06 Apr Hudson’s Bay Co. Shows Loss In Q4
Hudson’s Bay Company announced its fourth quarter financial results for the thirteen and fifty-two week periods ended January 28, 2017. Unless otherwise indicated, all amounts are expressed in Canadian dollars.
“In 2016 we took important steps to position all of our businesses for industry leadership. Our team remains focused on our all-channel model, anticipating our customers’ evolving needs and adapting to our customers’ expectations both in store and online. We executed on the organic growth of our existing store base and substantially increased our investment in digital. I am very proud of the hard work and dedication of all of our associates, who continue to focus on what matters most: our customers. We believe our winning model of combining world class real estate assets, which are less impacted by short-term trends, with our diverse retail businesses will continue to provide value for the company and our shareholders.” stated Richard Baker, HBC’s Governor and Executive Chairman.
Jerry Storch, HBC’s Chief Executive Officer, added, “The past year was a disruptive one for the retail industry. While the department store sector remains challenging, we are taking decisive action and making the tough decisions to ensure continued performance should the current environment persist. We are cutting expenses, rationalizing and reallocating our capital spending, strengthening our balance sheet, and taking other necessary actions. Rest assured, as we remain focused on the continued growth of our company, we are aggressively positioning HBC to adapt to the changing retail environment.”
Key Actions
- Cutting expenses: Recently announced efficiency measures are expected to save $75 million on an annualized basis, and management continues to work diligently to reduce overhead further and generate additional savings while continuing to focus on our customers. HBC is currently engaged in a cross-banner review of productivity enhancements designed to make improvements in the company’s operating model and to optimizing in-store operations, and expects to provide additional details on the progress of these initiatives in due course.
- Rationalizing and reallocating capital spend: Net capital investments in Fiscal 2017 are expected to be between $450 million and $550 million, approximately $150 million less than Fiscal 2016. The company’s capital investments in Fiscal 2017 will focus on in-progress and expected high-return projects, including growth in Europe and ongoing renovation programs across the world.
- Strengthening the balance sheet: HBC took advantage of favourable lending conditions during the year to refinance its mortgage on the Lord & Taylor flagship and reduce the interest rate on its term loan. The company ended the year with approximately the same amount of total debt on its balance sheet as at the beginning of Fiscal 2016.
- Other actions: As part of the ongoing review of the businesses, the company took the necessary step of writing down the goodwill associated with HBC’s Off Price business, though management still believes that both Saks OFF 5TH and Gilt have strong strategies in place with potential to generate long term profitable growth. In addition to focusing on a more elevated merchandise mix at Saks OFF 5TH, the company expects to combine the inventory at Saks OFF 5TH and Gilt by the end of the year, allowing Saks OFF 5TH merchandise to be sold online through Gilt. At Hudson’s Bay and Lord & Taylor, the company is growing key product categories such as active, dress and home. Initiatives in Europe include new brand additions and merchandising improvements at GALERIA Kaufhof, as well as the introduction of Saks OFF 5TH and Hudson’s Bay. Finally, Saks Fifth Avenue is expected to benefit from ongoing growth of digital and the introduction of buy online pickup in store later in the fall.
Fourth Quarter Summary
All comparative figures below are for the thirteen week period ended January 28, 2017 compared to the thirteen week period ended January 30, 2016. DSG refers, collectively, to the Lord & Taylor, Hudson’s Bay and Home Outfitters banners. HBC Europe refers, collectively, to the GALERIA Kaufhof, Galeria INNO and Sportarena banners. HBC Off Price refers, collectively, to the Saks Fifth Avenue OFF 5TH (“Saks OFF 5TH”) and Gilt banners.
HBC has now anniversaried the acquisition of HBC Europe, as well as the formation of the real estate joint ventures. Accordingly, reported results for the fourth quarter are largely comparable to the previous year, excluding the impact of the Gilt acquisition which closed on February 1, 2016, the beginning of Fiscal 2016.
Retail sales were $4,600 million, an increase of $114 million, or 2.5 percent, from the prior year. The increase was primarily driven by the addition of Gilt, which generated $177 million in sales during the quarter, as well as the addition of five Saks Fifth Avenue and 32 Saks OFF 5TH stores, which contributed a total of $123 million in sales during the quarter. These additions were partially offset by the combination of a negative $110 million foreign exchange impact on the translation of U.S. dollar and Euro denominated sales and lower comparable sales of approximately $42 million at the company as a whole.
On a constant currency basis, comparable sales grew by 0.6 percent at DSG and 0.1 percent at Saks Fifth Avenue, offset by declines of 2.0 percent at HBC Europe and 5.9 percent at HBC Off Price, resulting in an overall consolidated comparable sales decline of 1.2 percent. Comparable sales during the quarter were impacted by a highly promotional environment across HBC’s markets. Additionally, sales at Gilt continue to be impacted by lower traffic, while Saks OFF 5TH has experienced lower sales driven in part by the decision to introduce more moderately priced apparel during Fiscal 2016. Saks OFF 5TH is in the process of re-merchandising its product mix to have a higher concentration of products at the top end of its offering range, which is expected to drive increased traffic and conversion as well as a higher overall basket size. This updated product mix is expected to be fully implemented by the third quarter of Fiscal 2017.
Digital sales increased by 52.8 percent from the prior year, and comparable digital sales on a constant currency basis increased by 13.3 percent. Excluding Gilt, comparable digital sales on a constant currency basis increased by 20.9 percent, reflecting the company’s continued strategic focus on growing this channel.
For HBC overall, gross profit1 as a percentage of retail sales was 40.2 percent, which improved by 50 basis points compared to the prior year. After adjusting for the $69 million impact associated with the amortization of inventory related purchase accounting adjustments in the prior year, gross profit as a percentage of retail sales declined by 110 basis points. Reduced gross profit rates were the result of lower gross margins realized in the majority of HBC banners, largely driven by the highly promotional environment experienced during the quarter.
SG&A expenses were $1,669 million compared to $1,499 million in the prior year. The increase is primarily attributable to non-cash impairment charges of $150 million and the addition of Gilt, which added $77 million in SG&A during the quarter, as well as a reduction in the company’s ownership in its real estate joint ventures, which resulted in a $10 million increase in net rent expense. Moreover, the shift to digital sales from traditional in-store sales during the quarter further contributed to higher SG&A expenses as a result of higher fulfillment costs. Profit margins on digital sales are expected to improve over time, as the company continues to invest in its digital supply chain, reduces expenses related to its digital operations and introduces store centric all-channel delivery options.
These SG&A expense increases were partially offset by a decrease in non-recurring charges of $52 million, a $43 million favourable foreign exchange impact related to the translation of U.S. dollar and Euro denominated SG&A expenses.
Fourth quarter results include a non-cash goodwill impairment charge of $116 million related to HBC Off Price. This charge was driven by recent sales weakness at Gilt and Saks OFF 5TH as described above, which resulted in management prudently lowering its future earnings expectations as compared to initial internal estimates.
Notwithstanding this charge, management continues to believe that both Saks OFF 5TH and Gilt have strong strategies in place with the potential to generate long term profitable growth for the company. The acquisition of Gilt continues to provide HBC with best in class digital capabilities and a strong online presence with the millennial audience. The company expects to combine the inventory at Saks OFF 5TH and Gilt by the end of the year, allowing Saks OFF 5TH merchandise to be sold online through Gilt. To improve the customer experience at HBC Off Price, the company is working on a number of other initiatives, including: expanded brand partnerships; refocusing on higher end core offerings; and, the ongoing roll out of technology enhancements related to enhanced website navigation, personalization and delivery options.
Adjusted SG&A1 expenses were $1,442 million or 31.3 percent of retail sales, compared to $1,372 million or 30.6 percent in the prior year. The increase in SG&A expenses is primarily attributable to the addition of Gilt, the reduction in the company’s ownership in its real estate joint ventures, and the shift of in-store sales to online sales as described above. Partially offsetting this increase was a favourable foreign exchange impact of $38 million related to the translation of U.S. dollar and Euro-denominated SG&A expenses. These factors, combined with the impacts associated with lower than expected comparable sales, resulted in an increased SG&A expense rate.
Adjusted EBITDAR1 was $564 million, a decrease of 9.9 percent compared to $626 million in the prior year. The decline in Adjusted EBITDAR1 can be primarily attributed to an increase in Adjusted SG&A1 expenses as discussed above, combined with relatively flat gross profit dollars after excluding the impacts of purchase price accounting adjustments in the prior year.
Adjusted EBITDA1 was $404 million, a decrease of $51 million compared to $455 million in the prior year. This decline is largely consistent with the decline in Adjusted EBITDAR1, offset by a smaller cash impact from the company’s joint ventures resulting from the distribution during the quarter of excess funds that had been reserved to pay taxes in Germany. HBS Global Properties expects to begin paying cash taxes in 2018, and will set aside approximately EUR 1.5 million per month beginning in July of 2017 for future amounts owed.
Net loss was $152 million compared to net earnings of $370 million in the prior year. This loss was driven in part by the impairment charges described above which had a combined after tax impact of $136 million. Additionally, prior year earnings included net of tax gains of $333 million on the sale of investments in the joint ventures and $27 million on contribution of assets to the joint ventures. Normalized Net Earnings1 were $2 million compared to $145 million in the prior year. This decrease is primarily a result of higher Adjusted SG&A1, as described above, as well as increased depreciation and amortization expenses.
During the quarter the company completed its purchase price allocation for Gilt. This included finalization of the amortization methodology related to customer lists. As a result, amortization expense in the quarter reflects a cumulative adjustment of approximately $37 million.
Finance costs were $43 million compared to $60 million in the prior year. This decrease was largely driven by a $32 million reduction in the write-off of deferred financing costs compared to the prior year, during which the company repaid U.S. $585 million on its term loan. This reduction was partially offset by lower non-cash finance income generated from mark-to-market adjustments associated with the valuation of outstanding common share purchase warrants. Interest paid in cash was $46 million compared to $40 million in the prior year.
Year-To-Date Summary
All comparative figures below are for the fifty-two week period ended January 28, 2017 compared to the fifty-two week period ended January 30, 2016.
Retail sales were $14.5 billion, an increase of 29.5 percent from the prior year. Approximately $3 billion of this increase is related to the addition of HBC Europe and Gilt during the year. The remainder of the increase has been driven by the opening of five Saks Fifth Avenue and 32 Saks OFF 5TH stores during the year which contributed $320 million in sales. There was also an additional $26 million positive foreign exchange impact on the translation of U.S. dollar and Euro denominated sales. These positive sales impacts were partially offset by lower overall comparable sales of approximately $164 million.
Consolidated comparable sales at the company decreased by 0.7 percent. On a constant currency basis, comparable sales grew 0.4 percent at DSG, offset by declines of 1.2 percent at HBC Europe, 2.8 percent at Saks Fifth Avenue, and 7.4 percent at HBC Off Price, resulting in an overall consolidated comparable sales decline of 1.7 percent. Comparable sales during the year were impacted by a highly promotional environment across HBC’s markets. Additionally, sales at Gilt continue to be under pressure, while Saks OFF 5TH has experienced lower sales driven in part by the decision to introduce more moderately priced apparel during Fiscal 2016.
Digital sales increased by 69.6 percent from the prior year, and comparable digital sales on a constant currency basis increased by 8.1 percent. Excluding Gilt, comparable digital sales on a constant currency basis increased by 16.6 percent.
For HBC overall, gross profit1 as a percentage of retail sales was 41.3 percent, an increase of 80 basis points from the prior year. This increase was primarily related to the addition of HBC Europe, which operates at relatively higher gross margin and SG&A rates. The positive impact associated with HBC Europe was offset by lower realized gross margins at the majority of HBC’s other banners.
SG&A expenses were $5,692 million compared to $4,066 million in the prior year, primarily as a result of the addition of HBC Europe and Gilt, which drove approximately $1.5 billion of this increase. Additionally, non-cash impairment charges increased by $174 million, which includes impairment on goodwill as described above, and net rent expense related to the company’s joint ventures increased by $127 million. These increases were partially offset by gains on sale of assets of $33 million, a decline in other non-recurring expenses of $19 million, an $11 million favorable exchange rate impact related to the translation of U.S. dollar and Euro denominated SG&A expenses.
Adjusted SG&A1 expenses were $5,275 million or 36.5 percent of retail sales, compared to 33.9 percent in the prior year. This rate increase was primarily driven by the addition of HBC Europe and Gilt as discussed above, as well as lower comparable sales at the company as a whole. The impact of net rent expense to the joint ventures was $164 million for the fifty-two week period ended January 28, 2017, compared to $37 million for the fifty-two week period ended January 30, 2016. Adjusting for this impact, Adjusted SG&A1 as a percentage of retail sales is 35.4 percent for the fifty-two week period ended January 28, 2017 compared to 33.5 percent for the fifty-two week period ended January 30, 2016.
Adjusted EBITDAR1 was $1,353 million, an increase of 12.8 percent compared to $1,200 million in the prior year, primarily as a result of the increase in gross profit dollars compared to the prior year offset by an increase in Adjusted SG&A1 expenses as discussed above.
Adjusted EBITDA1 was $636 million, compared to $781 million in the prior year. The joint ventures had a $227 million impact on Adjusted EBITDA1 in Fiscal 2016, compared to a $76 million impact in the prior year. This increased joint venture impact, plus the rent expense associated with addition of HBC Europe and Gilt, drove the majority of the decline in Adjusted EBITDA1 relative to Adjusted EBITDAR1.
Net loss was $516 million compared to net earnings of $387 million in the prior year. Prior year earnings include total after tax gains of $565 million related to the joint ventures, compared to $44 million in the current year. Fiscal 2016 earnings also include after tax impairment expenses of $150 million compared to nothing in the prior year. Normalized Net Loss1 was $313 million compared to earnings of $55 million in the prior year, primarily driven by lower Adjusted EBITDA1, the non-cash goodwill impairment charge outlined above, as well as increased depreciation and amortization expense.
Finance costs were $192 million compared to $188 million in the prior year. The majority of this increase is related to higher interest expense related to the company’s finance leases and pension and employee liabilities acquired as part of the GALERIA Kaufhof transaction, offset by a reduction in the write-off of deferred financing costs. Interest paid in cash was $173 million, a $26 million increase over the prior year.
Note:
1 These performance metrics have been identified by the Company as Non-IFRS measures.
In North America, HBC’s leading banners include Hudson’s Bay, Lord & Taylor, Saks Fifth Avenue, Gilt, and Saks OFF 5TH, along with Home Outfitters. In Europe, its banners include GALERIA Kaufhof, the largest department store group in Germany, Belgium’s only department store group Galeria INNO, as well as Sportarena.