnings losses over three years, the company announced a major restructuring of operations. The Hudson’s Bay Company sold all unrelated operations. The company recommitted itself to retailing, its core business; the company streamlined operations and cut costs. Included in its reorganization was a cut in operating expenses by $13.5 million over a two-year period.
Canada entered 1991 with a recession, some expecting it to be short lived and mild. Nationally, seasonally adjusted unemployment rose to 10.3% in December 1991 from 9.7% in January 1991. The unpopular Goods and Services Tax, or GST, was introduced, and cross-border shopping increased. These elements had a disastrous impact on Canadian consumer spending. Department store type merchandise sales were down by 10.7 per cent in 1991 as compared to 1990; however, the Hudson’s Bay Company increased sales by 1.3 per cent, a substantial gain in market share.
3.0 Financial Breakdown
Total sales and revenue have been on the increase in the past five years. The Hudson’s Bay Company has been steady, with some moderate increases and a few marked decreases.
3.1 Fundamental Analysis
The debt-equity ratio has remained unchanged at 1.1:1 since 1989, when it dropped form 1.8:1 in 1988 and 1987. For the retail industry, the company’s debt-equity ratio is well within acceptable range.
Operating profits of $278 million is down from the previous year, with 1990 showing operating profits of $325 million. Until 1990, operating profits were increasing. Operating profits for 1989 were $312 million, 1988 showed profits of $233 million, and 1987 was at $175 million.
Total cash outflow for 1991 was $110 million, a slight improvement over 1990’s outflow of $111 million, and total cash inflow for 1989 was significantly better at $131 million. However, the expenditures for acquiring Towers in 1990 amounted to $142 million, and the corresponding 1991 outlay for Towers was $36 million.
Working capital in 1991 was $185 million, a decrease from $203 million in 1990. This change in working capital is a result of increased inventory levels, more aggressive buying in women’s wear, and promotions.
Dividends-per-share in 1991 remain unchanged from 1990 at $0.80 per share; however, this does represent an increase of $0.20 per share from $0.60 in 1989. Earnings-per-share increased dramatically from 1987 to 1989 and have since dropped slightly. Dividends per share, when compared against earnings per share, are respectable. (See Figure 1 below.)
Source: Hudson’s Bay Company Annual Report 1991, p. 32.
The severe recession in Canada led to reduced consumer spending, intensified competitive pressure, reduced prices, and lower gross margins. As a result, sales and revenue for The Bay fell from $2.3 billion in 1990 to $2.1 billion in 1991, a decrease of approximately 8.8%. Similarly, Fields also decreased in sales and revenue from $91 million in 1990 to $86 million in 1991, a moderate decrease. Zellers, however, increased its sales and revenue from $2,320.0 million in 1990 to $2,788.8 million in 1991. Zellers also shows an increase in operating profit, from $200 million in 1990 to $218 million in 1991. The Hudson’s Bay Company altogether showed an increase in sales and revenue of $62 million, with $5,032 million in sales and revenue for 1991 as compared to $4,970 in 1990.
Zellers is the “leading national chain of discount department stores. It targets the budget minded customer.” (Hudson’s Bay Company, Annual Stock Report 1991. p. 11.) Zellers offers excellent values with frequent national advertisements and offers a frequent buyer program, Club Z. Zellers is a successful competitor because of its very low expenses and its appeal to the budget-minded consumer.
Zellers is a very strong division with increases in sales and revenue. Zellers has increased its share of sales over the other divisions in the Hudson’s Bay Company. (See Figures 2 and 3 below.)
 
Source: Hudson’s Bay Company Annual Report 1991, p. 32.
4.0 Future Plans
The Hudson’s Bay Company anticipates that consumers will continue to demand and purchase better and better quality merchandise. Therefore, the company intends to obtain the best quality merchandise the company can at the lowest prices possible.
4.1 Purchasing Policies
The Hudson’s Bay Company hopes to raise profits by purchasing cheaper merchandise from the United States and Asia. Buying directly from the manufacturer and enabling the company to cut importing costs will result in lower prices. Just under 20 per cent of the merchandise sold through the Hudson’s Bay Company comes directly from Asian manufacturers, such as household goods, appliances, and clothes. However, the Hudson’s Bay Company’s policy is to “always procure a Canadian-made product if the price, quality, fashionability, and delivery is the same or better than an imported product.” (Hudson’s Bay Company. Annual Stock Report 1991. p. 3.)
4.2 Retail Marketing Strategies
As department store type merchandise sales are expected to decline further, the company has decided to focus on better quality merchandise in order to gain a greater market share.
4.3 Forecast
A further decrease in consumer spending is expected for 1992. Another difficult year is expected, “characterized by intense price competition and requiring a continuing priority on expense and inventory management.” (Hudson’s Bay Company. Annual Stock Report 1991. p. 2.) Despite this, the Hudson’s Bay Company still expects that an improvement in earnings is realizable.
A good earnings growth is forecast for the next 3 to 5 years, but the Hudson’s Bay Company stock’s “long-term capital appreciation potential is only modest.” (David R. Cohen. P. B87.)
5.0 Executive Summary
The next sections relate the findings, conclusions, and recommendation for the Hudson’s Bay Company.
5.1 Findings
The Hudson’s Bay Company, though it did not have dramatic increases in earnings and revenue, is a financially stable and established company. The Hudson’s Bay Company has retail outlets across the nation; with its divisions, the company serves the needs and budgets of a broad cross-section of our society.
The recession has thrown the company a few interesting curves, but the company is handling its difficulties well with some sound financial planning and restructuring. The company has refocused on the retail aspect of the business and is concentrating more on quality merchandise to expand market share further.
5.2 Conclusions
The stock is stable, offering a modest return on money invested. The stock is not likely to earn large portions of money; however, it is also not likely to lose money.
5.3 Recommendations
Investing in Hudson’s Bay Company stock as a stable investment vehicle is recommended.
BIBLIOGRAPHY
“Bay Looks to Asia for More of its Goods.” Globe and Mail. 30 January 1992: Section B, p. 8.
The Canadian Encyclopedia. 1988 ed.
Caravella, Robert. “Management System Helps HBC Restructure.” Computing Canada, 19 July 1990: pp. 19-35.
Cohen, David R. “Hudson’s Bay Company.” Equity Value Service, 2 February 1992: p. B87.
Dunnan, Nancy. Dun & Bradstreet Guide to $Your Investments$. New York, New York: Harper Collins Publishing, 1992.
Evans, Mark. “Hudson’s Bay Profit Drops to $82.8M in 1991.” Financial Post, 13 March 1992: p. 15.
Hudson’s Bay Company. Annual Stock Report 1991.
“Hudson’s Bay Company.” The Financial Post Publications. (1991): 1-19.
404, 9925-83 Avenue
Edmonton, Alberta T6B 2B9
26 May 1992
Mr. Gene Binfet
English Instructor, NAIT
11762-106 Street
Edmonton, Alberta T5G 2R1
Dear Mr. Binfet:
I am submitting the report titled Hudson’s Bay Company Analytical Stock Report to you for your examination and assessment as required for the Technical Report portion of Business Communications 222.
This report discusses the advantages and disadvantages of investing $100,000 in Hudson’s Bay Company stock.
I would like to thank my research team, Julie Lam and Candace Enns, for their help in researching this topic; Jerry Mark of Wood Gundy for assisting my team members in obtaining stock market and Hudson’s Bay Company information; the staff at the Edmonton Public Library, the Stony Plain Library, the Spruce Grove Library, and the NAIT Library for their assistance in locating the necessary materials; my brother, A. Toews, for his computer assistance; and Mr. Binfet for his advice and assistance in formatting a technical report. Any additional materials or information will be submitted upon request.
Yours truly,
Laurie A. M. Ashton
Business Accounting Student
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