HBC announces its 3Q FY2016 financial results

  • Consolidated retail sales increased 28.6% to $3.3 billion from $2.6 billion a year ago
  • Digital sales at Legacy HBC grew 12.9% on a constant currency comparable basis
  • Inventory levels on a comparable basis declined approximately 2% from a year ago as a result of the Company’s disciplined focus on this area
  • Adjusted EBITDAR decreased 1.4% to $276 million
  • Net Loss of $125 million; The current quarter included $3 million in net dilution gains related to the joint ventures compared to $91 million a year ago, which contributed to net earnings of $7 millionin that period

TORONTO & NEW YORK & COLOGNE, Germany, 2016-Dec-07 — /EPR Retail News/ — Hudson’s Bay Company (“HBC” or the “Company”) (TSX: HBC) today (December 5, 2016) announced its third quarter financial results for the thirteen and thirty-nine week periods ended October 29, 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).

“During the third quarter we continued to execute our all channel strategy in the face of a retail environment where there were challenges in the women’s apparel, department store and luxury segments. To address this we are continuing to move aggressively, making specific improvements both in our digital and brick and mortar operations that will allow us to better serve our customers. During the quarter we finished installing our world class robotic fulfillment system in Canada, and are already leveraging this technology at Hudson’s Bay during the busy holiday season. We are also excited about our progress in Europe. In the Netherlands, we are executing our organic growth strategy, and in November we completed our first major renovation in Germany at our GALERIA Kaufhof store in Düsseldorf. During the quarter, we took advantage of a favourable lending environment to reprice our term loan which will reduce our interest costs going forward. We believe our world class real estate portfolio, which is less affected by near term retail trends, continues to provide substantial value to the Company,” stated Richard Baker, HBC’s Governor and Executive Chairman.

Jerry Storch, HBC’s Chief Executive Officer, added, “Sales were challenging in the third quarter but we believe our all channel strategy is the right long-term strategy for generating profitable growth. We continue to focus on delighting our customers and building a digital and brick and mortar platform that will allow them to shop whenever, wherever and however they choose. Many of our initiatives revolve around finding new ways to wow our customers and offering tailored, exclusive product, which we expect will drive sales across all of our banners. While we have made considerable progress on increasing efficiencies during the last year, we believe that there are further areas for improvement and we will continue to evaluate our options. We remained focused on inventory management during the quarter and despite lower than expected sales, driven by challenges in some of our markets, comparable inventory levels decreased by approximately 2% from the prior year. We believe we are well positioned for and excited about the current holiday season and remain focused on executing our all channel strategy across our banners and geographies.”

Plans to Drive Sales Growth

Hudson’s Bay and Lord & Taylor are focused on strengthening outperforming categories such as dresses and active wear. Additionally, Hudson’s Bay is optimizing its Home Goods business while better utilizing existing space through the addition of new categories such as toys. Both banners will continue to emphasize top-performing brands and products that are “Exclusively Ours”. For the holiday season, Hudson’s Bay and Lord & Taylor look to deliver strong key items at tremendous values and the introduction of an all-door gift giving program is expected to drive incremental sales. Both banners are also increasing their focus on the fast-growing mobile segment of the digital market.

Saks Fifth Avenue is very focused on sourcing exclusive and limited distribution product in order to differentiate its offerings. In conjunction with this, SaksFirst, the Saks Fifth Avenue customer loyalty program, is dedicating its service towards driving loyalty among emerging customers and creating one-of-a-kind experiences for existing members. For the holiday season, Saks Fifth Avenue is also proud to introduce a new gift concierge service which will offer dedicated gift concierges to assist customers with all of their gift-giving needs, including gift-wrapping, shipping, delivery, or simply finding that perfect holiday gift. Along with these initiatives, Saks Fifth Avenue is equipping all of its sales associates with tools that allow them to market themselves locally and take greater control over their success.

GALERIA Kaufhof is continuing its renovation program to modernize its selling space and introduce new and exciting brands. For example, Topshop recently opened its first German location at the Berlin store on Alexanderplatz. While renovations at key stores have negatively impacted current sales, these initiatives are expected to drive long-term sales growth and modernize the shopping experience throughout the banner. In addition to the ongoing renovations, GALERIA Kaufhof is investing in digital platforms as it works towards creating a best-in-class all channel offering. Digital sales are currently a small portion of the banner’s overall sales and GALERIA Kaufhof believes that there is significant opportunity to grow sales in this channel.

HBC’s Off Price banners are refocusing on their core strategy: offering high end brands at everyday value. While Saks OFF 5TH attempted to broaden its appeal by offering a wider selection of price points, the banner’s ability to provide high end, sought after products is a major differentiating factor for Saks OFF 5TH as compared to other off priced retailers. Saks OFF 5TH is in the process of re-merchandising its product mix to have a higher concentration of products at the top end of Saks OFF 5TH’s offering range, which is expected to drive increased traffic and conversion as well as a higher overall basket size. In addition, Saks OFF 5TH introduced a revised pricing strategy which was fully implemented by the end of the third quarter in the prior year. This revised strategy substantially reduced promotional activity and focused on offering great value on an everyday basis. The revised pricing strategy is expected to drive increased margin by offering customers a clearer value proposition. Gilt recently unveiled holiday offerings that feature entire outfits curated from its selection of unique brands, and is expanding its concierge program to provide personalized service to top customers. Heading into next year, Gilt expects to expand its brand partnerships to include new up and coming brands in addition to securing exclusive launches and collaborations.

Third Quarter Summary

All comparative figures below are for the thirteen week period ended October 29, 2016 compared to the thirteen week period ended October 31, 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. Legacy HBC refers to the Company as structured prior to the acquisition of HBC Europe and Gilt.

Consolidated retail sales were $3,300 million, an increase of 28.6% from the prior year, primarily as a result of the addition of HBC Europe and Gilt offset by a decrease in comparable sales of 4.0%. On a constant currency basis, comparable sales declined by 2.4% at DSG, 2.2% at HBC Europe, 8.4% at HBC Off Price and 4.6% at Saks Fifth Avenue, resulting in a total comparable sales decline of 3.6%. Total digital sales increased by 73.0% from the prior year, with total digital comparable sales increasing by 5.4% on a constant currency basis. Total digital comparable sales at Legacy HBC increased 12.9% on a constant currency basis.

For HBC overall, gross profit rate as a percentage of retail sales was maintained at 42.2% compared to the prior year.

Over the last several quarters, 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 $1,342 million compared to $1,012 million in the prior year. This increase reflects the additions of HBC Europe, Gilt and the Joint Ventures. Normalized SG&A expenses were $1,284 million or 38.9% of retail sales, compared to 35.3% in the prior year. This rate increase was primarily driven by increased net rent expenses incurred in connection with the Joint Ventures, lower than expected comparable sales, and the inclusion of HBC Europe, which operates at a higher SG&A rate, for the full quarter.

Adjusted EBITDAR was $276 million, a decrease of 1.4% compared to $280 million in the prior year. This decrease should be viewed in relation to the 52.2% increase in Adjusted EBITDAR reported in the prior year. The decline in the current quarter was driven primarily by lower comparable sales, offset by the addition of HBC Europe for part of the quarter.

Adjusted EBITDA was $89 million, a decrease of $81 million compared to $170 million in the prior year. The Joint Ventures had a $60 million impact on Adjusted EBITDA compared to an $18 million impact in the prior year. Adjusting for this $42 million increase, the decline would have been 22.9%. This decline is relative to an Adjusted EBITDA increase of 44.1% in the prior year.

Commencing with the fourth quarter, the Company expects that its results will be more comparable as it anniversaries the increase in Joint Venture rent expenses associated with the contribution of its European properties and the sales of part of its equity in the HBS Joint Venture to third party investors. These Joint Venture rent expenses are essentially flat over the course of the year, while the retail business is seasonal, with sales and earnings weighted towards the back of the fiscal year.

Finance costs were $48 million compared to $29 million in the prior year. Of the $19 million increase, $8 million was 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, and $6 million was related to higher interest expense associated with finance leases and pension liabilities acquired as part of the GALERIA Kaufhof transaction. Interest paid in cash was $41 million compared to $36 million in the prior year.

Net loss was $125 million compared to net earnings of $7 million in the prior year. Prior year earnings included a net gain of $91 million related to the dilution gains from investments in the Joint Ventures, compared to $3 million in the current year. Normalized Net Loss was $102 million compared to a loss of $1 million in the prior year. This increase in loss is primarily a result of increased rent expenses to the Joint Ventures and third parties, higher depreciation and amortization expenses, lower comparable sales and increased finance costs.

Year-to-Date Summary

All comparative figures below are for the thirty-nine week period ended October 29, 2016 compared to the thirty-nine week period ended October 31, 2015.

Consolidated retail sales were $9,855 million, an increase of 47.6% 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 0.7%. On a constant currency basis, comparable sales grew 0.2% at DSG, offset by declines of 0.9% at HBC Europe, 8.0% at HBC Off Price and 4.0% at Saks Fifth Avenue, resulting in a total comparable sales decline of 2.0%. Total digital sales increased by 81.8% from the prior year, with total digital comparable sales increasing by 5.5% on a constant currency basis. Total digital comparable sales at Legacy HBC increased 13.0% on a constant currency basis.

For HBC overall, gross profit rate as a percentage of retail sales was 41.9%, an increase of 80 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.

SG&A expenses were $4,023 million compared to $2,567 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 $3,833 million or 38.9% of retail sales, compared to 36.1% 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 $789 million, an increase of 37.5% compared to $574 million in the prior year, primarily as a result of the addition of HBC Europe. This increase follows an Adjusted EBITDAR increase of 22.1% in the prior year.

Adjusted EBITDA was $232 million, compared to $326 million in the prior year. The Joint Ventures had a $182 million impact on Adjusted EBITDA during the first three quarters of this fiscal year, compared to a $19 millionimpact in the prior year.

Commencing with the fourth quarter, the Company expects that its results will be more comparable as it anniversaries the increase in Joint Venture rent expenses associated with the contribution of its European properties and the sales of part of its equity in the HBS Joint Venture to third party investors. These Joint Venture rent expenses are essentially flat over the course of the year, while the retail business is seasonal, with sales and earnings weighted towards the back of the fiscal year.

Finance costs were $149 million compared to $128 million in the prior year. The majority of this increase is related to higher interest expense related to the Company’s finance leases and pension and employee liabilities acquired as part of the GALERIA Kaufhof transaction, as well an increase in short term borrowing interest expense. Interest paid in cash was $127 million, a $20 million increase over the prior year.

Net loss was $364 million compared to net earnings of $17 million in the prior year. Prior year earnings include total gains of $198 million related to the Joint Ventures, compared to $41 million in the current year. Normalized Net Loss was $315 million compared to a loss of $90 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, and increased depreciation and amortization expense.

Inventory

Inventory at the end of the third quarter increased by $217 million compared to the prior year. This increase was driven by the acquisition of Gilt, the opening of new Saks Fifth Avenue and Saks OFF 5TH stores and foreign exchange movements. During the quarter there was a heightened focus on inventory and as a result, on a comparable basis, inventory levels decreased by approximately 2% compared to the prior year.

Store Network

During the third quarter, the Company opened five Saks OFF 5TH stores in Canada, which are located in Toronto, Ontario; Ottawa, Ontario; Vancouver, British Columbia; Calgary, Alberta and Edmonton, Alberta. In the U.S., the Company opened two Saks Fifth Avenue stores located in New York, New York and Honolulu, Hawaii, as well as 12 Saks OFF 5TH stores, which are located in Woodland Hills, California; Frisco, Texas; Fairfax, Virginia; Palm Desert, California; Springfield, Virginia; Washington, DC; Pittsburgh, Pennsylvania; Brooklyn, New York; Naples, Florida;Scottsdale, Arizona; Rockville, Maryland and Clarksburg, Maryland. The Company closed two Saks Fifth Avenuestores in Short Hills, New Jersey and Fort Myers, Florida, one Saks OFF 5TH store in Schaumburg, Illinois and three Home Outfitters stores in Ottawa, Ontario; Nepean, Ontario and Montreal, Quebec.

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