HBC takes hit on weakness in its U.S., European units

Nearly doubles its Q3 losses, sales slide 4.2%

TORONTO • Hudson’s Bay Co. chief executive Richard Baker believes the department store retailer will see an upside from the demise of Sears Canada, but the apparent health of HBC’s operations in Canada might be moot given the malaise and underperformance of its business divisions in the U.S. and Europe.

The country’s oldest retailer disappointed investors by nearly doubling its thirdquarter losses on Wednesday while overall sales at the owner of Saks, Lord & Taylor and Kaufhof in Germany slid 4.2 per cent.

It comes amid a year of sales losses and department store closings in the U.S. and big-picture fears that traditional mall-based department store retailers are losing appeal to customers who increasingly buy merchandise online.

HBC tied the quarterly weakness to lower customer traffic across its banners and an increased number of sales promotions. It also admitted that laying off 2,000 employees in June led to operational problems, particularly in its digital business, which it has been trying to grow.

Chief financial officer Ed Record said HBC will reduce its overall inventory levels in order to cut back on its promotional activity and will also reallocate resources to improve its online capabilities.

But investors appear to be losing faith: shares slid 13 per cent in afternoon trading, and are down about 22 per cent this year.

“What (HBC) describes as ‘operational challenges’ would suggest that the ‘detail’ in their retail needs refocusing,” said Jim Danahy, CEO of Toronto-based retail advisory firm Customer Lab.

“Basics such as inventory and staff management — those are the things that determine retail success or failure. And personnel reductions are not generally aligned with store operational improvements.” That is the constant and challenging balancing act in the era of bricks-and-mortar retailers competing with Amazon, he said.

While HBC took pains to note that its Hudson’s Bay stores in Canada performed well, “they are struggling with the other areas of the business,” said Danahy, adding HBC needs to “figure out” if it can compete in Europe and in the U.S. where even top players such have Nordstrom are struggling.

HBC declared a net loss 0.2 per cent at Saks Fifth Avenue and were positive for the 29th-consecutive quarter at Hudson’s Bay in Canada, though the company did not break out the Canadian retailer’s performance.

“When Sears goes out of business in Canada, I think our opportunity for driving volume through our stores, especially in the smallest markets, improves,” Baker told analysts.

But comparable sales in HBC’s “department store group,” segment, which includes 89 Hudson’s Bay stores in Canada, 50 Lord & Taylor stores in the U.S. and European business or going private. Key executives exited the business. Don Watros, president of HBC’s international business, left in September after 11 years with the company and CEO Jerry Storch left abruptly in October after close to three years at the helm, reportedly because he and Baker did not see eye-to-eye on HBC’s retail strategies.

The conflict with Litt, who had launched an appeal with the Ontario Securities Commission seeking to overturn a $632-million sale of eightyear mandatory convertible preferred shares to Rhône Capital LLC, was seemingly resolved last week. HBC and Litt agreed that any security issue from HBC would give rights to shareholders with the same one-year price protection that Rhône Capital received in its deal, which closed Wednesday.

The deal itself, a joint venture between WeWork Property Advisors and Rhône, transforms floors of HBC department stores in New York, Toronto, Vancouver and Germany into WeWork’s shared office workspaces for entrepreneurs, freelancers and small businesses. While viewed as a smart investment to slash debt and increase productivity in its square footage, it hasn’t assuaged the market’s broader fears about the future of department stores.

“HBC is trying to play catch-up because they were not that swift about getting online,” says Ed Strapegiel, a Toronto-based retail consultant.

“It is a huge investment to do it right, and they are now way behind Amazon and Walmart and they have this issue with inventory. Every once in a while you’ll see a huge, blow-out sale. I just don’t see that they have really gotten their act together yet.”

Retail analysts also questioned whether selling Lord & Taylor’s merchandise online at Walmart.com, a move announced in November, will help or hurt the flagging veteran department store.

Baker said Wednesday that management doesn’t believe the deal will harm Lord & Taylor, which has the bulk of its stores in the U.S northeast.

“We are living in a world now where all types of different products are available to customers in all types of different places and in different ways,” he told analysts. “So this is our way of reaching a much larger customer (base) with our Lord & Taylor brand.”