The Hudson’s Bay Co., currently underperforming at several of its divisions, sees better days ahead principally through digital initiatives, cost-cutting, new business partnerships, European expansion and monetizing real estate assets.
“While Saks Fifth Avenue and Hudson’s Bay are performing well, our overall third-quarter results did not meet our expectations,” Richard Baker, HBC’s governor, executive chairman and interim chief executive officer, acknowledged Wednesday, after the company reported a net loss of Canadian $243 million compared to $125 million in the prior year.
HBC blamed the higher net loss on lower gross margin dollars combined with higher finance costs, higher depreciation and amortization expenses and a lower income tax benefit. In addition, third-quarter retail sales decreased 4.2 percent to $3.2 billion; comparable sales on a constant currency basis declined by 3.2 percent, and digital sales increased by only 2.1 percent, where many retailers have been seeing double-digit growth in digital.
“We are making the necessary changes in our retail operations to drive performance across our banners,” Baker said. “Building on our track record of success at Hudson’s Bay, we expect to benefit from the closing of Sears Canada.”
While business at Saks and Hudson’s Bay is OK, there’s softness at Lord & Taylor, Saks Off 5th, Gilt and Galeria Kaufhof.
“At Lord & Taylor, we are cleaning up our marketing and promotional cadence in an effort to improve sales and margin,” Baker said during a conference call. “Saks Off 5th merchandise is now available on gilt.com, and we believe sales and margin will improve at both Gilt and Saks Off 5th as we work toward a fully shared common pool of inventory for our off-price businesses.”
Baker added that in Europe, “We are committed to achieving the full potential of our businesses in Germany and the Netherlands and are introducing new concepts to drive innovation that resonates with those consumers.” Among them, bringing Sephora into Kaufhof stores.
On another positive note, HBC officials cited a good start to the holiday season, as have several other retailers since Black Friday weekend.
Earlier this year, the $10 billion HBC eliminated more than 2,000 jobs, mostly from its headquarters staff, leading to major savings. The sweeping “transformation” plan also involved decentralizing senior management and setting new leadership at the department store divisions, putting Liz Rodbell, formerly president of the Hudson’s Bay department store division in Canada and the Lord & Taylor chain in the U.S., solely in charge of L&T, and naming Alison Coville president of Hudson’s Bay and Home Outfitters in Canada.
Baker said Wednesday that the transformation plan “remains on track to generate annual savings of Canadian $350 million. We expect these initiatives to have a positive impact on our overall results in 2018 as we focus on improving our cash flow,” Baker said.
Among the partnerships that could help lift the company, a Lord & Taylor “flagship” will be created on walmart.com, and WeWork will establish a New York headquarters inside the Lord & Taylor flagship building on Fifth Avenue, which will be downsized dramatically to make room for WeWork.
“Where possible, we will actively reposition the existing floor space for use by partners such as WeWork, Topshop, Sephora and food halls to maximize productivity and drive additional traffic in key customer segments to HBC stores,” Baker said.
“Similarly, we will exit space when it is prudent to do so. In addition to the lease of the Lord & Taylor building, we recently sold two Lord & Taylor leases back to their landlords, generating proceeds of $23 million. These activities are an integral aspect of our long-term strategy to highlight and realize the value of our assets.” The investment by Rhône Capital for a minority stake in HBC and the sale of the Lord & Taylor Fifth Avenue building to WeWork will generate total proceeds of $1.6 billion and “substantially strengthen” the balance sheet.
Baker listed HBC’s “high priorities” as cost reductions, increasing comparable sales, improving margins, prioritizing capital investments and further developing the digital business.
Ed Record, HBC’s chief financial officer, added, “While Saks Fifth Avenue and Hudson’s Bay are performing well, our overall third-quarter results did not meet our expectations. The workforce reductions made as part of our Transformation Plan caused some operational challenges, particularly in our digital business, which we are working to address. We know we can do better, and our highest priorities include increasing comparable sales, improving margins and prioritizing our capital investments as we focus on further developing our digital business. Our emphasis on digital continues to grow, and we are reallocating resources to improve HBC’s digital platforms and online capabilities. We also plan on reducing total inventory as part of an effort to moderate promotional activity and increase full-price selling.
During the third quarter, Saks’ comparable sales increased by 0.2 percent, but comparable sales declined by 3 percent at HBC Europe, 3.7 percent at the department store group which includes Lord & Taylor and Hudson’s Bay, and 7.6 percent at HBC Off Price, which includes Saks Off 5th and Gilt. Comparable sales during the quarter were impacted by lower traffic across HBC’s banners, higher promotional activity, operational challenges related to streamlinings and the effects of the hurricanes in Texas, Florida and Puerto Rico.
Adjusted earnings before interest, taxes, depreciation and amortization was $34 million, a decrease of $55 million compared to the prior year. The decline was largely attributed to a decline in gross profit dollars partially offset by decrease in various expenses.
During the third quarter, HBC opened two Saks Off 5th stores in Canada, in Vancouver, British Columbia and Montreal, Quebec. In the U.S., three Saks Off 5th units in New York, Seattle, and East Hanover, N.J.
The Company also opened 10 Hudson’s Bay stores in the Netherlands, in Amsterdam, Rotterdam, The Hague, Leiden, Breda, Maastricht, Almere, Zwolle, Tilburg and Den Bosch and one Saks Off 5th store in Rotterdam. The company closed one Hudson’s Bay store in Quebec City; one Home Outfitters store in Kitchener, Ontario; a Galeria Kaufhof store in Berlin, and one Sportarena store in Dresden, Germany.