Hudson’s Bay loss widens as operating profit rises
Hudson’s Bay Co. posted a net loss of $142 million in the second quarter amid increased costs from its real estate joint ventures.
The Toronto owner of Hudson’s Bay and luxury chain Saks Fifth Avenue has grown dramatically in the last year, acquiring German department store chain Galeria Kaufhof, online retailer Gilt and forming joint ventures with RioCan Real Estate Investment Trust and Simon Property Group in order to tie the company’s retail businesses to top-tier real estate investments.
Last year, HBC governor and real estate investor Richard Baker engineered a partnership with Toronto-based RioCan REIT and Simon Property Group to form joint venture deals worth $4.2 billion.
In purchasing Kaufhof, HBC bought its 135 retail locations from Metro AG for $3.36 billion and simultaneously sold 40 pieces of Kaufhof’s real estate holdings to the Simon group for $3.3 billion.
HBC’s net loss in the period ended July 30, which amounted to a loss of 78 cents per share, compared with net earnings of $59 million (a profit of 28 cents per share) in the same period of 2015, which included a pre-tax gain of $133 million related to the creation of the joint ventures.
The normalized net loss in the quarter was $122 million, compared with a loss of $61 million in the same period of 2015.
“We don’t have the benefit from the pre-tax gain last year on the sale of the properties into the joint ventures,” Hudson’s Bay chief executive Jerry Storch said.
“Secondly, the rents from the joint venture are flat throughout the year no matter how big the quarter is, even though the most profitable quarters are the third and fourth quarters.
“So earlier in the year, the expenses are higher relative to the income and later in the year the income is much higher relative to the rent.”
Storch was more keen to focus on the company’s operating profit.
Adjusted earnings before interest, taxes, depreciation and amortization climbed 60 per cent to $81 million, compared with $52 million a year ago.
Operating profit excluding rent grew to $263 million, up 113.8 per cent from last year’s $123 million, thanks to HBC’s European operations.
“None of our competitors” grew by those measures in the most recent quarter, a challenging period for U.S. retailers, Storch said.
“They all declined by 15 to 20 per cent. We are the only retailer in our class who grew (operating earnings) in the quarter.”
Last month, veteran U.S. department store retailer Macy’s Inc. announced it would close 100 of its stores, about 15 per cent of its network, after its sixth straight quarterly decline in sales.
Consolidated retail sales in the second quarter at HBC rose 60 per cent to $3.25 billion from $2.04 billion a year ago, largely due to the additional revenue from Kaufhof and Gilt.com.
Comparable sales, an important measure that strips out year-overyear square footage changes, rose 1.9 per cent but fell by 1.3 per cent on a constant currency basis.
That played out in its stores as a 1.1 per cent gain at its department stores, offset by a 0.9 per cent decline at HBC Europe and a sharp 11.4 per cent decline at its normally robust off-price business unit, which includes Saks off Fifth and Gilt.
Storch said the comparable decline was due to a very high comparable gain in the same period a year ago.
Management also implemented a less promotional pricing structure at Saks Off Fifth and an improved return policy at Gilt, and both measures improved the businesses’ profitability and gross margin rate.