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HBC’s Net Loss Grows to $124.2M

Despite revenue gains, the company was impacted by its $2.9 billion purchase of Saks Fifth Avenue in the third quarter.

Hudson's Bay Yorkdale

Hudson’s Bay Co., impacted by its $2.9 billion purchase of Saks Fifth Avenue and the promotional environment affecting margins, saw its net loss grow in the third quarter despite revenue gains.

The Toronto-based retailer said its loss rose to $124.2 million in the period ended Nov. 2, compared with a loss of $14.4 million a year ago.

HBC, promoting aggressively to draw shoppers, saw total sales rising 5.8 percent to $984.1 million. On a same-store basis, sales at Lord & Taylor turned positive for the first time in a year, rising 1.6 percent. Sales at Hudson’s Bay department stores in Canada grew 6.4 percent. E-commerce sales were $48.9 million, an increase of 58.3 percent compared with the third quarter of 2012.

In reporting the results Wednesday, HBC executives echoed widespread industry sentiment about how tough holiday business has been. With just two weeks to go before Christmas, “traffic patterns are going to be difficult,” warned Richard Baker, chairman and chief executive officer of HBC, in a conference call. “In November, we expected stronger sales.”

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Baker characterized apparel pricing as increasingly competitive, and for next year, the planning has been more conservative after an inventory receipt flow that has been too heavy.

In the last quarter, the company’s operations improved with “normalized” net earnings rising to $8.9 million, against the year-ago loss of $300,000. Normalized earnings exclude the impact of onetime costs such as the Saks deal and restructurings. Earnings before interest, taxes, depreciation and amortization were $64.3 million, an increase of $16.4 million compared with the third quarter of 2012.

For the fourth quarter, HBC projects total sales of $1.37 billion to $1.41 billion, and normalized EBITDA of $160 million to $180 million. Same-store sales will benefit from the negative impact of Superstorm Sandy last year. However, with all the price promoting and some higher costs, a lower gross profit rate in the current quarter and full year is expected.

Saks’ figures were not included in the third-quarter results or the guidance, since the deal was closed at the beginning of the fourth quarter. In the call, however, Michael Culhane, HBC’s chief financial officer, said Saks posted $795 million in total sales, with same-store sales ahead 9.6 percent driven by increased promotional activity and continued strength in e-commerce. Normalized EBITDA came to $68.2 million.

With the Saks deal done, HBC is “in the midst of a transformational period,” Baker said, explaining that they are working on integrating Saks and making the luxury retailer leaner. “There is lots of work ahead of us.”

Dramatic changes have already happened, with HBC eliminating much of the senior team at Saks and naming Marigay McKee as president. Additional layoffs are expected as Saks’ back office operations get consolidated into the central operations of the Toronto-based HBC. In January, Saks’ distribution center in Maryland will close and operations will shift to the Lord & Taylor distribution center in Wilkes-Barre, Pa. That will lead to layoffs, as well as efficiencies in trucking.

McKee has been busy visiting Saks stores around the country and developing plans to pump up certain sites. Some openings of Saks full-line and Off 5th outlets in Canada are seen, as are some full-line closings in the U.S. Some could be converted to Lord & Taylor. Baker has stated the company is prepared to invest $200 million to upgrade the Saks Fifth Avenue flagship in Manhattan. Sources speculate that an overhaul of the main floor and converting the lower level to selling space are possible to expand cosmetics, accessories and jewelry.

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“While we would prefer our year-to-date performance to have been stronger, our investments in both store productivity and our omnichannel platform have produced clear and promising results,” Baker said. “We are confident that these investments are necessary and will benefit earnings over the long term. Further, the addition of Saks will allow us to leverage these investments over a larger platform. Saks also provides us with the opportunity to create considerable economies of scale. We are determined to take full advantage of this and deliver $100 million in synergies over the next three years.”

A key initiative at the Hudson’s Bay department store group entails ongoing upgrade and expansion of omnichannel operations, with expanded online assortments and fulfillment capabilities, “auto locate” capabilities in the stores to find items and sell them faster and at better margins, and a more robust infrastructure. “Omni remains a start-up business,” Baker said, citing its high sales growth yet lower EBITDA contribution than brick-and-mortar. “We have made tremendous progress, starting from no online sales just a couple of years ago. But we are not yet satisfied with the level of service and with all the sku’s [stockkeeping units] we have available and volume levels. We are committed to having a state-of-the-art online offering in Canada. We hope to be there in the next 12 to 15 months. We don’t think the complexity of adding Saks online in Canada is going to slow down or divert any of our efforts. We will be leveraging our existing online and distribution capabilities in Canada to create a better launch of Saks online. In the U.S., Saks has a more mature and higher-functioning online business, and we are using their quality people to help us with Lord & Taylor and Hudson’s Bay’s online businesses.”

“Calculated” investments in stores is another initiative, Baker said, citing the recent renovation of the Vancouver flagship, which has since seen a 34 percent sales lift, and the creation of Canada’s largest shoe floor at the Hudson’s Bay flagship on Queen Street in Toronto. Six Hudson’s Bay locations have received significant renovations.

Developing partnerships with brands, such as Topshop/Topman in-store shops that are being rolled out, is another initiative. Last quarter, Topshop/Topman, along with women’s and men’s apparel generally, ladies shoes, handbags and accessories, were bestsellers at Hudson’s Bay. At Lord & Taylor, men’s and women’s apparel and handbags fared the best. E-commerce was strong at both banners.

For the year to date, top-line growth has been strong at Hudson’s Bay, but disappointing at L&T and Home Outfitters. Target in Canada has swiped some business from Home Outfitters.

With HBC owning valuable retail locations on Fifth Avenue and elsewhere, Baker said he is evaluating “every option on how to share the value of our real estate we have locked into this company” for stockholders. One possibility is to create a real estate investment trust.