The Hudson Bay Co., impacted by recently formed real estate joint ventures and the tough environment for selling women’s apparel and luxury goods, swung into the red for the quarter ended Oct. 29.
The international retailer based in Toronto and New York reported a net loss of 125 million Canadian dollars, or $94 million, in the third quarter compared to earnings of seven million Canadian dollars, or $5.3 million, in the year-ago period.
HBC executives said adjusted earnings before interest, taxes, depreciation, amortization and rents, or EBITDAR, is a better barometer of the company’s performance. It decreased 1.4 percent to 276 million Canadian dollars, or $208 million, from 280 million Canadian dollars, or $211 million, a year ago.
The swing in the results was substantially due to a big gain on the sale of a portion of the joint ventures a year ago. The current quarter included three million Canadian dollars, or $2.3 million, in net dilution gains related to the joint ventures compared to 91 million Canadian dollars, or $68.6 million, a year ago.
There are also new rents associated with the joint ventures formed with RioCan Real Estate Investment Trust and Simon Property Group. A comparable store sales decline of 4 percent last quarter further affected profitability.
On a constant currency basis, comparable sales decreased 2.4 percent at HBC’s department store group, which includes Hudson’s Bay in Canada and Lord & Taylor in the U.S.; 2.2 percent at HBC Europe, which includes Galeria Kaufhof, Galeria Inno and Sportarena; 8.4 percent at HBC off-price units, and 4.6 percent at Saks Fifth Avenue.
On the positive side, total retail sales rose 28.6 percent to 3.3 billion Canadian dollars, or $2.5 billion, from 2.6 billion Canadian dollars, or $2 billion, a year ago, primarily due to the acquisitions of Galeria Kaufhof in Germany and the Gilt Group. Also, digital sales at legacy HBC operations grew 12.9 percent on a comparable constant currency basis, and inventory levels declined 2 percent on a comp basis.
“We believe our long-term strategy for generating profitable growth is right,” HBC’s chief executive officer Jerry Storch told WWD on Monday. He cited the company’s “disciplined inventory management” in a tough retail environment and said that HBC’s comp sales change was “similar to our peers. Over a two-year period, ours are much better than others.'”
Going forward, HBC shouldn’t show such big swings in profitability. The company noted that commencing in the fourth quarter, its results will be more comparable as it anniversaries increases in joint venture rent expenses associated with contribution of its European properties and sales of part of its equity in the joint ventures to third-party investors. Rent expenses, the company said, are essentially flat during the year while sales and earnings are much larger toward the back of the fiscal year.
“Clearly, there are challenges for women’s apparel, department stores and luxury, but keep in mind, our third quarter started in the beginning of August, which includes much of the summer where there were above average temperatures,” said Richard Baker, HBC’s governor and executive chairman.
“During the third quarter we continued to execute our all channel strategy in the face of a retail environment where there were challenges in the women’s apparel, department store and luxury segments,” he added. “To address this we are continuing to move aggressively, making specific improvements both in our digital and brick-and-mortar operations that will allow us to better serve our customers. During the quarter we finished installing our world-class robotic fulfillment system in Canada and are already leveraging this technology at Hudson’s Bay during the busy holiday season. We are also excited about our progress in Europe. In the Netherlands, we are executing our organic growth strategy, and in November we completed our first major renovation in Germany at our Galeria Kaufhof store in Düsseldorf. During the quarter, we took advantage of a favorable lending environment to reprice our term loan which will reduce our interest costs going forward.”
Baker and Storch disclosed several strategies designed to improve performance. Among them:
• At the Hudson’s Bay and Lord & Taylor divisions, focusing on outperforming categories such as dresses and activewear; home goods at Hudson’s Bay, and mobile selling and products that are “exclusively ours” at both banners.
• Saks Fifth Avenue is intensifying the focus on exclusive and limited distribution products and driving its loyalty program, Saks First.
• Galeria Kaufhof is aggressively renovating stores, introducing brands such as Topshop, and investing in platforms for digital sales, which represent a small portion of overall sales.
• Saks Off 5th is remerchandising its product mix towards a higher concentration of products at the top end of the assortment.
• Gilt is expanding its concierge service for its best customers and strengthening brand partnerships for new and up-and-coming brands and exclusives.