HUDSON’S BAY CEO SAYS THERE ARE ‘NO SACRED COWS’ AFTER RETAILER MISSES Q1 EARNINGS.

First quarter earnings miss estimates

TORONTO • As Hudson’s Bay Co.'s new chief executive, Helena Foulkes has the unenviable task of refashioning a retailer being dragged down by its biggest division.

At a dire time for U.S. department stores, the owner of Saks, Hudson’s Bay and Kaufhof in Europe saw its overall retail sales fall in 2017, and missed industry estimates despite posting the first profit in eight quarters.

“We have many opportunities to improve from where we are today,” Foulkes told investors Wednesday on her first analyst call since taking on the top role in February. “We are not happy with how we executed the transformation plan, and we see a real opportunity to turn that around and improve performance.”

In June, HBC laid off 2,000 employees as part of a vast overhaul aimed at saving the retailer $350 million per year by the end of fiscal 2018. It restructured operations in merchandise buying, marketing and IT and integrated digital functions throughout the company.

“The strategy was the right one,” said Foulkes, one that began under the watch of former CEO Jerry Storch, who resigned in November.

“I think that the execution of it was not good. It started with issues of alignment at the top, then essentially poor change management, so we had a lot of moving parts in the second half of last year with a good percentage of our folks in new positions and not enough clarity around their roles.”

Turnover at the top also weighed on the retailer, which has seen five executives including Storch depart in the last year: Don Watros, president of HBC’s international business, CFO Paul Beesley, Brian Pall, president of HBC’s real estate and Jonathan Greller, president of HBC’s off price business.

At the same time, an activist investor has been pressing HBC to monetize more of its real estate. In October, the firm sold its flagship Lord & Taylor building in New York to WeWork Cos. as part of a joint venture that raised $1.6 billion to pay down debt, and will transform floors of key HBC department stores in New York, Toronto, Vancouver and Germany converted into WeWork shared office workspaces.

HBC shares rebounded after falling more than three per cent in early trading Wednesday. The retailer is still looking for a buyer for its HBC store in Vancouver.

“I have been concerned by the level of executive turnover in the company,” said Randy Harris of the apparel market research firm Trendex North America. “I think Canada isn’t their problem. They could be doing acceptably and they will benefit somewhat from the demise of Sears.”

Ed Strapagiel, a Torontobased retail analyst, said retailers who sell off real estate and continue to lease back their stores may benefit in the short term from the cash infusion, but ultimately HBC needs to drive up performance in its core store assets, even as web sales have grown to 17 per cent of overall revenue. “The trouble with the real estate play is that you can only sell that land once,” Strapagiel said. “You need to be a really good store operator, regardless.”

Foulkes, on the job for just six weeks, was not ready to discuss further strategies to boost business.

“It is clear that things do need to change,” she said, adding there would be no “sacred cows” when it comes to assessing the retailer. “Everything is on the table.”

HBC’s retail sales fell to $14.3 billion in 2017 from $14.5 billion, a drop largely attributable to its lagging performance in the U.S., its largest division. Sales at U.S. stores fell to $6.68 billion from $6.9 billion; in Canada, where the retailer operates under its eponymous banner, Home Outfitters, Saks and off-price division Saks Off Fifth, sales rose to $3.35 billion from $3.28 billion.

In the three-month period ended Feb. 3, the retailer saw sales climb 2.1 per cent to $4.7 billion, an increase of $95 million from the prior year.

Net earnings were $84 million, or 39 cents per share, compared with a net loss of $152 million (83 cents) in the prior year. Adjusted income was $20 million, missing analyst expectations of $120.18 million, according to Thomson Reuters I/B/E/S.

Comparable sales at Saks Fifth Avenue grew for the third-consecutive quarter, increasing by 2.1 per cent. But overall comparable sales — a measure that tallies volume at stores open for more than a year — fell 2.6 per cent at the retailer’s department store group, which also includes Lord & Taylor.

Similarly, comparable sales tumbled 3.4 per cent at HBC’s European department stores and sank 7.6 per cent at HBC’s struggling off-price division, which includes Saks Off Fifth and the online retailer Gilt.com. While problems with Gilt were largely responsible for weakness in the off-price category, HBC also cited lower traffic at Lord & Taylor, HBC’s off price stores, and Galeria Kaufhof.