Hudson’s Bay Co. is feeling the costs of transformation.
The retailer, pulled down primarily by rent associated with new real estate joint ventures and restructuring charges, doubled its net loss for the quarter ended April 30 to 97 million Canadian dollars, or $76.3 million, from 49 million Canadian dollars, or $38.5 million, in the year-ago period.
However, the Toronto-based retailer maintained its sales and earnings guidance for the year and said the impact of rents would be less in the second half of the year due to the seasonality of the business. Compared to the first two quarters of the year, the third and fourth quarters generate far greater revenues, which will help offset the rent impact. Several other retailers have adjusted their guidance for the year downward due to the traffic malaise hitting malls and shifting consumer spending patterns.
“This was a transformational period for us as we entered Canada with both Saks Fifth Avenue and Saks Off 5th. Gilt came on board this quarter as well and we are seeing the start of the first year with our new real estate structure, so there’s been a lot of change,” Jerry Storch, HBC’s chief executive officer, told WWD.
HBC now considers adjusted EBITDAR [earnings before interest, taxes, depreciation, amortization and real estate] as the best measure of its operations. On that basis, earnings increased 44.1 percent to 251 million Canadian dollars, or $197.3 million, from 174 million Canadian dollars, or $136.8 million, the year before, mainly as a result of the addition of HBC Europe, which includes Galeria Kaufhof in Germany and Inno in Belgium, purchased last year. In the first quarter, which is typically the company’s slowest quarter of the year, the real estate joint ventures had a 61 million Canadian dollar, or $48 million, impact on adjusted EBITDA and a similarly large impact on normalized net income.
Last year, HBC formed HBS Global Properties, a real estate joint venture with the Simon Property Group, to reduce borrowings. Madison International also has an equity investment in HBS Global Properties.
Last quarter, retail sales increased 59.4 percent to 3.3 billion Canadian dollars, or $2.59 billion, from 2.1 billion Canadian dollars, or $1.65 billion, largely due to the acquisitions of Galeria Kaufhof and Gilt last year. Comparable sales rose 4.4 percent. On a constant currency base, sales dropped 1 percent. Total digital sales increased 86.2 percent, with comparable digital sales up 7.4 percent on a constant currency basis.
Gross profit rate increased 70 basis points to 41.9 percent, driven by the addition of HBC Europe.
HBC is projecting sales for this year to range between 14.9 billion to 15.9 billion Canadian dollars, or $11.71 billion to $12.5 billion. The company is also projecting adjusted EBITDAR between 1.56 billion to 1.71 billion Canadian dollars, or $1.22 billion to $1.34 billion, and adjusted EBITDA of between 800 million to 950 million Canadian dollars, or $629 million to $747 million.
The first Saks Fifth Avenue in Canada opened at the Toronto Eaton Centre on Feb. 18, followed by the second store at the Sherway Gardens Mall in Etobicoke, Ontario, on Feb. 25. Also opened were the first four Saks Off 5th units in Canada, at Vaughan Mills, in Vaughan, Ontario; Toronto Premium Outlets in Halton Hills, Ontario; Outlet Collections at Niagara in Niagara-on-the-Lake, Ontario; and Tanger Outlets in Ottawa, Ontario.
Storch said that the company’s diverse portfolio, in terms of both geography and targeted consumer segments, gives HBC an advantage over other retailers. “We are more diversified than our competitors. There is strength from Canada, strength in Europe. We are getting good profits out of Saks Off 5th, and luxury continues to be a challenge in the U.S.”
Rents will continue to impact HBC’s results, though Storch noted that rents are flat across the year and that the company remains “confident” in its guidance for the year. “We know that our higher rents will have less of an effect for the back half of the year.”
HBC’s profits were also impacted by 12 million Canadian dollars, or $9.43 million, in charges in the quarter from voluntary restructurings at its Germany headquarters in Cologne and outsourcing of IT maintenance in the U.S. HBC has not disclosed how many people will be affected by the restructuring.
In the third quarter of fiscal 2015, HBC unveiled an initiative to reduce SG&A expenses by 75 million Canadian dollars, or $59 million, through its North American operations realignment. The company realized about 28 million Canadian dollars, or $22 million, in savings during the first quarter this year, and one-time charges of about 6 million Canadian dollars, or $4.7 million, were incurred during the quarter as a result of the initiative.
HBC is renegotiating its Saks Fifth Avenue lease in Honolulu. The store there opens in August. HBC is closing the Saks Fifth Avenue store in Short Hills, N.J.
Like other retailers, HBC has been impacted in the U.S., by international tourists spending less at stores due to the strong dollar and the overall softness in the luxury market. With luxury sales, Storch said “if anything, it might be getting a little better” and that retailers can look forward to easier comparisons in the second half. With tourism, Storch said, “I don’t see much change,” though he added that as retailers cycle through a year of depressed tourist spending, “it becomes less and less of an impact.”
While HBC’s U.S. stores, which include Saks Fifth Avenue and Lord & Taylor, are impacted by tourism, HBC’s Hudson’s Bay chain in Canada is benefiting from Canadians spending more domestically than south of the border.
On another positive note, Storch said the company was pleased with results for Saks Off 5th for the quarter. “Sales were negative but the new pricing strategy led to better gross margins and better profitability.” Pricing has become more item-specific rather than running broad sales across entire departments.
He also said the integration of Gilt and the European business is “proceeding well. …We feel very good about our diversification strategy, both in terms of geography and consumer segments.”
“With banners across multiple geographies and consumer segments, we believe HBC’s diversified retail platform positions us well for future sales and earnings growth in all of our businesses. In the first quarter we continued to generate sales growth as a result of the Galeria Kaufhof and Gilt acquisitions and experienced continued strength at our Canadian operations.” Richard Baker, HBC’s governor and executive chairman, said. “Additionally, HBC’s real estate portfolio, which is less impacted by short-term trends in retail, continues to provide the company with opportunities to create value. In preparation for our planned flagship Saks Fifth Avenue store in New Jersey at American Dream [mall], we agreed to modify our Saks Fifth Avenue lease at the Short Hills mall in New Jersey. Additionally, we made modifications to our Saks Fifth Avenue lease in Honolulu, Hawaii. These two lease modifications generated proceeds of $99 million.”
Earlier this year, HBC said up to 17 Hudson’s Bay department stores and three Saks Off 5th outlets will open across the Netherlands over the next two years, beginning in summer 2017. It’s possible more stores will be revealed in the future for the Netherlands. Among the initial stores will be a 170,000-square-foot flagship for Hudson’s Bay in Amsterdam where HBC is combining three buildings to create the new property. HBC also plans to expand to Luxembourg with a Galleria Inno store in 2018.
The Netherlands marks HBC’s second expansion maneuver in Europe. The first involved acquiring the Galeria Kaufhof chain in Germany and its Inno division in Belgium last September, marking the launch of a “global platform,” including expanding Saks Fifth Avenue and Saks Off 5th chains to Europe.
A separate organization is being formed to run Saks Off 5th stores in Europe. Wayne Drummond, formerly senior vice president and general merchandise manager of men’s and ladies’ wear at HBC’s North American department store group, will head up Off 5th in Europe. The Netherlands marks the first time that Hudson’s Bay department stores will be operating overseas, beyond its domestic market of Canada.