Bay's shopping list of excuses is of little comfort to investors

Hudson's Bay shares are so cheap they just might be a worthwhile investment if the company were managed by a clever retailer or a turnaround expert.

But the Bay, unfortunately, is run by neither. It's run by George Heller.

That Mr. Heller has survived in the job this long -- six years and counting -- despite HBC's dismal financial results, is a statement about either the impotence of the board or the shallowness of Corporate Canada's talent pool. Either way, it's almost comical to watch Jerry Zucker, the U.S. investor who owns nearly 20 per cent of the Bay, turn himself into knots of frustration over the latest fiasco.

Last week the Bay issued a profit warning for fiscal 2005 and said, somewhat ominously, that it's reviewing its Pollyannaish "targets" for 2006 to 2008, which had projected revenues and profits on par with a Middle Eastern oil kingdom. "We don't really understand what's gone wrong here," Robert Johnston, a Zucker vice-president, told The Globe. "We're patient investors. But we also don't want to see major surprises on a regular basis."

Well, well. Now that's rich. If "major surprises" aren't what they want, why on earth are they investing in the Bay in the first place -- never mind buying 20 per cent of the company? For if there's a defining characteristic of the Heller era, it's surprises, and they're rarely of the pleasant variety. Here's a sampling from the archives.

July, 2001: Profit warning. The company blames "aggressive promotional activity" and cautious consumers.

October, 2001: Ditto.

August, 2002: Profit warning. The culprit is "the clearance of seasonal merchandise."

August, 2003: Profit warning. SARS, the blackout, and so on.

The next month, Mr. Heller released an aggressive five-year plan that targeted sales growth of $1.5-billion and a threefold increase in earnings per share. This quickly achieved the same degree of credibility as the old Soviet five-year plans for world domination. "Nobody believed it, that they would triple their earnings in a five-year period," says David Brodie, an analyst at Research Capital. "I thought, 'Wow, they must be either smoking something or they know something I don't know.' "

You can't blame Mr. Heller for all of this. Retail trends are hard to predict, and who could have foreseen an event like the 2003 SARS crisis? When he was named CEO in 1999, Canadian Business magazine called it "The job from hell," and they were right. But Bay shareholders are paying good money here; Mr. Heller has averaged $1.8-million in salary and bonus over the past three years (and that's not counting the $235,000 "supplemental incentive bonus" he received in fiscal 2004, a year in which profits declined). What are they getting in return?

Forget about the share price, which has been inflated by takeover talk since Mr. Zucker arrived on the scene in 2003. The ultimate test of a CEO lies in the financial statements, and by most measures the record is appalling. In fiscal 1999, just before Mr. Heller took over, HBC was a company with $7-billion in sales and $187-million in operating profit. In the just-ended fiscal year it will do about $7.1-billion in sales and $135-million in operating profit (adjusted for special items), Mr. Brodie figures. Its five-year average annual return on equity is 3.7 per cent. Enough said.

None of this is surprising to investors who've looked at HBC and spotted the signs of a classic value trap -- which brings us back to Mr. Zucker and what he sees that's so enticing. There are a few ways shareholders could win, and all depart from the status quo. A takeover is the obvious one, but the stock has been cheap for years and there have been no offers yet. Breaking up the company and selling off the real estate is a possibility, although the Bay's property holdings have shrunk as the company sold land to pay down debt.

In the absence of those events, a management overhaul couldn't hurt. But Mr. Zucker hasn't asked for a spot on the board because it would restrict his ability to sell or launch a takeover bid, and there doesn't seem to be much of a Dump Heller movement forming. Pity. No one knows if another CEO could do better. But it's hard to see how someone else could do worse.

vox@globeandmail.ca

Hudson's Bay Company

SHARE PRICE, DAILY CLOSE (HBC - TSX)

Feb. 26, 1999

George Heller becomes CEO.

Yesterday's close

$13.08, up 48¢

Dec. 10, 2003

Jerry Zucker says he owns 10% of the Bay.

SOURCE: THOMSON DATASTREAM