(By Balaseshan) CIBC World Markets Inc. analyst Perry Caicco initiated coverage of retailer Hudson's Bay Co. (TSE: HBC) with a "Sector Outperformer" rating and $22 price target.
Caicco said HBC combines iconic Canadian merchant The Bay with strengthening American department store Lord & Taylor. Both divisions, particularly the former, are in the midst of profound business transformations.
The analyst said costs have been reduced by developing shared back offices, while gross margins have been stabilized by better promotional planning. The primary goal is to improve sales productivity, which lags industry standards. New and expanded brands, and partnerships, such as Topshop, will be key.
Despite the headwind of Target (NYSE: TGT) openings in Canada and a sluggish Canadian consumer, Caicco believes that HBC can produce $439 million of EBITDA and $1.41 of EPS in fiscal 2013. There is also untapped real estate value (suitable for REIT conversion) worth about $1.6 billion.
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The analyst applies a price-to-earnings value of 15 times to HBC and also consider the net asset value of the company in a post-REIT situation. These methods average to a $22 price target.
The brokerage established its 2012 EPS estimate of $0.63 and its 2013 estimate of $1.41.
HBC is trading up 2.18% at $16.86 on Friday.