Net Loss Inches Up, But Op­er­at­ing Earn­ings Gain At HBC

WWD Digital Daily - - News - BY DAVID MOIN

“Bold ac­tions are start­ing to pay off.”

That’s the mes­sage from Hud­son’s Bay Co. chief ex­ec­u­tive of­fi­cer He­lena Foulkes, who dur­ing an in­ter­view with WWD ad­dressed the re­cent per­for­mance of the com­pany and its fu­ture.

The Toronto-based re­tailer re­ported a small in­crease in the net loss for the third quar­ter to 124 mil­lion Cana­dian dol­lars, or $92.8 mil­lion, from 116 mil­lion Cana­dian dol­lars in the year-ago pe­riod, but Foulkes stressed that HBC’s re­tail op­er­a­tions are im­prov­ing.

“The num­ber to look at is ad­justed EBITDA,” Foulkes said. Ad­justed earn­ings be­fore in­ter­est, taxes, de­pre­ci­a­tion and amor­ti­za­tion rose to $63 mil­lion from $40 mil­lion, driven by sales growth and im­proved gross mar­gin and ex­pense rates. Those fig­ures, and all sub­se­quent ones re­lated to the re­sults, are in Cana­dian dol­lars.

Year-to-date, Foulkes noted, ad­justed EBITDA is $151 mil­lion. “That’s a $106 mil­lion gain” in Cana­dian dol­lars from

$45 mil­lion. “We’ve had a very nice per­for­mance from an EBITDA per­spec­tive.”

The net loss last quar­ter, ac­cord­ing to chief fi­nan­cial of­fi­cer Ed­ward Record, was pri­mar­ily driven by in­creased de­pre­ci­a­tion and amor­ti­za­tion ex­penses.

Those “bold” ac­tions in­cluded sell­ing to Karstadt in Ger­many a ma­jor­ity stake in HBC’s Euro­pean re­tail op­er­a­tions and a 50 per­cent stake in HBC’s Euro­pean real es­tate. That deal, val­ued at over 600 mil­lion eu­ros, closed last week and cre­ated a merger of the Karstadt and Kaufhof depart­ment store chains in Ger­many.

In other ma­neu­vers, HBC is in the process of sell­ing Lord & Tay­lor’s Fifth Av­enue flag­ship to WeWork in an $850 mil­lion U.S. deal ex­pected to close next Jan­uary. WeWork has an op­tion to con­vert $125 mil­lion into HBC eq­uity.

Also, HBC sold Gilt to Rue La La back in June.

HBC’s sell-offs, said Foulkes, mean the com­pany will be able to pay off $2 bil­lion in debt in the fourth quar­ter. HBC has over $4 bil­lion in debt.

Other “bold steps” could be taken to fur­ther re­duce debt and stream­line the re­tail op­er­a­tions.

“There are no plans right now,” Foulkes said, when asked if the sale of any di­vi­sions, such as Saks Fifth Av­enue or Lord & Tay­lor, are be­ing con­tem­plated. There has re­cently been on and off talks to sell Saks Fifth Av­enue to the Neiman Mar­cus Group, and po­ten­tially other pieces of the busi­ness.

“Part of my job is to be open to op­por­tu­ni­ties and to be mak­ing sure we are con­stantly eval­u­at­ing the land­scape. Ev­ery­thing re­mains on the ta­ble,”

Foulkes said.

HBC’s to­tal sales in­creased 5.6 per­cent to $2.2 bil­lion last quar­ter. Com­pa­ra­ble sales rose 2.9 per­cent.

Saks Fifth Av­enue’s com­pa­ra­ble sales rose 7.3 per­cent; Hud­son’s Bay, Lord & Tay­lor, and Home Ou­fit­ters com­bined saw an in­crease of 0.9 per­cent, and Saks Off 5th reg­is­tered a comp de­cline of 2.3 per­cent.

HBC Europe saw a 2.1 per­cent com­pa­ra­ble sales de­cline.

Re­gard­ing Lord & Tay­lor, “We are re­ally en­cour­aged by the work that Vanessa and her team are do­ing to turn that busi­ness around,” Foulkes said, re­fer­ring to L&T’s pres­i­dent Vanessa LeFeb­vre. “She has a unique abil­ity to un­der­stand the con­sumer and is tak­ing real ac­tions to sim­plify the shop­ping ex­pe­ri­ence and bring back fash­ions that are com­fort­able and easy. The team is very fo­cused on be­ing lo­cal and rel­e­vant to drive re­sults.”

Foulkes wouldn’t com­ment on whether Lord & Tay­lor makes or loses money, other than say­ing, “It’s mov­ing in the right di­rec­tion. It’s get­ting more prof­itable.”

Re­gard­ing the Lord & Tay­lor store on Wal­, “It’s very early days,” Foulkes said. “We are both learn­ing to­gether.” At this point, “There is not a real im­pact on the over­all busi­ness.”

With HBC’s dig­i­tal op­er­a­tions, the bulk of what’s been done over the year in­volves “fix­ing the fun­da­men­tals, get­ting the or­ga­ni­za­tional struc­ture right. It was very dif­fused. It took too long to ef­fect change,” Foulkes said. HBC now has a com­mon plat­form across di­vi­sions and there’s been progress on site speed, nav­i­ga­tion and de­liv­ery time. “In each area, we are mak­ing progress. We still have more to do,” Foulkes said. She also cited progress in the “mar­riage of dig­i­tal tools to stores,” thereby giv­ing sales as­so­ciates tools to bet­ter ser­vice cus­tomers.

At Saks, the fo­cus is on the Man­hat­tan flag­ship ren­o­va­tion. Foulkes said the ren­o­va­tion re­mains “on track” and that the main floor for hand­bags and a lower level for fine jew­elry, which will be called The Vault, will both open in the first quar­ter of next year. A “spec­tac­u­lar” es­ca­la­tor is be­ing built which “will es­sen­tially ex­pand our main floor into three, cre­at­ing an ex­pan­sive ex­pe­ri­ence where our cus­tomers will have seam­less ac­cess to the lower level, ground floor and sec­ond floor,” Foulkes said dur­ing a con­fer­ence call.

“The power of the Saks model is in the power of dig­i­tal and stores to­gether,” Foulkes said. The Fifth Av­enue ren­o­va­tion “sets the tone for the over­all chain. We are al­ready see­ing suc­cess mov­ing the beauty busi­ness to the sec­ond floor.”

Also next year, the fa­mous L’Av­enue restau­rant in Paris will open in­side the Saks flag­ship.

In the call, Foulkes said Saks con­tin­ues to drive over­all re­sults at HBC, and that the third quar­ter of 2018 marked the lux­ury divi­sion’s sixth con­sec­u­tive three­month pe­riod of pos­i­tive com­pa­ra­ble sales. They were up 7.3 per­cent. She said Saks’ per­for­mance has been bol­stered by “its long-term strat­egy to el­e­vate the Saks brand through a dif­fer­en­ti­ated fash­ion-for­ward of­fer­ing, in­creased cus­tomer en­gage­ment, em­pha­sis on ease of ser­vice, per­son­al­ized in­ter­ac­tions, and en­hance­ments to the dig­i­tal plat­form.

Saks as­so­ciates have been given dig­i­tal tools to en­able them to bet­ter serve cus­tomers. HBC is also con­tin­u­ing to in­vest in the Saks mo­bile app.

Ren­o­va­tions on the main floor be­gan dur­ing the third quar­ter, Foulkes said.

With the con­struc­tion con­tin­u­ing, comp sales were neg­a­tively im­pacted in the third quar­ter and will be fur­ther hit dur­ing the fourth quar­ter.

At the Hud­son’s Bay chain in

Canada, Foulkes said the big­gest op­por­tu­ni­ties in­volve top doors and top-spend­ing cus­tomers.

“We are very en­cour­aged by the po­si­tion­ing of Hud­son’s Bay,” though she noted the ser­vice ex­pe­ri­ence can be im­proved. Foulkes said there is an op­por­tu­nity in Canada to re­fresh the fleet with ren­o­va­tions, though she feels good about its over­all health. The chain has been able to cap­i­tal­ize this year on the clos­ing of Sears Canada. “We see very nice per­for­mances at stores near Sears.”

Foulkes, who joined HBC last Fe­bru­ary, said it’s been a year for “fix­ing the fun­da­men­tals, the over­all tech­nol­ogy and bring­ing in new lead­er­ship.” Q3 re­sults rep­re­sent progress, Foulkes said. “We are pleased with con­tin­ued mo­men­tum in North Amer­ica. We are op­ti­mistic about our progress but we still have sig­nif­i­cant work ahead.

“Bring­ing the cus­tomer into ev­ery de­ci­sion we are mak­ing is hav­ing an im­pact.”

One area is with in­ven­to­ries. “We still ex­pect rather sig­nif­i­cant in­ven­tory re­duc­tions on track to be down around 5 per­cent by the end of year, and down next year as well, but not as much,” said Foulkes.

Ex­ec­u­tives cited Saks’ strong per­for­mance and debt re­duc­tion through sell-offs.

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