Hudson’s Bay hunkers down
After recording a $152M loss, department store is done ‘waiting for the market to get better’
Hudson’s Bay Company has decided to operate as if the current retail downturn won’t end, in order to improve profitability regardless of what happens in the marketplace, analysts were told Wednesday.
“We’re really done waiting for the market to get better. We’re going to manage this business so that we do well in any kind of market,” said Jerry Storch, chief executive officer, on an earnings call held after the company announced it lost $152 million in the fourth quarter ended Jan. 28.
Company executives pointed to identified cost savings of $75 million annually and a decision to reduce capital expenditures by $150 million as examples of a new mentality, focused on a retail-won’t-recoversoon scenario.
“The market in the U.S. in particular continues to be challenged, so we’re planning as if the environment is not going to improve,” Storch said. “If it does improve, that’s great. But this is why we’re focused so heavily on cost reduction, capital reduction, etc. To make sure that no matter what happens in the future we’re prepared for it.”
Scotiabank retail analyst Patricia Baker called the reduction in capital expenditures a prudent move, a sentiment echoed by analyst Mark Petrie of CIBC World Markets.
“We view this decision positively as we believe the declining top-line environment and current leverage level warrant a greater focus on (capital expenditure) reduction in order to generate free cash flow,” Petrie wrote in a note to investors.
Petrie added that the decision to write down $150 million of goodwill associated with the acquisition of Gilt.com came as a surprise.
The writedown was the result of lower-than-expected sales, but Storch and Richard Baker, governor and executive chairperson, HBC, said the work to add Saks Off 5TH inventory to Gilt.com will finish this year. They said Gilt has a strong mobile game that is a big draw for millennials and is expected to generate long-term profitable growth.
Despite cost savings, the company continues to invest in its digital properties — the recent opening of a Scarborough distribution centre equipped with advanced robotics has made it possible to fulfil online orders 12 times faster than in the past, Baker said.
It will also finish capital expenditure projects and renovations that are currently underway, as well as projects expected to return high value. The chain is preparing to open 10 Hudson’s Bay stores in the Netherlands this year, with a flagship in Amsterdam.
Net capital investments for the year are expected to ring in at between $450 million and $550 million.
Expanding the network in Europe remains a priority and it helps to grow the business away from the overstored U.S. marketplace, Baker said.
Baker said that while competing retailers like Macy’s and J.C. Penney are burdened by hundreds of stores in markets across the U.S., Hudson’s Bay remains focused on the top 100 retail markets in the U.S., putting it in a better position.
“We have very few to no stores that are not profitable . . . we keep our eye on that,” said Baker. “Having high quality bricks-and-mortar buildings is still part of our business plan.”
Baker showed a new sense of urgency when asked about his realestate plans as U.S. interest rates rise.
“We have a tremendously valuable portfolio of real estate, which could be monetized in a variety of ways,” Baker said Wednesday. “What we should have done and what we should be doing as quick as possible is IPO-ing our U.S. real-estate portfolio and/or IPO-ing our Canadian real-estate portfolio.”
In a call seven months ago, Baker said third-party investors had valued the real-estate equity at $6.5 billion. Wednesday he said the real-estate value “is still there.” He also mentioned other ways to take advantage of the real-estate portfolio, for instance by selling a building.
Among the problems that are hurting the department store industry: The growth of online shopping; the high rate and cost of returned merchandise purchased online, and a highly promotional environment that is forcing retailers to sell product at reduced profit margins. HBC said it is continuing to look at costs.
Retail sales for the fourth quarter were $4.6 billion, an increase of 2.5 per cent from the prior year, driven mainly by the addition of Gilt, as well as the addition of five Saks Fifth Avenue and 32 Saks Off 5th stores.
Comparable sales grew by 0.6 per cent at the company’s Department Store Group and 0.1 per cent at Saks Fifth Avenue, offset by declines of 2.0 per cent at HBC Europe and 5.9 per cent at HBC Off Price, resulting in an overall consolidated comparable sales decline of 1.2 per cent, according to the company.
Retail sales for the year were $14.5 billion, an increase of 29.5 per cent over the prior year, driven by the addition of HBC Europe, Gilt and the newly opened Saks properties. Overall consolidated comparable sales declined 1.7 per cent for the year.
The net loss for the year was $516 million, compared to net earnings of $387 a year earlier.