By  on June 3, 2014

Hudson's Bay Co., eyeing $10 billion in revenues and a 10 to 12 percent profit margin rate in five years, has a plateful of initiatives in motion to meet the objectives.

At more than $7 billion in revenues, the retail conglomerate is “overspending” on digital initiatives, and is “well on track” to see online sales represent up to 20 percent of gross revenues in five years, according to Richard Baker, the group’s chief executive officer.

On the brick-and-mortar front, efforts are afoot at Saks Fifth Avenue to finalize capital plans for renovating the Manhattan flagship and pumping up other locations, and to shift open-to-buy to the most productive brands and designer labels and away from less productive ones. The bottom 20 percent of the matrix will be hit.

At the Saks Off 5th outlet chain, new formats in key departments, including shoes and handbags, are being introduced; moderate merchandise is being ramped up, and efforts to clarify the pricing with new ticketing and signage are under way so shoppers have a clear idea of the bottom-line price and the values. Heretofore, the pricing has confused the outlet customer and led to surprises at the checkout, and contributed to many Off 5th customers shopping Nordstrom Rack and TJ Maxx with greater frequency.

In an interview with WWD on Tuesday, after the company reported that for the first quarter it swung into the black and had respectable sales gains considering the tough retail climate, Baker sounded most bullish on the opportunities for digital growth and off-price. “Online and off-price are our two biggest growth areas, in terms of the percentage of growth,” he said.

In light of the fast-increasing online business, Baker said the digital spend would be increased by $40 million this year, largely to add 125 associates, and make the sites for the group’s three retail nameplates more efficient, more exciting and easier to navigate. “At our department store group, online sales more than doubled,” on top of 35 percent growth seen in last year’s quarter, Baker said, declining to reveal actual sales figures. He acknowledged that the department store group’s online business is not huge, “but we’re not tiny. We are overinvesting on digital. We have the advantage of having a high-quality digital team from Saks, which is now leading all of our HBC digital businesses” since February. Saks’ online business is far more advanced than that of Lord & Taylor and Hudson’s Bay in Canada.

Regarding the Off 5th outlet business, Baker said it had a trend of less than zero revenue growth for the past five years, but for the first quarter this year, sales are up more than 15 percent. “Something is going on,” he said. He attributed the gains to his team and to the general off-price craze, with consumers craving the treasure hunt. Off 5th is being readied to enter Canada, but the timing is yet to be revealed.

Baker also discussed the importance of clarifying the pricing at Off 5th. “Before we acquired Saks, we did a great deal of surveys and studies. We determined that customers were very confused with the pricing. The signage and tags were so confusing that at the checkout, they were “pleasantly surprised” that the prices were lower than expected. “But that’s a bad thing,” Baker added. “You want consumers to know the value when [the merchandise] is on the racks.”

The research also indicated that customers were cross-shopping Off 5th with TJ Maxx and Nordstrom Rack. “They were shopping more at those places than Saks Off 5th,” Baker acknowledged. That led to a decision to bring in some “aspirational but slightly more moderate brands than what is traditionally found at Saks Off 5th,” such as Steve Madden and Sam Edelman, Baker said. “We moved in Lord & Taylor residual product and found the Saks Off 5th customer loved it.”

A decision on whether Saks opens a second Manhattan store will be made soon. Talks are ongoing with Brookfield Place on Vesey Street in lower Manhattan. Baker declined to comment on the talks. He would also like to open an Off 5th unit downtown.

Regarding the paring process occurring at Saks, Baker explained: “We are taking the open-to-buy from the least productive, bottom 20 percent [of the brand matrix] and moving that open-to-buy out to the most productive. Brands and designer labels that fall into the least productive 20 percent will either be shrunk or exited.” Among the strong-performing brands that will see greater open-to-buy are Chanel, Louis Vuitton, Céline and Dior, Baker noted.

For the first quarter, the company reported net earnings of 176 million Canadian dollars, or $161 million, for the first quarter, compared with a loss of 22 million Canadian dollars, or $20 million, in the year-ago period.

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Normalized earnings before interest, taxes, depreciation and amortization came to 97 million Canadian dollars, or $89 million (5.2 percent of sales), compared with 29 million Canadian dollars, or $27 million (3.3 percent of sales), a year ago. The EBITA margin rate currently runs around 7 percent. Normalized earnings take into account one-time occurrences such as the gain on the sale of the Hudson’s Bay flagship on Queen Street in Toronto, severances and some accounting changes. HBC continues to integrate operations and personnel.

With the business reporting a decent first quarter and liking many of the trends it’s seeing, “we affirmed guidance” of low to midsingle digit comparable-store sales, total sales of $7.8 billion to $8.1 billion, capital investments of $380 million to $420 million, and earnings before interest, taxes, depreciation and amortization, EBITDA, of $580 million to $620 million for the year. “We feel cautiously optimistic about the balance of the year,” Baker told WWD.

He also said all of HBC’s operating divisions — the department store group, Saks Fifth Avenue, outlets and digital — all comped positive during the first quarter, which ended May 3.

Comparable sales rose 2.8 percent to 1.86 billion Canadian dollars, or $1.7 billion, versus 884 million Canadian dollars, or $810 million, a year ago. Sales and earnings gains reflect the inclusion of Saks Fifth Avenue and Saks Off 5th, which were purchased in November by HBC for $2.9 billion.

In a conference call, Baker said the company had a “positive start to fiscal 2014,” with same-store sales at the department store group up 2.5 percent. Strength was seen at the Hudson’s Bay chain, which was partially offset by weakness at Lord & Taylor. Baker characterized L&T’s performance as consistent with its peer group.

Saks’ same-store sales were up 2.6 percent, while Off 5th was ahead 15.1 percent. “We continue to modify Off 5th to deliver true fashion and real value,” Baker said.

Regarding meeting the $10 billion and double-digit EBITDA goals, Baker spelled out the key initiatives: driving digital sales across the divisions; growing Off 5th; driving growth at the top doors of Saks, L&T and Hudson’s Bay; driving synergies and efficiencies, and bringing Saks Fifth Avenue to Canada. Two Saks Fifth Avenue units will open in spring 2015 in greater Toronto.

Saks has new management, including Marigay McKee, president, who was hired in the fall. “There are lots of opportunities at the core Saks business,” Baker said. “We think they are executing in a very strong way. We are working on capital expenditures and plans.…We can see a very strong, positive trend in luxury items. The more unique, the more expensive the product, the greater the demand. That bodes well for Saks.”

In Canada, “Hudson’s Bay continues to take market share and continues to be the dynamic coast-to-coast national retailer,” Baker said. “Flagships where we spent considerable capital — Queen Street, Vancouver, Yorkdale, Sherway — are showing above-plan growth. We are very optimistic and feel good about the capital spend at those stores.”

With Off 5th, “We remain extremely excited about the opportunities to open new stores, grow it online and to increase our comps in existing boxes.”

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