Shoppers use a Fifth Avenue entrance to Saks

Saks to launch in Canada

Luxury U.S. retailer Saks will soon open its doors in Canada with plans to launch up to seven stores north of the border, after being snatched up Monday by Hudson’s Bay Co. for US$2.9-billion.

TORONTO — Luxury U.S. retailer Saks will soon open its doors in Canada with plans to launch up to seven stores north of the border, after being snatched up Monday by Hudson’s Bay Co. for US$2.9-billion.

In addition to expected operational savings of about $100 million and a portfolio of prime U.S. real estate, one analyst said the deal will give HBC (TSX:HBC) greater fashion credibility.

“Saks is such a revered name in fashion,” said Wendy Evans of Evans and Company Consultants Inc. in Toronto.

“It’s been around for a long, long time — since the 1920s. There’s an aura about it.”

Evans said the deal will broaden the selection of premium brands available to Canadians, including the in-store Saks line, and will also give HBC access to some of the retailer’s designers.

The high-end U.S. department store chain carries brands such as Hugo Boss, Prada, Giorgio Armani, Chanel and Dolce and Gabbana.

For some Canadian shoppers, news of the upscale chain’s foray into Canada, was overdue. Adrian Salamunovic, a business owner who lives in Ottawa, said he’s been shopping at Saks for about seven years.

Salamunovic, 37, was thrilled to hear that Saks will be opening up to 25 of its Saks Off Fifth outlet stores in Canada, which sell designer brands at discount prices.

Salamunovic said he often visits these stores when he’s staying at his second home in Los Angeles to pick up brands such as Vince, John Varvatos and the Made & Crafted line by Levis — all of which he says are difficult to find in Canada.

“Especially in Ottawa, there’s limited selection of fashion brands for men,” he said.

“The stuff they have on the shelves is always very well selected. It is expensive. I mean, it’s on the higher end of the pricing spectrum, but still reasonable, still affordable.”

Ada Wong, an executive assistant, writer and self-described shopaholic, said she’s visited the flagship Saks store in Manhattan, N.Y. — a popular tourist destination — to pick up items from Gwen Stefani’s L.A.M.B. line for her friends.

“I think the people there are kind of snooty, but at the same time they offer some exclusive lines,” said the 34-year-old Toronto resident.

“We live in a world-class city, and we deserve some of these world-class brands here.”

Richard Baker, HBC’s chairman and chief executive, didn’t provide a timeline for the launch.

“We’re going to move as quickly as we can,” Baker told analysts during a conference call on Monday.

Saks currently operates 42 stores across the U.S., while HBC’s holdings include 90 Hudson’s Bay stores and 69 Home Outfitters in Canada.

HBC also owns 48 Lord & Taylor luxury retail stores in the U.S. Northeast.

Together, the combined company will comprise more than 32 million square feet of retail space and rake in about C$7.2 billion of sales annually.

HBC said it may transform some of its Hudson’s Bay stores into Saks locations, open new Saks stores in existing buildings or, in some cases, build new stores from the ground up.

The Toronto-based retailer is also eyeing the possibility of starting a real estate investment trust.

“The combination of Saks and HBC real estate creates an unmatched, highly valuable North American retail real estate portfolio, with a coast-to-coast footprint serving three strong banners,” Baker said.

Paul Swinand, an analyst with Morningstar in Chicago, said the prime real estate portfolio was likely one of the biggest draws for HBC.

“There’s no way they could have accessed these real estate assets at any other price, or in any other way,” said Swinand.

“These are assets in locations where you couldn’t get that size of a store otherwise.”

However, Swinand noted it will be a challenge for HBC to improve Saks’ operating margin, which is in the low-single digits.

“They have high sales per square foot, but their profitability has not been that great,” he said.

Baker said HBC will keep the stores under separate banners, and plans on renovating the Saks stores and working with more vendors to make the chain “as luxurious as possible.”

“We think that Saks is very well positioned in the luxury market in the United States, but we think there’s a great opportunity to improve that positioning,” he said.

HBC, which has been eyeing the struggling high-end American chain for the past few months, said it will pay US$16 per Saks share plus assume debt as part of the transaction.

It will issue US$1 billion worth of equity and $2.3 billion of debt securities to pay for Saks.

It has received funding from the Ontario Teachers Pension Plan, which will buy about US$500 million of the equity, and Canadian private equity firm West Face Capital, which will buy US$250 million of the new HBC equity.

Hudson’s Bay Co. will also issue US$1.9 billion of secured loans and US$400 million of unsecured notes.

Saks will pay a fee to HBC if the deal doesn’t go through, but HBC would not specify the amount.

HBC shares closed up 96 cents, or 5.82 per cent, to $17.45 on the Toronto Stock Exchange Monday.

Saks shares (NYSE:SKS) closed up 64 U.S. cents, or 4.18 per cent, to $15.95, on the New York Stock Exchange.

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