After a string of joint ventures, store closings and sell-offs, Hudson’s Bay Co. executives say they’re now doubling down on improving their North American retail businesses.
Results from the second quarter show Saks Off 5th and Lord & Taylor still drag down the corporation while Saks Fifth Avenue continues on a roll and Hudson’s Bay’s performance is somewhere in the middle.
On Wednesday, HBC reported it widened its net loss to 147 million Canadian dollars, or U.S. $172.2 million, in the second quarter compared with a loss of 100 million Canadian dollars, or $115.8 million, a year ago.
But the increase in the loss was primarily driven by foreign exchange rates related to joint ventures and a decrease in income tax benefits, and the operations did better. Earnings before interest, taxes, depreciation and appreciation rose to $33 million, up significantly from $3 million in the prior year largely due to gross margin improvement and better full-price selling at Saks Fifth Avenue, which has “enhanced fashion, increased customer engagement, and greater integration of its online and in-store channels,” officials said. Q2 marked Saks’ fifth consecutive quarter of growth.
The margin improvement excited investors. HBC’s stock was up about 5.5 percent at midday.
There’s a beehive of activity at the Saks Fifth Avenue flagship in Manhattan where the main floor is largely closed down for renovations as part of the multiyear overhaul of the site. Business has been impacted but officials said it’s better than anticipated. The main floor and a new escalator linking to the recently reopened beauty floor on two is expected to be ready next year. Also soon to open, a L’ Avenue restaurant and the Vault for fine jewelry on the lower level.
In Canadian dollars, HBC’s total sales decreased 2 percent to $2.2 billion, while total comparable sales declined 0.4 percent.
By division, Saks Fifth Avenue posted a 6.7 percent comparable-sales gain. However, comparable sales at Hudson’s Bay, Lord & Taylor and Home Outfitters combined declined 3.8 percent, and those at Saks Off 5th fell 7.6 percent.
HBC is saddled with more than Canadian $4 billion in debt, but on Tuesday, the company announced a “strategic partnership” in Germany with the Signa Group to merge HBC’s Galeria Kaufhof stores with those of Signa’s Karstadt. The deal will reduce debt and free up management from what’s been a challenging overseas retail business. The partnership also involves sharing the German real estate while combining Germany’s two department store chains, leading to synergies, cost savings, better merchandising and possibly store closings. HBC is also soon to close on a deal to sell the Lord & Taylor flagship in Manhattan to WeWork, which will also help cut the debt.
“I am so excited. I’ve been spending a lot of time in Europe focused on what to do with that business,” HBC’s chief executive officer Helena Foulkes told WWD. “It’s a great deal for shareholders, but now I can focus on running the North American business, getting into the stores, hearing what customers and associates have to say. I’ve been doing much more of that lately. I see so much opportunity.”
Foulkes said she felt “really good” about what happened during the second quarter. “Saks had an amazing quarter. I am proud of the team. They’re taking advantage of the market and focused on results.”
Regarding Saks Off 5th, Foulkes said that Gilt, which was sold off last June, “really distracted the team.” But now there’s new leadership at the offprice division, which is looking at “the fundamentals” such as having the right merchandise, pricing and promotion schemes.
At Hudson’s Bay in Canada, the Web site is being replatformed. While Hudson’s Bay’s stores look good, HBC hasn’t invested enough on technology.
At Lord & Taylor, which is closing 10 stores and its Fifth Avenue flagship, “there is certainly a chance to rethink that business,” said the ceo. Aside from downsizing the square footage, HBC is looking at new formats for L&T. “Digital plays a real role. Lord & Taylor is more profitable this year than last year despite the sales decline.” Foulkes said it’s too soon to discuss performance by the Lord & Taylor store on walmart.com. “Essentially, we haven’t started to market that business,” she said.
“We are beginning to see improvement in the North American businesses,” Foulkes said during a conference call Wednesday with retail analysts. She cited significant EBITDA improvement driven by higher gross margins and progress reducing inventory. “There’s Increased accountability across our banners,” Foulkes added.
“Earnings at Lord & Taylor and Saks Off 5th have stabilized. But we need improvement on the topline,” she said. “Saks Off 5th and Lord & Taylor are clearly turnaround stories. They will take some time.”
On the other hand, “We are clearly very excited about the performance of Saks Fifth Avenue and feel good about Hudson’s Bay,” Foulkes said.
It’s possible HBC pulls the trigger on additional sell-offs or joint ventures. Talks with the Neiman Marcus Group have long been on and off, and no deal is currently in the works, though it’s possible down the road.
“I continue to say that everything is on the table as we continue to focus on driving shareholder value,” Foulkes said.