HBC Reports Second Quarter 2019 Financial Results

  • Revenues totaled $1.9 billion, with comparable sales down 0.4% including a 19% year-over-year increase in digital sales
  • Saks Fifth Avenue’s comparable sales up 7.3% on a two-year stacked basis, which includes 0.6% comp in the second quarter
  • Saks OFF 5TH’s comp sales up 3.4% driven by new customer growth
  • Continued inventory and expense discipline with comparable inventory down 5% year-over-year and a $34 million decrease in SG&A resulting in 170 basis points of SG&A leverage
  • Net loss from continuing operations of $462 million, includes $150 million to write-down the value of deferred tax assets
  • Adjusted EBITDA was $52 million in the second quarter

TORONTO & NEW YORK–(BUSINESS WIRE)–HBC’s (TSX: HBC) second quarter sales were driven by accelerated growth in digital, continued positive comp at Saks Fifth Avenue, sequential progress at Hudson’s Bay and the second consecutive quarter of increased comparable sales at Saks OFF 5TH. Gross margin declined year-over-year. Approximately two-thirds of the gross margin decrease was due to changes in store footprint, vendor relationships and merchandise, the impact of which is expected to lessen slightly during the second half of the year. The remaining one-third was due to a hyper-promotional market environment.

“We continue to concentrate on controlling the ‘controllables’ – serving our customers and lowering expenses and inventory while making strategic investments for our future. While we’ve progressed in simplifying the business and strengthening operations, the second quarter demonstrates that we are still in the early stages of what HBC can become,” said Helena Foulkes HBC’s CEO. “This quarter we responded as the market moved early to discount merchandise in both luxury and Canadian retail. Our digital performance was a standout with a sharp increase in growth as our changes in strategy, people and infrastructure are paying off. With the Lord + Taylor sale agreement, our focus is now squarely on Saks Fifth Avenue and Hudson’s Bay – businesses that have the greatest potential for HBC amid the consolidating industry.”

Operating Results

HBC’s financial results and comparable sales are for the thirteen week period ended August 3, 2019, as compared to the thirteen weeks ended August 4, 2018. Certain metrics, including those expressed on an adjusted, normalized, comparable and/or constant currency basis, are non-GAAP financial measures. For more information please refer to the “Supplemental Information” section of this press release and the reconciliation tables provided.

Following the company’s agreement to sell Lord + Taylor to Le Tote, Lord + Taylor has been classified and presented as discontinued operations and its financial results are not included in the following discussion, including any impacts related to Lord + Taylor’s comp inventory or lease obligations.

Second quarter revenues totaled $1.9 billion, which includes a 19 percent increase in digital sales, driven by data-driven marketing, assortment balance and technology improvements. HBC’s second quarter comparable sales decreased 0.4 percent.

  • Saks Fifth Avenue’s comparable sales grew for the ninth consecutive quarter by 0.6 percent. Significant categories with above trend growth included men’s, women’s ready-to-wear, handbags and beauty.
  • Hudson’s Bay’s comparable sales decreased 3.4 percent in the second quarter, a sequential improvement from the 4.3 percent decline in the first quarter. While the team continues to correct its previous merchandise choices, Hudson’s Bay modernized its marketing mix, which increased omni-channel customers and nearly doubled the digital growth rate from a year ago.
  • Saks OFF 5TH is in the early stages of its new strategy, which included shifts to its buying, marketing and service model. In the second quarter, Saks OFF 5TH’s comp increased 3.4 percent with notable gains in jewelry, women’s modern clothing and men’s classic apparel.

Foulkes continued, “Saks Fifth Avenue has been posting quarter-after-quarter of industry-leading sales growth by focusing on its ‘New Luxury’ strategy, which includes merchandise and experiences that can only be found through Saks. The second quarter was bolstered by strong sales through the Fifth Avenue Club, our personal shopping service available in every store, and an acceleration in digital growth. The promotional activity in luxury was exceptionally intense in the second quarter and a notable change from the first quarter. For Hudson’s Bay, we are working to fix this business to recapture market share over time. Our merchants are modernizing our merchandise mix by exiting more than 300 unproductive brands, and adding 100 new and emerging brands to reset the fall assortment. We expect these changes may take time to resonate in the market. Finally, the positive change in Saks OFF 5TH’s performance demonstrates the power of a strategic shift in how we appeal to customers.”

Gross margin declined 530 basis points year-over-year to 34 percent. The decline was driven by:

  • The strategic decision to sunset Home Outfitters and close Saks OFF 5TH locations was approximately 110 basis points of the decline. In the second quarter, the SG&A savings, which resulted from store closures, offsets $20 million decline in gross profit. The vast majority of the 15 Saks OFF 5TH locations will be closed in the third quarter.
  • Transitions in vendor relationships accounted for nearly 110 basis points of the decline. In the fall season, the company anticipates the impact to gross margin will lessen and in the long-term the change will positively impact our gross margin.
  • The company’s inventory discipline continued, with end of quarter comparable inventory down 5 percent year-over-year and down 10 percent in aged inventory. The company strategically utilized the closing of Home Outfitters to clear aged Hudson’s Bay inventory. Approximately 110 basis points of the gross margin decline can be attributed to inventory.
  • Finally, the company aligned with the hyper-promotional environment which accounted for about 180 basis points of the decline.

SG&A margin improved by 170 basis points year-over-year to 36.7 percent. Expense reductions were widespread with improvements from closed stores, corporate and store operations.

Second quarter net loss from continuing operations was $462 million, including a $150 million non-cash write down of the value of Canadian deferred income tax assets as a result of the company’s assessment that full utilization may not be likely. Net loss from continuing operations was $104 million in the second quarter of 2018.

The loss from the European retail operations totaled $69 million in the second quarter. HBC expects the $1.5 billion sale of the company’s remaining stake in its European real estate and retail joint ventures to close in the fall, subject to customary closing conditions. As part of the overall transaction, HBC will assume full ownership of the Netherlands retail business and its lease liabilities.

Excluding one-time items, HBC’s normalized net loss1 was $171 million, as compared to a normalized net loss of $85 million in the second quarter a year ago.

Adjusted EBITDA1 totaled $52 million for the second quarter, down from $106 million a year ago. Second quarter Adjusted EBITDA1 from real estate joint ventures declined $7 million to $57 million due to a partial sale of European real estate assets in fiscal 2018. North American department stores posted an Adjusted EBITDA1 loss of $5 million, as compared to $42 million in the same quarter a year ago. The decrease in North American department store Adjusted EBITDA1 is primarily due to the decline in gross margin.

Adjusted EBITDAR1 was $120 million in the second quarter, as compared to $183 million in the same period a year ago.

Balance Sheet & Capital Spending

The company ended the quarter with approximately $3 billion of debt, which declined more than $800 million from the end of the second quarter in 2018. The company retired the Lord + Taylor mortgage, permanently reduced its term loan and had lower outstanding borrowings on its Global ABL.

HBC anticipates it will retire the $429 million term loan with a portion of the European transactions’ net proceeds.

At August 3, 2019, HBC had the following outstanding loans and borrowings on its balance sheet, including ABL borrowings for Lord + Taylor:

(in millions of Canadian dollars at respective quarterly foreign exchange rates)

 

Aug 3, 2019

Aug 4, 2018

Global ABL

 

865

972

U.S. Term Loan B

 

429

650

Saks Mortgage

 

1,651

1,624

Lord + Taylor Mortgage

 

509

Other loans

 

27

28

Total Outstanding Loans and Borrowings

 

2,972

3,783

 

Capital investments were $138 million during the second quarter of 2019, a decline from $188 million from the same quarter a year ago. In fiscal 2019, the company expects its capital expenditures, net of landlord incentives, to moderate year-over-year, spending between $300 and $325 million.2

Subsequent Event

In August, the company agreed to sell Lord + Taylor to Le Tote, pending Le Tote securing financing commitments for the full purchase price. The company will receive approximately $100 million in cash upon the transaction’s closing, a secured promissory note for approximately $33 million payable in cash after two years, and a 25 percent equity stake in the combined entity. Le Tote will receive approximately $284 million worth of inventory, and for the initial three years HBC has agreed to maintain economic responsibility for the rent payments owed by Lord + Taylor at the 38 locations operated by Le Tote. Net of HBC’s distributions from HBS Global Properties, HBC expects to continue to be liable for approximately $77 million in Lord + Taylor total cash rent on an annual basis.

Starting in 2021, HBC and Le Tote will have options to reassess the Lord + Taylor store network. This may include HBC recapturing select locations to determine their highest and best use, including possible redevelopment into mixed-use properties with a variety of services, experiences and retail offerings. HBC has hired a team of seasoned professionals to lead the planning and execution of any redevelopment, which is an inherently complex, capital intensive, long-term project. For any recaptured or returned stores, HBC retains long-term rent responsibility, risk and costs for redevelopment.

The company expects the transaction to close prior to the 2019 holiday season, subject to satisfaction (or waiver) of closing conditions.

Dividend

The Board of Directors of HBC declared the company’s regular quarterly dividend to be paid on October 15, 2019, to shareholders of record at the close of business on September 30, 2019. The dividend is in the amount of $0.0125 per HBC common share and is designated as an “eligible dividend” for Canadian tax purposes. The declaration of dividends is at the discretion of HBC’s board.

Consolidated Financial Statements and Management’s Discussion and Analysis

The company’s unaudited interim condensed consolidated financial statements for the thirteen and twenty-six weeks ended August 3, 2019 and Management’s Discussion and Analysis (“MD&A”) thereon are available under the company’s profile on SEDAR at www.sedar.com and on the company’s website at www.hbc.com. HBC encourages investors to review the MD&A.

Conference Call to Discuss Results

Management will discuss the second quarter financial results and other matters during a conference call on September 12, 2019 at 8:30 am EST.

The conference call will be accessible by calling the participant operator assisted toll-free dial-in number (800) 535-7056 or international dial-in number (253) 237-1145. A live webcast of the conference call will be accessible on HBC’s website at: http://investor.hbc.com/events.cfm. The audio replay also will be available via this link.

About HBC

HBC is a diversified retailer focused on driving the performance of high quality stores and their omnichannel platforms and unlocking the value of real estate holdings. Founded in 1670, HBC is the oldest company in North America. HBC’s portfolio today includes formats ranging from luxury to premium department stores to off price fashion shopping destinations, with over 300 stores and about 40,000 employees. HBC’s leading businesses across North America include Saks Fifth Avenue, Hudson’s Bay, Lord + Taylor, and Saks OFF 5TH.

HBC also has significant investments in joint ventures. It has partnered with Simon Property Group Inc. in the HBS Joint Venture, which owns properties in the United States. In Canada, it has partnered with RioCan Real Estate Investment Trust in the RioCan-HBC Joint Venture. HBC has partnered with SIGNA Retail Holdings for real estate and retail joint ventures in Europe.

Consolidated Financial Information

The following tables set out summary consolidated financial information and supplemental information for the periods indicated. The summary financial information set out below for the quarters ended August 3, 2019 and August 4, 2018 has been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) as issued by the Financial Accounting Standards Board (“FASB”) on a retrospective basis beginning with the company’s published first quarter 2019 results. In the opinion of the company’s management, this unaudited financial data reflects all adjustments, consisting of normal and recurring adjustments, necessary for a fair presentation of the results for those periods. The results of operations for interim periods are not necessarily indicative of the results to be expected for a full year or any future period. The information presented herein does not contain disclosures required by GAAP for consolidated financial statements and should be read in conjunction with the company’s unaudited interim condensed consolidated financial statements for the thirteen and twenty-six weeks ended August 3, 2019.

 

INTERIM CONSOLIDATED STATEMENTS OF LOSS

 

(millions of Canadian dollars, except per share amounts)

 

 

Thirteen week period ended

Twenty-six week period ended

 

Aug 3, 2019

Aug 4, 2018

Aug 3, 2019

Aug 4, 2018

Retail sales

1,825

1,830

3,656

3,650

Credit revenue and other, net

25

29

50

55

Total revenue

1,850

1,859

3,706

3,705

Cost of goods sold (exclusive of depreciation shown separately below)

(1,221)

(1,129)

(2,353)

(2,225)

Gross profit

629

730

1,353

1,480

Selling, general and administrative expenses (“SG&A”)

(679)

(713)

(1,378)

(1,433)

Depreciation and amortization

(108)

(108)

(207)

(210)

Transaction, restructuring and other costs

(89)

(6)

(121)

(18)

Gain on sale of property, net

817

Gain on sale of equity-method investment – real estate

3

3

Impairment

(17)

(17)

(7)

Operating (loss) income

(261)

(97)

450

(188)

Interest expense, net

(44)

(45)

(87)

(87)

Income from equity-method investments – real estate

7

5

20

3

Loss from investment in the EDS Group

(69)

(202)

Dilution gain from equity method investments – real estate

1

(Loss) income before income tax

(367)

(137)

181

(271)

Income tax (expense) benefit

(95)

33

(327)

65

Net loss – continuing operations

(462)

(104)

(146)

(206)

Net loss – discontinued operations, net of taxes

(522)

(176)

(563)

(456)

Net loss for the period

(984)

(280)

(709)

(662)

 

 

 

 

 

Loss per share – basic and diluted

 

 

 

 

Continuing operations

(2.51)

(0.58)

(0.79)

(1.13)

Discontinued operations

(2.84)

(0.87)

(3.06)

(2.49)

Total operations

(5.35)

(1.45)

(3.85)

(3.62)

 

INTERIM CONSOLIDATED BALANCE SHEETS

(millions of Canadian dollars)

 

 

 

Aug 3, 2019

 

Feb 2, 2019

Assets

 

 

 

 

Cash and cash equivalents

 

21

 

19

Restricted cash

 

147

 

Trade and other receivables

 

179

 

157

Inventories

 

2,103

 

2,162

Asset held for sale

 

 

279

Assets of discontinued operations held for sale

 

898

 

658

Other current assets

 

137

 

171

Total current assets

 

3,485

 

3,446

 

 

 

 

 

Property, plant and equipment

 

3,455

 

3,885

Operating lease assets

 

2,422

 

Finance lease assets

 

401

 

Goodwill

 

209

 

207

Other intangible assets

 

498

 

580

Pensions and employee benefits

 

170

 

170

Deferred tax assets

 

203

 

318

Equity-method investments – real estate

 

755

 

554

Investment in the EDS Group

 

81

 

284

Other assets

 

68

 

73

Total assets

 

11,747

 

9,517

 

 

 

 

 

Liabilities

 

 

 

 

Current portion of loans and borrowings

 

860

 

471

Current portion of operating lease liabilities

 

191

 

Current portion of finance lease liabilities

 

27

 

29

Trade payables

 

791

 

949

Other payables and accrued liabilities

 

796

 

743

Deferred revenue

 

99

 

112

Liabilities of discontinued operations held for sale

 

1,123

 

271

Other current liabilities

 

231

 

246

Total current liabilities

 

4,118

 

2,821

 

 

 

 

 

Loans and borrowings

 

2,059

 

2,538

Operating lease liabilities

 

3,163

 

Finance lease liabilities

 

315

 

318

Pensions and employee benefits

 

171

 

177

Deferred tax liabilities

 

156

 

143

Equity-method investment – real estate

 

231

 

239

Other liabilities

 

537

 

1,597

Total liabilities

 

10,750

 

7,833

 

 

 

 

 

Shareholders’ equity

 

 

 

 

Common shares – 184 and 183 million shares issued and outstanding

 

1,438

 

1,434

Convertible preferred shares

 

618

 

618

Accumulated deficit

 

(1,625)

 

(931)

Additional paid-in capital

 

183

 

170

Accumulated other comprehensive income

 

383

 

393

Total shareholders’ equity

 

997

 

1,684

Total liabilities and shareholders’ equity

 

11,747

 

9,517

 

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(millions of Canadian dollars)

 

 

 

Twenty-six week period ended

 

 

Aug 3, 2019

 

Aug 4, 2018

Operating activities

 

 

 

 

Net loss

 

(709)

 

(662)

Net loss – discontinued operations, net of taxes

 

563

 

456

Net loss – continuing operations

 

(146)

 

(206)

Adjustments to reconcile net loss to cash used in operating activities:

 

 

 

 

Loss from investment in the EDS Group

 

202

 

Depreciation and amortization

 

207

 

210

Impairment

 

17

 

7

Loss on disposal of assets

 

13

 

Net defined benefit pension and employee benefits expense

 

9

 

11

Distributions of earnings from equity-method investments – real estate

 

52

 

100

Dilution gains from equity method investment – real estate

 

 

(1)

Income from equity-method investments – real estate

 

(20)

 

(3)

Gain on sale of property, net

 

(817)

 

Gain on sale of equity-method investment – real estate

 

(3)

 

Share of rent expense to equity-method investments – real estate

 

(61)

 

(61)

Share based compensation

 

20

 

26

Other operating activities

 

6

 

35

Changes in operating assets and liabilities

 

246

 

(139)

Cash used in operating activities from continuing operations

 

(275)

 

(21)

Cash used in operating activities from discontinued operations

 

(148)

 

(394)

Net cash used in operating activities

 

(423)

 

(415)

Investing activities

 

 

 

 

Capital investments

 

(138)

 

(188)

Proceeds on sale of property, net of transaction costs

 

770

 

33

Deposit on sale of the investments in the European Real Estate JV and the EDS Group

 

150

 

Loans to the EDS group

 

(19)

 

Proceeds on sale of equity-method investments – real estate

 

3

 

Investment in equity-method investments – real estate

 

(13)

 

Proceeds on disposal of assets

 

 

1

Proceeds on sale of Gilt operations

 

 

41

Other investing activities

 

(14)

 

Cash provide by (used in) investing activities from continuing operations

 

739

 

(113)

Cash used in investing activities from discontinued operations

 

(3)

 

(105)

Net cash provided by (used in) investing activities

 

736

 

(218)

Financing activities

 

 

 

 

Repayments

 

(515)

 

(4)

Borrowing costs

 

(10)

 

Long-term loans and borrowings

 

(525)

 

(4)

Net borrowings from asset-based credit facilities

 

392

 

576

Borrowing costs

 

 

(1)

Short-term loans and borrowings

 

392

 

575

 

 

 

 

 

Settlement of share based compensation

 

(3)

 

(3)

Payments on finance leases

 

(19)

 

(19)

Dividends paid

 

(5)

 

(4)

Cash (used in) provided by financing activities – continuing operations

 

(160)

 

545

Cash provided by financing activities – discontinued operations

 

 

80

Net cash (used in) provided by financing activities

 

(160)

 

625

Foreign exchange (loss) gain on cash

 

(4)

 

2

Increase (decrease) in cash and cash equivalents

 

149

 

(6)

Cash and cash equivalents at beginning of year

 

21

 

70

Cash, cash equivalents and restricted cash at end of period

 

170

 

64

Deduct: cash reclassified to assets of discontinued operations held for sale

 

(2)

 

(40)

Deduct: restricted cash

 

(147)

 

Cash and cash equivalents at end of period – continuing operations

 

21

 

24

 

Supplemental Information

On the pages that follow, the company has provided certain supplemental information that we believe will assist the reader in assessing our business operations and performance, including certain non-GAAP financial information and required reconciliations to the most comparable GAAP measure.

Supplemental schedules provided include:

Quarterly Adjusted EBITDA & Adjusted EBITDAR Reconciliations

A reconciliation of Adjusted EBITDA and Adjusted EBITDAR are provided. The information provides the reader with information we believe is necessary to analyze the company.

Quarterly Combined Adjusted EBITDA & Adjusted EBITDAR Reconciliations

A reconciliation of Combined Adjusted EBITDA and Combined Adjusted EBITDAR are provided.

Normalized Net Earnings (Loss)

A reconciliation of Normalized Net Earnings (Loss) is provided. The information provides the reader with information we believe is necessary to analyze the company.

Non-GAAP and Quarterly Supplemental Data

On this schedule, the company provides certain non-GAAP business unit information that we believe is useful to understanding the business operations of the company.

 

HBC QUARTERLY ADJUSTED EBITDA AND ADJUSTED EBITDAR RECONCILIATIONS

 

 

 

Thirteen week period ended

 

Twenty-six week period ended

(millions of Canadian dollars)

 

Aug 3, 2019

 

Aug 4, 2018

 

Aug 3, 2019

 

Aug 4, 2018

 

 

$

 

$

 

$

 

$

Net loss – continuing operations

 

(462)

 

(104)

 

(146)

 

(206)

Interest expense, net

 

44

 

45

 

87

 

87

Income tax expense (benefit)

 

95

 

(33)

 

327

 

(65)

Depreciation and amortization

 

108

 

108

 

207

 

210

EBITDA (1)

 

(215)

 

16

 

475

 

26

 

 

 

 

 

 

 

 

 

Transaction, restructuring and other costs

 

89

 

6

 

121

 

18

Impairment

 

17

 

 

17

 

7

Income from equity-method investments – real estate

 

(7)

 

(5)

 

(20)

 

(3)

Loss from investment in the EDS Group (3)

 

69

 

 

202

 

Dilution gains from equity-method investments – real estate(4)

 

 

 

 

(1)

Gain on sale of property, net

 

 

 

(817)

 

Gain on sale of equity-method investment – real estate

 

(3)

 

 

(3)

 

Non-cash share based compensation

 

10

 

8

 

14

 

21

Non-cash pension expense

 

3

 

6

 

8

 

11

Adjustment for store closures

 

10

 

 

 

Other

 

22

 

11

 

22

 

19

Adjusted EBITDA (1) – North American Department Stores

 

(5)

 

42

 

19

 

98

 

 

 

 

 

 

 

 

 

Share of income from equity-method investments – real estate

 

7

 

5

 

20

 

3

Interest expense, net

 

25

 

24

 

49

 

46

Income tax expense

 

5

 

4

 

9

 

8

Depreciation and amortization

 

23

 

17

 

37

 

34

Foreign exchange adjustment

 

 

14

 

 

32

Other

 

(3)

 

 

(2)

 

Adjusted EBITDA (1) – Real estate equity method investments

 

57

 

64

 

113

 

123

Adjusted EBITDA (1)

 

52

 

106

 

132

 

221

 

 

 

 

 

 

 

 

 

Rent adjustments

 

68

 

77

 

135

 

159

Adjusted EBITDAR (1)

 

120

 

183

 

267

 

380

 

 

 

 

 

 

 

 

 

Share of net loss in the EDS Group

 

(69)

 

 

(202)

 

Interest expense, net

 

13

 

 

19

 

Income tax benefit

 

9

 

 

(22)

 

Depreciation and amortization

 

20

 

 

53

 

Inventory purchase price adjustment included in cost of sales

 

(1)

 

 

30

 

Restructuring

 

18

 

 

30

 

Adjusted EBITDA (1) – EDS Group

 

(10)

 

 

(92)

 

 

 

 

 

 

 

 

 

 

Third party rent expense – EDS Group

 

99

 

 

190

 

Adjusted EBITDAR (1) – EDS Group

 

89

 

 

98

 

 

 

 

 

 

 

 

 

 

Combined Adjusted EBITDA (1)

 

42

 

106

 

40

 

221

Combined Adjusted EBITDAR (1)

 

209

 

183

 

365

 

380

 

NORMALIZED NET EARNINGS (LOSS) RECONCILIATION

 

 

 

Thirteen week period ended

 

Twenty-six week period ended

(millions of Canadian dollars)

 

Aug 3, 2019

 

Aug 4, 2018

 

Aug 3, 2019

Aug 4, 2018

 

 

$

 

$

 

$

$

Net loss – continuing operations

 

(462)

 

(104)

 

(146)

 

(206)

Gain on sale of property, net

 

 

 

(533)

 

Gain on sale of investment in equity method investment – real estate

 

(2)

 

 

(2)

 

Dilution gains from equity-method investment – real estate

 

 

 

 

(1)

Impairment

 

12

 

 

12

 

7

Transaction, restructuring and other costs

 

90

 

4

 

111

 

13

Adjustments to (income) loss on equity method investments – real estate(5)

 

(2)

 

7

 

(1)

 

20

Adjustments to loss from investment in the EDS Group

 

12

 

 

42

 

Adjustment for store closure

 

 

 —

 

 —

 

Tax related adjustments

 

150

 

 

125

 

Other

 

23

 

8

 

21

 

14

Total adjustments(6)

 

291

 

19

 

(225)

53

Normalized net loss (1)

 

(171)

 

(85)

 

(371)

(153)

Contacts

INVESTOR RELATIONS:

Jennifer Bewley

Phone: (646) 802-4631

Email: jennifer.bewley@hbc.com

MEDIA:

Andrew Blecher

Phone: (646) 802-4030

Email: press@hbc.com

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