The Hudson’s Bay Co., after months of streamlining, real estate deals and debt reduction, is “a much stronger and more capable company than a year ago,” says its chief executive officer Helena Foulkes.
“Financial discipline is not a one-year event. It takes time, but the really good thing is that we have been taking costs out, taking inventory down and also making strategic investments for growth,” Foulkes told WWD during an interview Wednesday after the company reported its fourth-quarter and year-end results.
According to Foulkes, despite some slippage in sales and profitability, HBC is now a company with a better foundation, balance sheet and opportunities for growth in certain divisions.
For the quarter ended Feb. 2, HBC had a net loss from continuing operations of 226 million Canadian dollars, or $170 million, compared to net earnings of 180 million Canadian dollars, or $135 million, in the same quarter a year ago.
All subsequent figures are in Canadian dollars.
On adjusted EBITDA basis, the company had $187 million in earnings versus $216 million in earnings in the year-ago period.
HBC cited a $194 million restructuring charge, which unfavorably impacted contributions from the company’s European retail joint venture, and lower income tax benefits after a favorable $181 million impact in the fourth quarter of 2017 as a result of U.S. tax reform.
Fourth-quarter revenue was $2.9 billion, a decrease of $167 million from just over $3 billion in the same quarter a year ago. In 2017, the company’s results included a 53rd week, which generated $120 million of revenue. Excluding the extra week, fourth-quarter revenue declined $47 million or 1.6 percent in 2018.
Operating cash flow increased 63 percent from the prior year to $460 million in the fourth quarter. That strong performance, primarily due to improved working capital, propelled the company’s return to positive operating cash flow of $57 million in 2018.
Saks Fifth Avenue was the highlight of the season, reporting that fourth-quarter comparable sales grew 3.9 percent, marking the seventh consecutive quarter of comparable sales growth despite being hampered by construction on the main floor during the holiday season at the New York flagship. Foulkes said Saks is benefiting from a stronger focus on luxury and from its personal shopping service, the Fifth Avenue Club.
The department store group, which includes Hudson’s Bay, Lord & Taylor and Home Outfitters, saw a comparable sales decline of 5.2 percent.
Saks Off 5th was also down, reporting a comparable sales decline of 2.1 percent, though Foulkes noted that the rate of decline at the off-price chain continues to moderate, in part due to a substantial year-over-year increase in digital sales.
The ceo said the biggest opportunities for growth are at Saks Fifth Avenue, Hudson’s Bay and digital operations.
Overall, “I am very optimistic based on the progress we have made and I want you to know we have more work to be done,” Foulkes told WWD. “A lot of work involves fixing the fundamentals and reducing complexities. It’s everything from giving our merchant teams better planning tools — how we allocate inventory with e-comm versus stores — and our overall digital strategy to how we work together to make it simpler for our teams in the stores to serve customers and getting a lot of the unnecessary work out of the stores so we can focus on the customers.” Foulkes also said she’s getting the business unit teams to be [more] empowered,” and less dictated centrally.
It’s a cultural change that Foulkes, who joined HBC as ceo in February 2018, has aggressively brought to the business.
It’s also case of being bigger isn’t necessarily better.
In the past year, HBC sold off a 50.01 percent stake in its European retail operations and a portion of its real estate in Germany to Signa Group for $634 million; closed and sold the Lord & Taylor flagship to WeWork for $1.1 billion, and sold off Gilt Group to Rue La La. HBC also closed the Saks Fifth Avenue store in Brookfield Place in lower Manhattan; determined that up to 20 Saks Off 5th will be shuttered, and is in the process of closing the Home Outfitters 37-unit chain in Canada.
“We made substantial progress this year on a number of crucial fronts,” said Richard Baker, HBC’s governor and executive chairman, during a conference call. “We sharpened our financial discipline, returned to positive operating cash flow from continuing operations, streamlined our operation, and built a strong management team. Since joining us a year ago, Helena and her leadership team have taken quick action to build a better business. Since we spoke last, the company closed several key real estate transactions. Through those deals, our balance sheet is much stronger. The foundation combined with our focus and financial discipline allows us to better capitalize our unique flagship real estate.”
“Asked how 2019 might be different from 2018, Foulkes replied, “It is more of the same at some level. I don’t think we are done. We are aggressively after even more opportunities, taking costs out, simplifications, focusing on customers.…Everything still remains on the table.”
“But I feel especially happy that the leadership team and associates are really embracing what we are doing. There’s a different level of confidence and focus.”
Asked if additional real estate deals were imminent, Foulkes replied: “I don’t have any in particular we are working on.”
HBC still has much debt — over $3 billion — and needs to turn around Saks Off 5th and Lord & Taylor. Hudson’s Bay department stores need merchandise corrections after overloading on lower priced goods last year to lure former Sears Canada shoppers.
Saks Fifth Avenue, despite the massive renovation work at the Manhattan flagship, had a standout performance last year that surpassed results at competitors. Business at Saks stores around the country, especially those in Boston, Miami and Beverly Hills, offset the impact of the Fifth Avenue renovations.
While the Saks flagship’s main floor for luxury leather goods and the second floor for beauty have been completed, renovations continue on the women’s shoe floor on eight and on the lower level where The Vault for fine jewelry is being created. Both areas are seen opening sometime in the back half of this year.
Foulkes said the new main and beauty floors are “doing really well — right on plan. Traffic is up significantly.” She added that the luxury handbags are doing “phenomenally.”
She also said progress is being made on the underperforming Saks Off 5th division. “We have been lowering the rate of decline. In 2019, we will return to positive comps.” The division, she explained, has been moving “from a department store mindset to a true off-price mindset,” whereby the team has been buying product more for weekly deliveries, rather than taking a full-season approach.
At the Hudson’s Bay division in Canada, last fall Wayne Drummond was appointed chief merchant. He has his work cut out for him, impacting the fall buy. “He and the team have really been focused on editing the buy,” Foulkes said. “There were way too many sku’s. It was hard to feel a point of view. He is going back to a more balanced, ‘good, better, best’ strategy.”
HBC’s debt totaled $3.07 billion at the end of the fourth quarter, but the company noted that subsequent to the quarter’s end, it eliminated the $510 million Lord & Taylor mortgage, and reduced its borrowings under its asset-based revolving facility by $252 million with proceeds from the Lord & Taylor flagship sale.
For the year, there was a net loss of $631 million from continuing operations, versus a loss of $139 million in 2017. On an adjusted EBITDA basis, the company had a net of $338 million versus $261 million the year before.
Total sales slipped to $9.38 billion in 2018 from $9.49 billion in 2017.