Are shares of Hudson’s Bay Co. finally on the road to recovery?

The shares of Hudson’s Bay Co. have been sick for some time. Having fallen more than 40 per cent over the past year, they hit a 52-week low last month that was less than half of last summer’s high.

We have a diagnosis: Call it Macy’s disease. When the U.S. retailing giant announced deeply disappointing sales and earnings in August, 2015, it caused a seismic shift in investors’ thoughts about the department-store industry and traditional retail in general. Analyst Steven Salz of Toronto’s M Partners says the phrase “bricks and tombstones” was thrown around.

“Everyone started flipping out, saying it was the death of retail … the pervading mentality started this contagion, ” he says.

HBC’s shares, absent this type of activist intervention and hampered by reduced sales and earnings guidance in December, have not similarly bounced back. (There’s a case to be made that HBC has an underlying condition, with the weak loonie and the tepid Canadian economy making the stock further unwell.) Even with a bump up in the past two weeks, the stock has still fallen by a third since the Macy’s fiasco last August. It has lost 10 per cent of its value so far in 2016.

The irony is that no other retailer has done a better job than HBC in the past couple of years at creatively using the value of its real estate to boost its stock. In September, for example, HBC bought European retailer Galeria Kaufhof for $3.8-billion, then immediately paid for the entire acquisition by selling 41 of Kaufhof’s properties for $3.9-billion to a joint venture HBC co-owns.

While the real estate narrative has been much of the HBC story for its three-plus years as a public company, it also happens to be posting better numbers than nearly everyone in retail. With recent news of impressive sales, investors are beginning to catch on that HBC shares may well be on the road to recovery.

The Feb. 23 announcement of the company’s fourth-quarter same-store sales, a “prerelease” before the full earnings announcement in April, revealed that HBC’s performance was better, across its various storefronts, than many analysts expected. (Same-store sales, which measures results at stores open at least one year, is an important indicator of retail performance.)

Based on the figures, analyst David Hartley of Credit Suisse says in a recent report, HBC may post fourth-quarter sales $130-million higher than he’d estimated. In turn, he says, earnings per share could end up at $1.12, versus the consensus of $1.01 at the time. (Mr. Hartley has an “outperform” rating and $23 target price, versus Friday’s close of $17.16.)

The HBC story is becoming a multifaceted one. Executive chairman Richard Baker talked last quarter of three means of value creation: turning the company’s retail banners into “best-in-class” performers, adding to the company through mergers and acquisitions and continuing to add value by spinning out real estate into joint ventures.

Mr. Salz, who has an “outperform” rating and Street-high $36 target price, notes the story can be sold in a different way: With operations ranging from the “Off Fifth” discount chain, through mid-range Lord & Taylor and Hudson’s Bay Co. stores, and up the food chain to luxury retailer Saks, HBC has brands that cater to shoppers across a wide range of the economic spectrum. And with the addition of the Belgian Kaufhof chain, it has more geographic diversity than many retailers of its size.

And HBC now has a stronger online component: The acquisition of online retailer Gilt gives HBC technology that it would otherwise have to develop, and – theoretically – possible revenue gains by having Gilt’s customers make returns of unwanted merchandise at its Off Fifth locations.

“The ongoing shift of customer shopping preference to online is accelerating, ” CIBC World Markets analyst Perry Caicco says. “The online channel helps offset the otherwise long-term erosion of customer traffic into physical stores, even if it’s just by facilitating returns. But the problem remains profitability, ” he says. “Selling electronically for home delivery (or store pick-up) is much less profitable than traditional site-based retailing, where the customer does all the work.”

That’s a lot of moving parts. Operations, mergers, real estate. Upscale, mid-range, discount, online. And, actually, Mr. Caicco notes, these story lines are not even the most complicated thing about HBC. Instead, he argues in a recent note, it’s the “superstructure” by which HBC has set up and partly owns the joint ventures that own its properties and to which it pays rent.

“HBC is a unique company – we can find no other retailer built for the explicit purpose of paying rent into higher-value entities, ” he says. “HBC’s problem isn’t that ‘department stores are dead, ’ or that ‘the strategy is flawed.’ Their problem is that investors have seen few animals with these stripes.”

“Nobody can argue that management has not done a series of excellent deals – selling assets high; buying assets low; paying for assets with the assets’ own money; turning around moribund department stores, ” says Mr. Caicco, who has a “sector outperformer” rating and $30 target price. “But the resultant entity is a hybrid without a comparable that does not generate material amounts of cash. … The market today wants its retailers, or its real estate companies (and HBC is both), to put cash back into shareholders pockets. HBC is not doing that – just yet.”

If investors cure HBC of its Macy’s disease, the stock could show some healthy gains – as long as it doesn’t fall ill with a case of “too complex to understand.”

This story was first published at The Globe And Mail, By DAVID MILSTEAD