TORONTO & NEW YORK & COLOGNE, Germany--(BUSINESS WIRE)--Hudson's Bay Company (TSX: HBC) today announced its first quarter financial results for the 13 week period ended April 30, 2016. Unless otherwise indicated, all amounts are expressed in Canadian dollars. Certain metrics, including those expressed on an adjusted, normalized, comparable and/or constant currency basis, are non-IFRS financial measures (for more information please refer to the “Supplemental Information” section of this press release and the reconciliation tables further below).
“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 and Gilt acquisitions and experienced continued strength at our Canadian operations.” stated Richard Baker, HBC’s Governor and Executive Chairman. “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, 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 for the Company.”
Jerry Storch, HBC’s Chief Executive Officer, added “In the face of a challenging retail environment we continue to execute our strategy and are excited about growth prospects for our businesses. Our newly opened Saks stores in Canada are off to an impressive start, while our overall results at Saks were impacted by the current pressures in luxury retail. The integration of HBC Europe and Gilt are proceeding well and we are highly focused on continuing to leverage our scale to reduce expenses and increase efficiencies. Given the seasonal nature of our business, with sales and earnings weighted toward the second half of the year, the flat net rent expenses associated with our Joint Ventures have a more significant impact on the early part of the year. As we look toward the rest of the fiscal year, we expect that our ongoing efforts to become more efficient, in conjunction with our all-channel strategy of combining exciting retail destinations with a best in class e-commerce platform, will drive both sales and earnings growth."
Value Creating Initiatives
HBC continues its relentless focus on improving efficiencies, reducing expenses and optimizing its real estate portfolio:
North American realignment
In the third quarter of Fiscal 2015, HBC announced an initiative to reduce SG&A expenses by $75 million through its North American operations realignment. The Company currently expects to meet or exceed its target of $75 million in annualized savings, and realized approximately $28 million in savings during the first quarter of Fiscal 2016. One time charges of approximately $6 million were incurred during the quarter as a result of this initiative.
Voluntary restructuring program and back office efficiency initiatives
In addition to the above, the Company recently began a voluntary restructuring program in the merchandising department of its European operations to ensure the most efficient processes are in place to support the growth of HBC Europe. In North America, HBC has also outsourced IT systems maintenance positions. The Company expects to record total charges of approximately $21 million related to these two initiatives, of which $12 million was recorded in the first quarter of Fiscal 2016. Annualized savings as a result of these initiatives are expected to be approximately $16 million, which is in addition to the $75 million in annualized savings related to the North American operations realignment initiative. The Company is currently evaluating other cost savings opportunities as it continues its focus on profitable growth.
Distribution center automation
The Company has made significant progress on the implementation of best in class robotic technology in its Scarborough, Ontario distribution center. The technology is expected to reduce the fulfillment costs of online orders significantly while also improving the speed at which these orders are processed. In addition, the Company announced a new state-of-the-art, all-channel fulfillment distribution center in Pottsville, Pennsylvania. This distribution center is expected to open during the second quarter of Fiscal 2016, eventually utilizing the same highly innovative robotic technology.
Real estate assets
The Company continues to demonstrate the value of its real estate portfolio. Subsequent to the end of the first quarter, HBC entered into an agreement to modify its leasehold interests in the Saks Fifth Avenue stores at Short Hills Mall in New Jersey and in Honolulu, Hawaii in exchange for total proceeds of $99 million(1). The Company expects to receive these proceeds during the third quarter of Fiscal 2016.
(1) Assumes a USD:CAD exchange rate of 1.30
First Quarter Summary
All comparative figures below are for the 13-week period ended April 30, 2016 compared to the 13-week period ended May 2, 2015. DSG refers, collectively, to the Lord & Taylor, Hudson’s Bay and Home Outfitters banners. HBC Europe refers, collectively, to GALERIA Kaufhof, Galeria INNO and Sportarena. HBC Off Price refers, collectively, to the Saks Fifth Avenue OFF 5TH (“OFF 5TH”), Find @ Lord & Taylor and Gilt banners.
Consolidated retail sales were $3,303 million, an increase of 59.4% from the prior year, primarily as a result of the addition of HBC Europe and Gilt as well as an increase in comparable sales of 4.4%. On a constant currency basis, comparable sales grew 2.3% at DSG and 0.7% at HBC Europe, offset by declines of 4.1% at HBC Off Price and 5.7% at Saks Fifth Avenue, resulting in a total comparable sales decline of 1.0%. Total digital sales increased by 86.2% from the prior year, with comparable digital sales increasing by 7.4% on a constant currency basis.
During the quarter, HBC completed the implementation of its revised pricing strategy at OFF 5TH. This focus on offering great value on an everyday basis resulted in a substantial reduction in overall promotional activity, and drove the majority of the decline in HBC Off Price's comparable sales results. As a result of this revised pricing strategy, realized gross margins at OFF 5TH were significantly higher compared to the prior year, leading, as planned, to an overall improvement in profitability at OFF 5TH.
For HBC overall, gross profit rate as a percentage of consolidated retail sales was 41.9%, an increase of 70 basis points from the prior year. This increase was primarily related to the addition of HBC Europe, which operates at relatively higher gross margin and SG&A rates as well as increased margin at OFF 5TH.
SG&A expenses were $1,395 million compared to $780 million in the prior year, primarily as a result of the addition of HBC Europe. Normalized SG&A expenses were $1,300 million or 39.4% of consolidated retail sales, compared to 36.2% in the prior year. This rate increase was primarily driven by additional net rent expense incurred in connection with the Joint Ventures and the addition of HBC Europe. GALERIA Kaufhof and Galeria INNO operate with a significantly higher SG&A rate, which is offset by higher realized gross margins.
Adjusted EBITDAR was $251 million, an increase of 44.1% compared to $174 million in the prior year, primarily as a result of the addition of HBC Europe.
Following the creation of the Joint Ventures, management believes that Adjusted EBITDAR best reflects the performance of the retail business. This metric provides the most consistent view of the Company’s retail performance, as it is not impacted by, among other things, HBC’s ownership levels of the Joint Ventures and the resulting impact on net rents. In the first quarter, which is typically the Company's slowest quarter of the year, the Joint Ventures had a $61 million impact on Adjusted EBITDA, and a similarly large impact on Normalized Net Income. These Joint Venture expenses are essentially flat over the course of the year, while the retail business is seasonal, with sales and earnings weighted towards the second half of the fiscal year. While management believes that Adjusted EBITDA is less useful when evaluating the performance of the retail business, the Company will continue to disclose Adjusted EBITDA.
Finance costs were $45 million compared to $47 million in the prior year. Cash interest costs were $49 million, a $12 million increase over the prior year. The majority of this increase is related to timing of the monthly interest payments associated with the Company's mortgage on its Saks Fifth Avenue flagship property in Manhattan. A total of four monthly interest payments were made during the current quarter, compared to three in the prior year.
Net loss was $97 million compared to $49 million in the prior year. Normalized Net Loss was $91 million compared to $28 million in the prior year, primarily as a result of the creation of the Joint Ventures and the additional net rents associated with these entities, which are spread evenly over the course of the year. Normalized items include, among other things, the net-of-tax gain recognized on the sale of a portion of the Company’s equity in HBS Global Properties of $28 million in the first quarter.
Inventory
Inventory at the end of the first quarter increased by $981 million compared to the prior year. The addition of HBC Europe and foreign exchange rate fluctuations accounted for the majority of the increase. The remainder was driven by a marginal increase in comparable store inventory and additional inventory related to new store openings.
Store Network
During the first quarter, the Company opened its first Saks Fifth Avenue stores in Canada. The first store opened at the Toronto Eaton Centre on February 18, 2016, followed by the second store at the Sherway Gardens Mall in Etobicoke, Ontario, on February 25, 2016.
The Company also opened its first four OFF 5TH stores in Canada, located 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.
In addition the Company opened eight OFF 5TH stores in the U.S., which are located in Tucson, Arizona; Atlanta, Georgia; Chicago, Illinois; Farmington Hills, Michigan; Minneapolis, Minnesota; Shrewsbury, New Jersey; New York, New York and Austin, Texas. The Company closed two OFF 5TH stores in Tucson, Arizona and Pearl, Mississippi, two Home Outfitters stores in Pickering, Ontario and Vaughan, Ontario and one GALERIA Kaufhof store in Heilbronn, Germany.
About Hudson’s Bay Company
Hudson’s Bay Company is one of the fastest-growing department store retailers in the world, based on its successful formula of driving the performance of high quality stores and their all-channel offerings, unlocking the value of real estate holdings and growing through acquisitions. Founded in 1670, HBC is the oldest company in North America. HBC’s portfolio today includes ten banners, in formats ranging from luxury to better department stores to off price fashion shopping destinations, with more than 460 stores and 66,000 employees around the world.
In North America, HBC’s leading banners include Hudson’s Bay, Lord & Taylor, Saks Fifth Avenue, Gilt, and OFF 5TH, along with Find @ Lord & Taylor and Home Outfitters. In Europe, its banners include GALERIA Kaufhof, the largest department store group in Germany, Belgium’s only department store group Galeria INNO, as well as Sportarena.
HBC has significant investments in real estate joint ventures. It has partnered with Simon Property Group Inc. in the HBS Global Properties Joint Venture, which owns properties in the United States and Germany. In Canada, it has partnered with RioCan Real Estate Investment Trust in the RioCan-HBC Joint Venture.
