Hudson’s Bay Company announced 2Q financial results for thirteen and twenty-six week periods ended July 30, 2016

TORONTO & NEW YORK & COLOGNE, Germany, 2016-Sep-07 — /EPR Retail News/ — Hudson’s Bay Company (“HBC” or the “Company”) (TSX: HBC) today (September 6, 2016) announced its second quarter financial results for the thirteen and twenty-six week periods ended July 30, 2016. Unless otherwise indicated, all amounts are expressed in Canadian dollars. Certain metrics, including those expressed on an adjusted, normalized, comparable and/or constant currency basis, are non-IFRS financial measures (for more information please refer to the “Supplemental Information” section of this press release and the reconciliation tables further below).

“The second quarter was another solid quarter for HBC. We continued to execute on our expansion plans in Europe with the announcement that we would be introducing our iconic Hudson’s Bay banner to the Netherlands. We currently plan to open up to 20 stores, and during the quarter signed long term lease agreements for 11 locations accounting for approximately 1,526,000 square feet. We also announced the first five Saks OFF 5TH locations in Germany, which we expect to open next summer. In New York we closed a U.S. $400 million, 5-year mortgage on our Lord & Taylor flagship location on 5th Avenue which valued the property at U.S. $655 million based on an independent appraisal commissioned by the lenders. This transaction, as well as the attractive rate we secured, exemplifies both the value of our real estate portfolio and the significant financial flexibility that it provides to HBC as we work through a challenging retail environment” stated Richard Baker, HBC’s Governor and Executive Chairman.

Jerry Storch, HBC’s Chief Executive Officer, added, “In the second quarter we made good progress on focusing on expenses and leveraging our scale to increase efficiencies. Additionally, our sales associates continued to delight our customers and were able to drive sales in a challenging market. Gross margins increased 200 basis points as a result of the inclusion of HBC Europe as well as our revised pricing strategy at Saks OFF 5TH. To support our digital growth we are bringing industry-leading robotic technology to Canada which we expect will reduce digital order processing time and generate significant savings. We expect the first installation to be fully functional this fall, and are currently the only company in Canada to utilize this technology. We are also proud to support Team Canada in the Rio Olympic and Paralympic games, and it was great to see the iconic Hudson’s Bay stripes in both the opening and closing ceremonies and on the medal podiums. As we look towards the second half of 2016, we are monitoring the retail environment closely and are taking prudent steps to ensure that HBC is in a position to capitalize on the opportunities presented as we anniversary last year’s tough third and fourth quarters. Despite the uncertainty in the current environment, we remain focused on executing on our long term strategy for profitable growth.”

Second Quarter Summary

All comparative figures below are for the thirteen week period ended July 30, 2016 compared to the thirteen week period ended August 1, 2015. DSG refers, collectively, to the Lord & Taylor, Hudson’s Bay and Home Outfitters banners. HBC Europe refers, collectively, to GALERIA Kaufhof, Galeria INNO and Sportarena banners. HBC Off Price refers, collectively, to the Saks Fifth Avenue OFF 5TH (“Saks OFF 5TH”) and Gilt banners.

Consolidated retail sales were $3,252 million, an increase of 59.6% from the prior year, primarily as a result of the addition of HBC Europe and Gilt as well as an increase in comparable sales of 1.9%. On a constant currency basis, comparable sales grew 1.1% at DSG, offset by declines of 0.9% at HBC Europe, 11.4% at HBC Off Price and 1.3% at Saks Fifth Avenue, resulting in a total comparable sales decline of 1.3%. Total Digital sales increased by 84.4% from the prior year, with total Digital comparable sales increasing by 1.4% on a constant currency basis. Excluding HBC Off Price, total Digital comparable sales increased 17.3% on a constant currency basis.

As discussed in the prior quarter, HBC has significantly reduced its promotional activity at Saks OFF 5TH compared to the prior year, which has substantially increased margins while reducing sales. During the quarter the Company also migrated the Saks OFF 5TH website to a new platform, which caused some disruption and impacted Digital sales at this banner. In addition, at Gilt, which is included in HBC Off Price and is a major component of the Company’s digital comparisons, the return policy was enhanced. The Company expects the liberalization of the return policy at Gilt and the new common digital platform will enable HBC to build stronger relationships with its customers over the long term.

For HBC overall, gross profit rate as a percentage of retail sales was 41.5%, an increase of 200 basis points from the prior year. This increase was primarily related to the addition of HBC Europe, which operates at relatively higher gross margin and SG&A rates, as well as higher gross margins at Saks OFF 5TH.

The Company remains focused on improving efficiencies, reducing expenses and optimizing its real estate portfolio, and has made solid progress on its expense management initiatives disclosed previously. These initiatives include the North American operations realignment program, voluntary restructuring programs of its European operations, and the outsourcing of IT systems maintenance positions in North America. During the quarter the Company recorded charges of $4 million related to these initiatives.

Over the last year, HBC has grown dramatically through the acquisition of GALERIA Kaufhof, Gilt, and the creation of the respective joint ventures with RioCan Real Estate Investment Trust and Simon Property Group (collectively the “Joint Ventures”). Until the Company begins to anniversary these transactions, SG&A expenses will not be directly comparable to previous periods.

SG&A expenses were $1,286 million compared to $775 million in the prior year. This increase reflects the additions of HBC Europe, Gilt and the Joint Ventures. Normalized SG&A expenses were $1,249 million or 38.4% of retail sales, compared to 36.9% in the prior year. This rate increase was driven by the inclusion of HBC Europe, which operates at a higher SG&A rate, and the additional net rent expense incurred in connection with the Joint Ventures.

Adjusted EBITDAR was $263 million, an increase of 113.8% compared to $123 million in the prior year, primarily as a result of the addition of HBC Europe. As a percentage of retail sales, Adjusted EBITDAR improved 210 basis points to 8.1%, reflecting the Company’s continued focus on increasing efficiencies.

Adjusted EBITDA was $81 million, an increase of 55.8% compared to $52 million in the prior year. The Joint Ventures had a $61 million impact on Adjusted EBITDA during the quarter. These Joint Venture expenses are essentially flat over the course of the year, while the retail business is seasonal, with sales and earnings weighted towards the second half of the fiscal year. While management believes that Adjusted EBITDA is less useful than Adjusted EBITDAR when evaluating the performance of the retail business, the Company will continue to disclose Adjusted EBITDA.

Finance costs were $56 million compared to $52 million in the prior year, primarily due to the change in non-cash finance income generated from mark to market adjustments associated with the valuation of outstanding common share purchase warrants.

Net loss was $142 million compared to Net earnings of $59 million in the prior year. Prior year earnings include a pre-tax gain of $133 million related to the creation of the Joint Ventures. Normalized net loss was $122 millioncompared to a loss of $61 million in the prior year. The increase is primarily a result of the creation of the Joint Ventures and the additional net rent expense associated with these entities, which are spread evenly over the course of the year, as well as increased depreciation and amortization expenses.

Year-to-Date Summary

All comparative figures below are for the twenty-six week period ended July 30, 2016 compared to the twenty-six week period ended August 1, 2015.

Consolidated retail sales were $6,555 million, an increase of 59.5% from the prior year, primarily as a result of the addition of HBC Europe and Gilt as well as an increase in comparable sales of 3.2%. On a constant currency basis, comparable sales grew 1.7% at DSG, offset by declines of 0.1% at HBC Europe, 7.9% at HBC Off Price and 3.7% at Saks Fifth Avenue, resulting in a total comparable sales decline of 1.1%. Total Digital sales increased by 86.9% from the prior year, with total Digital comparable sales increasing by 5.5% on a constant currency basis.

For HBC overall, gross profit rate as a percentage of retail sales was 41.7%, an increase of 140 basis points from the prior year. This increase was primarily related to the addition of HBC Europe, which operates at relatively higher gross margin and SG&A rates, as well as increased margins at Saks OFF 5TH.

SG&A expenses were $2,681 million compared to $1,555 million in the prior year, primarily as a result of the addition of HBC Europe, Gilt, and the Joint Ventures. Normalized SG&A expenses were $2,549 million or 38.9% of retail sales, compared to 36.5% in the prior year.. This rate increase was primarily driven by the inclusion of HBC Europe, as well as net rent expense incurred in connection with the Joint Ventures.

Adjusted EBITDAR was $513 million, an increase of 74.5% compared to $294 million in the prior year, primarily as a result of the addition of HBC Europe. As a percentage of retail sales, Adjusted EBITDAR improved 60 basis points to 7.8%, reflecting the Company’s continued focus on improving efficiencies.

Adjusted EBITDA was $143 million, compared to $156 million in the prior year. The Joint Ventures had a $122 million impact on Adjusted EBITDA during the first two quarters of this fiscal year. These Joint Venture expenses are essentially flat over the course of the year, while the retail business is seasonal, with sales and earnings weighted towards the second half of the fiscal year.

Finance costs were $101 million compared to $99 million in the prior year. Cash interest costs were $86 million, a$15 million increase over the prior year. The majority of this increase is related to finance lease payments at HBC Europe and long term property leases at the RioCan-HBC Joint Venture.

Net loss was $239 million compared to net earnings of $10 million in the prior year. Prior year earnings include a pre-tax gain of $133 million related to the Joint Ventures. Normalized net loss was $213 million compared to a loss of $89 million in the prior year, primarily as a result of the creation of the Joint Ventures and the additional net rent expense associated with these entities, which are spread evenly over the course of the year, as well as increased depreciation and amortization expense.

Inventory

Inventory at the end of the second quarter increased by $829 million compared to the prior year. The addition of HBC Europe and Gilt accounted for the majority of the increase. The remainder was driven by additional inventory related to new store openings. On a total company basis, management believes that inventory is in line with the Company’s sales expectations for the coming quarters.

Store Network

During the second quarter, the Company opened one Saks Fifth Avenue store located in Greenwich, Connecticutand two Saks OFF 5TH stores located in Chicago, Illinois and Plymouth Meeting, Pennsylvania. The Company closed one Home Outfitters store in Anjou, Quebec.

Store information as at July 30, 2016 Store Count(1) Gross Leasable Area (1) /Square Footage (000s)
Hudson’s Bay 90 15,864
Lord & Taylor 50 6,898
Saks Fifth Avenue 41 5,051
OFF 5TH 102 3,028
Home Outfitters 59 2,102
HBC Europe 130 28,609
Total 472 61,552

(1) Hudson’s Bay Company operates one Find @ Lord & Taylor store, one Hudson’s Bay outlet, two Zellers clearance centers and two Lord & Taylor outlets that are excluded from the store count and gross leasable area.

Capital Expenditure

Capital expenditures, net of landlord incentives, during the second quarter totaled $186 million, compared to $65 million in the prior year. HBC’s initiatives during the quarter included the opening of two Saks OFF 5TH stores in the U.S. and a Saks Fifth Avenue store located in Greenwich, Connecticut. Additionally, the Company completed the remodeling of the 4th floor of the Saks Fifth Avenue flagship in Manhattan, and made significant progress on the construction of the new Brookfield Place and Hawaii Saks Fifth Avenue stores which are expected to open during the third quarter. Installation of automated order fulfillment technology at the Company’s distribution centre inToronto is nearing completion, and the Company expects that this upgrade will significantly increase the efficiency with which online orders are processed.

Debt Summary

As at July 30, 2016, the Company had the following outstanding loans and borrowings on its balance sheet (refer to note 11 of the unaudited interim condensed consolidated financial statements for the thirteen and twenty-six week periods ended July 30, 2016):

(millions of Canadian dollars, unless otherwise noted) TOTAL ($) CAD ($) USD ($) EUR (€)
Global Revolving Credit Facility 849 302 397 20
U.S. Term Loan B 653 500
Lord & Taylor Mortgage 522 400
Saks Mortgage 1,632 1,250
Other loans 8 6
Total Outstanding Loans and Borrowings 3,664 302 2,553 20

Dividend

The Company also announced today that its Board of Directors has approved a quarterly dividend to be paid onOctober 17, 2016, to shareholders of record at the close of business on September 30, 2016. The dividend is in the amount of $0.05 per Common Share and is designated as an “eligible dividend” for Canadian tax purposes.

Outlook

The following outlook is fully qualified by the “Forward-Looking Statements” section of this press release

Given the overall retail environment, management currently expects Sales, Adjusted EBITDAR and Adjusted EBITDA for Fiscal 2016 to trend towards the bottom end of its outlook range. This outlook reflects the Company’s performance to date and anticipates overall comparable sales growth, calculated on a constant currency basis, to be in the low single digits for the remainder of the fiscal year as the Company anniversaries the challenging fall season experienced in Fiscal 2015.

(Canadian dollars) Fiscal 2016
Sales $14.9 to $15.9 billion
Adjusted EBITDAR $1,560 to $1,710 million
Adjusted EBITDA $800 to $950 million

The Company currently expects that in Fiscal 2016 it will make higher than normal investments in growth initiatives, with total capital investments, net of landlord incentives, expected to be between $750 million and $850 million, which is approximately 5.0%-5.7% of the midpoint of the Sales outlook. Included in these amounts is the anticipated capital spend associated with the Company’s recent acquisitions: HBC Europe and Gilt. Capital expenditure related to growth initiatives is expected to be approximately 70% of the total amount, with the remaining 30% representing maintenance capital expenditures.

The above outlook reflects exchange rate assumptions of USD:CAD = 1:1.32 & EUR:CAD = 1:1.50. Any variation in these foreign exchange rate assumptions could impact the above outlook.

Conference Call to Discuss Results

Richard Baker, HBC’s Governor and Executive Chairman, Jerry Storch, HBC’s Chief Executive Officer and Paul Beesley, HBC’s Chief Financial Officer, will discuss the second quarter financial results and other matters during a conference call on September 7, 2016 at 8:30 am EST.

The conference call will be accessible by calling the participant operator assisted toll-free dial-in number (800) 535-7056 or international dial-in number (253) 237-1145. A live webcast of the conference call will be accessible on HBC’s website at: http://investor.hbc.com/events.cfm. The audio replay also will be available via this link.

Consolidated Financial Statements and Management’s Discussion and Analysis

The Company’s unaudited interim condensed consolidated financial statements for the thirteen and twenty-six week periods ended July 30, 2016 and Management’s Discussion and Analysis thereon are available under the Company’s profile on SEDAR at www.sedar.com.

Consolidated Financial Information

The following tables set out summary consolidated financial information and supplemental information for the periods indicated. The summary financial information set out below has been derived from unaudited interim condensed consolidated financial statements, prepared in accordance with International Accounting Standard 34, Interim Financial Reporting, for the thirteen and twenty-six week periods ended July 30, 2016. The unaudited financial information presented has been prepared on a basis consistent with our audited consolidated financial statements for Fiscal 2015. In the opinion of our management, such unaudited financial data reflects all adjustments, consisting of normal and recurring adjustments, necessary for a fair presentation of the results for those periods. The results of operations for interim periods are not necessarily indicative of the results to be expected for a full year or any future period.

About Hudson’s Bay Company

Hudson’s Bay Company is one of the fastest-growing department store retailers in the world, based on its successful formula of driving the performance of high quality stores and their all-channel offerings, unlocking the value of real estate holdings and growing through acquisitions. Founded in 1670, HBC is the oldest company in North America. HBC’s portfolio today includes ten banners, in formats ranging from luxury to premium department stores to off price fashion shopping destinations, with more than 470 stores and 66,000 employees around the world.

In North America, HBC’s leading banners include Hudson’s Bay, Lord & Taylor, Saks Fifth Avenue, Gilt, and OFF 5TH, along with Find @ Lord & Taylor and Home Outfitters. In Europe, its banners include GALERIA Kaufhof, the largest department store group in Germany, Belgium’s only department store group Galeria INNO, as well as Sportarena.

HBC has significant investments in real estate joint ventures. It has partnered with Simon Property Group Inc. in the HBS Global Properties Joint Venture, which owns properties in the United States and Germany. In Canada, it has partnered with RioCan Real Estate Investment Trust in the RioCan-HBC Joint Venture.

Forward-Looking Statements

Certain statements made in this news release, including, but not limited to, the benefits that are expected to result from the acquisitions of HBC Europe and Gilt, the Company’s plans for expansion in Europe, the benefits that are expected to result from the installation of automated order fulfillment technology at the Company’s distribution centre in Toronto, benefits of reduced promotional activity at Saks OFF 5TH and an enhanced return policy at Gilt, impact on the Company’s reported gross profit and expense margins as a result of the acquisition of HBC Europe, the benefits that are expected to result from the North American operations realignment initiative and additional cost saving activities, expected expenditures on investments in growth initiatives, the Company’s prospects for future growth opportunities, including targeting acquisitions, anticipated store openings, the Company’s growth strategies of improving retail operations and unlocking the value of real estate, and the Company’s commentary on outlook in respect of Sales, Adjusted EBITDAR, and Adjusted EBITDA, and other statements that are not historical facts, are forward-looking. Often but not always, forward-looking statements can be identified by the use of forward-looking terminology such as “may”, “will”, “expect”, “believe”, “estimate”, “plan”, “could”, “should”, “would”, “outlook”, “forecast”, “anticipate”, “foresee”, “continue” or the negative of these terms or variations of them or similar terminology.

Implicit in forward-looking statements in respect of Sales, Adjusted EBITDA, and Adjusted EBITDAR, are certain current assumptions, including, among others, the Company achieving overall low single digit comparable store sales growth on a constant currency basis for the remainder of Fiscal 2016, the Company achieving additional savings from operational initiatives, the Company’s anticipated total capital investments, net of landlord incentives, between $750 million and $850 million, the Company opening new stores in North America, the Company maintaining a significant ownership interest in the HBS Joint Venture and the RioCan-HBC JV, and assumptions regarding the overall retail environment and currency exchange rates for Fiscal 2016. Specifically, we have assumed the following exchange rates for Fiscal 2016: USD:CAD = 1:1.32 and EUR:CAD = 1:1.50. These current assumptions, although considered reasonable by the Company at the time of preparation, may prove to be incorrect. Readers are cautioned that actual future operating results and economic performance of the Company, including with respect to our anticipated Sales, Adjusted EBITDA, and Adjusted EBITDAR, are subject to a number of risks and uncertainties, including, among others described below, general economic, geo-political, market and business conditions, changes in foreign currency rates from those assumed, the risk of unseasonal weather patterns, the risk that the Company may not achieve comparable sales growth on a constant currency basis for the remainder of Fiscal 2016 and the risk that the Company may not achieve the contemplated cost savings and synergies as described above, and could differ materially from what is currently expected as set out above.

Although HBC believes that the forward-looking statements in this news release are based on information and assumptions that are current, reasonable and complete, these statements are by their nature subject to a number of factors that could cause actual results to differ materially from management’s expectations and plans as set forth in such forward-looking statements for a variety of reasons. Some of the factors – many of which are beyond HBC’s control and the effects of which can be difficult to predict – include, among others: ability to execute retailing growth strategies, ability to continue comparable sales growth, changing consumer preferences, ability to realize synergies and growth from strategic acquisitions, ability to make successful acquisitions and investments, successful inventory management, ability to upgrade and maintain our information systems to support the organization and protect against cyber-security threats, privacy breach, loss of key personnel, ability to retain key personnel of HBC Europe and Gilt, ability to attract and retain qualified employees, exposure to changes in the real estate market, successful operation of the Joint Ventures to allow the Company to realize the anticipated benefits, loss of flexibility with respect to properties in the Joint Ventures, exposure to environmental liabilities, changes in demand for current real estate assets, increased competition, change in spending of consumers including the impact of unfavourable or unstable political conditions and terrorism, fluctuations in the U.S. dollar, Canadian dollar, Euro and other foreign currencies, increase in raw material costs, extreme weather conditions or natural disasters, ability to manage indebtedness and cash flow, risks related with increasing indebtedness, restrictions of existing credit facilities reducing flexibility, ability to maintain adequate financial processes and controls, ability to maintain dividends, developments in the credit card and financial services industries, and other risks inherent to the Company’s business and/or factors beyond the Company’s control which could have a material adverse effect on the Company.

HBC cautions that the foregoing list of important factors and assumptions is not exhaustive and other factors could also adversely affect its results. For more information on the risks, uncertainties and assumptions that could cause HBC’s actual results to differ from current expectations, please refer to the “Risk Factors” section of HBC’s Annual Information Form dated April 28, 2016, as well as HBC’s other public filings, available at www.sedar.com and at www.hbc.com.

The forward-looking statements contained in this news release describe HBC’s expectations at the date of this news release and, accordingly, are subject to change after such date. Except as may be required by applicable Canadian securities laws, HBC does not undertake any obligation to update or revise any forward-looking statements contained in this news release, whether as a result of new information, future events or otherwise. Readers are cautioned not to place undue reliance on these forward-looking statements.

Caution should also be exercised in the evaluation and use of the independent appraisal results. The appraisals are based on various assumptions of future expectations, including the assumption that the entire flagship property is net leased by Lord & Taylor at an estimated current fair market rent. While the appraiser’s assumptions are considered to be reasonable at the current time, some of the assumptions may not materialize or may differ materially from actual experience in the future.

INVESTOR RELATIONS:
Hudson’s Bay Company:
Kathleen de Guzman
646-802-7070
kathleen.deguzman@hbc.com

Elliot Grundmanis
416-256-6732
elliot.grundmanis@hbc.com

MEDIA CONTACTS:
Hudson’s Bay Company:

Andrew Blecher
646-802-4030
Andrew.blecher@hbc.com

Source: Hudson’s Bay Company

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