Hudson’s Bay Company Reports First Quarter 2015 Financial Results

Strong Sales Growth

Declares Quarterly Dividend

TORONTO & NEW YORK--()--Hudson's Bay Company (“HBC” or the “Company”) (TSX:HBC) today announced its first quarter financial results for the 13-week period ended May 2, 2015. Unless otherwise indicated, all amounts are expressed in Canadian dollars.

First Quarter Year-Over-Year Highlights

  • Consolidated sales growth of 11.7% to approximately $2.1 billion, on same store sales growth of 11.7%
    • On a constant currency basis, consolidated same store sales increase of 2.7%
    • Department Store Group (“DSG”) same store sales increase of 4.9%
    • Saks Fifth Avenue same store sales increase of 0.6%
    • Saks Fifth Avenue OFF 5TH (“OFF 5TH”) same store sales increase of 10.3%
  • Digital sales increase of 37.2%
  • Normalized EBITDA of $96 million compared to $97 million
    • Normalized EBITDA margin of 4.6% compared to 5.2%
  • Opened one new Saks Fifth Avenue store and four new OFF 5TH locations

“We are pleased with our first quarter financial performance and operating results, which were in line with our expectations,” stated Richard Baker, HBC’s Governor and Executive Chairman. “Top line sales growth, led by DSG, OFF 5TH and the performance of HBC Digital, has us well-positioned to deliver on our 2015 strategic priorities and initiatives.”

Added Jerry Storch, HBC’s Chief Executive Officer, “We are energized by our progress and the opportunities ahead, and will continue to make the right investments to drive long-term sales growth and capitalize on margin enhancement opportunities. This includes strengthening our digital capabilities, expanding OFF 5TH, bringing Saks Fifth Avenue and OFF 5TH to Canada and leveraging our scale to capture synergies and promote efficiencies across our business.”

Financial Results

Throughout this press release, the terms "Normalized SG&A" and "Normalized EBITDA" refer to financial results that have been adjusted to exclude certain non-recurring items and charges. For a full explanation of the Company's use of non-IFRS measures, including the relevant definitions and reconciliations to reported measures, please refer to the “Supplemental Information” section of this press release. For further discussion of the Company's financial and operating results, please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations for the Thirteen Weeks Ended May 2, 2015 (the “MD&A”). DSG refers to the Company as structured prior to the acquisition of Saks (i.e., excluding Saks).

First Quarter Summary

All comparative figures below are for the 13-week period ended May 2, 2015 compared to the 13-week period ended May 3, 2014.

Retail sales, which include digital sales from all banners, were $2,072 million, an increase of $217 million or 11.7% from $1,855 million in the prior year. On a constant currency basis, consolidated same store sales increased by 2.7%. Same store sales on a constant currency basis increased by 4.9% at DSG, by 0.6% at Saks Fifth Avenue and by 10.3% at OFF 5TH. Digital commerce sales increased by 37.2% when compared to the prior year, reflecting the Company's continued strategic focus on growing this channel.

In terms of merchandise category performance, sales growth at DSG was driven by menswear and home products. Sales growth at Saks Fifth Avenue was driven by womenswear while at OFF 5TH, sales were strong across all categories.

Gross profit as reported was $846 million compared to $716 million for the prior year. Adjusting the prior year for the negative $38 million impact associated with the amortization of inventory related purchase accounting adjustments, the comparable gross profit in the first quarter of Fiscal 2014 was $754 million, resulting in a year-over-year improvement of $92 million. Improved performance at DSG and Saks, combined with a favourable currency conversion benefit on U.S. dollar denominated sales, drove the increase in gross profit dollars.

Gross profit rate as reported was 40.8% of retail sales, or a 220 basis point improvement over the first quarter of the prior year. Adjusting for the negative impact associated with the amortization of inventory related purchase accounting adjustments in the first quarter of Fiscal 2014, the comparable gross profit rate was 40.6%, resulting in a year-over-year improvement in gross profit rate of 20 basis points.

SG&A expenses were $780 million compared to $681 million for the prior year. Excluding normalization items of $30 million ($24 million in the prior year), Normalized SG&A expenses were $750 million compared to $657 million, a $93 million increase. In addition to these normalization adjustments, SG&A expenses were negatively impacted in the quarter from the conversion of U.S. dollar denominated expenses into Canadian dollars. Normalized SG&A expenses as a percentage of retail sales were 36.3% in the first quarter compared to 35.4% for the prior year, an increase of 90 basis points.

The current year SG&A expenses included the impact of incremental strategic investments in our HBC digital business, higher occupancy costs associated with a full quarter of Queen Street rent, and pre-opening costs associated with the introduction of Saks to Canada and accelerated OFF 5TH openings in the US. These increases are partially offset by operating synergies of $15 million realized in the first quarter. Absent these items, Normalized SG&A expenses as a percentage of retail sales were 35.9%, compared to 35.4% in the prior year.

Normalized EBITDA was $96 million compared to $97 million for the first quarter of Fiscal 2014, a decrease of $1 million. As a percentage of retail sales, Normalized EBITDA was 4.6% compared to 5.2% for the first quarter of Fiscal 2014. As previously stated, the Company intends to invest a total of $50 million in strategic initiatives during Fiscal 2015, with the impact of these investments expected to be more pronounced during the first half of the year, given the sales and earnings profile of the Company.

Finance costs were $47 million in the quarter, compared to $75 million for the first quarter of Fiscal 2014, a decrease of $28 million. The decrease is primarily related to an $18 million write-off of deferred financing costs and penalties of $12 million in connection with the early repayment of debt using proceeds from the Queen Street Sale, which took place in the first quarter of Fiscal 2014.

Normalized Net Loss was $33 million in the quarter, compared to $27 million in the first quarter of Fiscal 2014. Normalized items include the gain recognized on the Queen Street Sale of $261 million in the first quarter of Fiscal 2014.

Store Network

During the first quarter, the Company opened one new Saks Fifth Avenue store in San Juan, Puerto Rico and four new OFF 5TH stores located in Glendale, Arizona; Roseville, California; Boca Raton, Florida; and White Plains, New York.

       
Store Count(1)

Gross Leasable
Area(1) /
Square Footage
(000s)

STORE INFORMATION AS AT May 2, 2015
 
Hudson’s Bay 90 16,123
Lord & Taylor 50 6,898
Saks Fifth Avenue 39 4,789
OFF 5TH 81 2,247

Home Outfitters

67 2,444
Total 327 32,501
 
(1)  

HBC operates two Hudson’s Bay Outlets, two Zellers stores and four Lord & Taylor Outlets that are excluded from store count and
gross leasable area.

Dividend

The Company also announced today that its Board of Directors approved a quarterly dividend to be paid on July 15, 2015, to shareholders of record at the close of business on June 30, 2015. The dividend is in the amount of $0.05 per Common Share and is designated as an “eligible dividend” for Canadian tax purposes.

Fiscal 2015 Outlook

Based upon HBC’s results for the first quarter of Fiscal 2015, as well as management’s views on, among other things, the current and anticipated operating environment and our ongoing initiatives, management reaffirms the following Fiscal 2015 outlook, which is fully qualified by the “Forward-Looking Statements” section of this press release:

  • Total sales of between $9.0 and $9.3 billion. This implies low single digit consolidated same store sales growth, calculated on a constant basis.
  • Capital investments, net of landlord incentives, of between $350 million and $400 million. This activity includes the addition of one Saks Fifth Avenue store and between 12 and 14 OFF 5TH stores.

In Fiscal 2015, the Company intends to invest an incremental $50 million in strategic growth initiatives, including an accelerated pace of new store openings at OFF 5TH, strengthening its digital and all-channel presence and capabilities, and incurring pre-opening costs associated with the 2016 expansion of Saks and OFF 5TH into Canada.

This guidance reflects a U.S. dollar foreign exchange rate assumption of USD:CAD = 1:1.24 for Fiscal 2015. Significant variation in this foreign exchange rate assumption would impact the guidance. The actual average foreign exchange rate incorporated in the Company’s reported sales results for the first quarter 2015 was USD:CAD = 1:1.25.

Update on Joint Venture Transactions

Please refer to the MD&A for an update regarding the closings of the U.S. joint venture transaction with Simon Property Group Inc. and the Canadian joint venture transaction with RioCan Real Estate Investment Trust.

Conference Call to Discuss Results

Richard Baker, HBC’s Governor and Executive Chairman, Jerry Storch, HBC’s Chief Executive Officer and Paul Beesley, HBC’s Chief Financial Officer, will discuss the first quarter financial results and other matters during a conference call on June 10, 2015 at 8:30 am EST.

The conference call will be accessible by calling the participant operator assisted toll-free dial-in number (877) 852-2926 or international dial-in number (253) 237-1123. 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.

Consolidated Financial Statements and Management's Discussion and Analysis

The Company's unaudited interim condensed consolidated financial statements for the thirteen weeks ended May 2, 2015 and Management's Discussion and Analysis thereon are available under the Company's profile on SEDAR at www.sedar.com.

Selected Consolidated Financial Information

The following tables set out summary unaudited consolidated financial information and supplemental information for the periods indicated. The summary financial information set out below has been derived from unaudited interim condensed consolidated financial statements, prepared in accordance with International Accounting Standard 34, Interim Financial Reporting, for the thirteen week period ended May 2, 2015. The unaudited financial information presented has been prepared on a basis consistent with our audited consolidated financial statements for Fiscal 2014. In the opinion of our management, such 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 IFRS and should be read in conjunction with the Company’s unaudited interim condensed consolidated financial statements for the thirteen weeks ended May 2, 2015.

 

CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) EARNINGS

(millions of Canadian dollars, except per share amounts)

(unaudited)

 
Thirteen weeks ended
May 2, 2015   May 3, 2014
Retail sales 2,072 1,855
Cost of sales (1,226) (1,139)

Selling, general and administrative
expenses

(780) (681)
Depreciation and amortization (100) (82)
Gain on sale and leaseback transaction 308
Operating (loss) income (34) 261
Total interest expense (39) (71)
Acquisition-related finance costs (8) (4)
Finance costs (47) (75)
(Loss) earnings before income tax (81) 186
Income tax benefit (expense) 27 (10)
Net (loss) earnings for the period (54) 176
 

Net (loss) earnings per common
share - basic and diluted

(0.30)

0.97

 
 

The following table shows the reconciliation of Net (Loss) Earnings to Normalized Net Loss.

 
 

 

Unaudited

Fiscal Quarter Ended
(millions of Canadian dollars) May 2, 2015   May 3, 2014
Net (Loss) Earnings (54) 176

Normalization Adjustments (1)

Gain on Queen Street Sale - (261)
Saks Acquisition and integration related expenses and finance costs (2) 14 13
Restructuring and other 3 -
Financing related adjustments (3) - 22
Amortization of Saks inventory purchase price accounting adjustment - 23
Foreign exchange adjustment (4) 4 -
Total normalizing adjustments 21 (203)
Normalized Net Loss (33) (27)
 
(1)   Net of tax as appropriate.
(2)

Includes the recognition of non-cash finance costs related to Common Share purchase warrants of $8 million for the thirteen week
period ended May 2, 2015 (May 3, 2014: $4 million).

(3) Includes write-off of deferred financing costs and penalties on early extinguishment of debt.
(4) Represents the impact of unrealized gains related to the translation of U.S. dollar denominated asset and liability balances.
 

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(millions of Canadian dollars)

(unaudited)

         
May 2, 2015

   May 3,   
2014(1)

January 31,
2015

Assets
Cash 35 39 168
Trade and other receivables 178 130 212
Inventories 2,437 2,056 2,349
Financial assets 9 6 24
Income taxes recoverable 9 24 7
Other current assets 88 76 69
Total current assets 2,756 2,331 2,829
 
Property, plant and equipment 4,431 3,951 4,606
Intangible assets 1,023 963 1,076
Goodwill 227 205 237
Pensions and employee benefits 65 67 69
Deferred tax assets 250 225 240
Other assets 17 11 15
Total assets 8,769 7,753 9,072
 
Liabilities
Loans and borrowings 405 428 265
Trade payables 885 616 945
Other payables and accrued liabilities 562 534 603
Other liabilities 76 76
Deferred revenue 104 127 130
Provisions 106 185 115
Income taxes payable 10 2 8
Financial liabilities 6 2
Total current liabilities 2,154 1,892 2,144
 
Loans and borrowings 2,739 2,426 2,859
Provisions 59 17 63
Financial liabilities 76 28 68
Pensions and employee benefits 108 97 109
Deferred tax liabilities 622 618 668
Other liabilities 666 485 669
Total liabilities 6,424 5,563 6,580
Shareholders’ Equity
Share capital 1,420 1,420 1,420
Retained earnings 630 658 693
Contributed surplus 67 46 60
Accumulated other comprehensive income 228 66 319
Total shareholders’ equity 2,345 2,190 2,492
Total liabilities and shareholders’ equity 8,769 7,753 9,072
 
(1)  

During fiscal 2014, the Company identified measurement period adjustments based on new information relating primarily to
inventories. The impacts of the adjustments to previously reported amounts are provided in more detail in Note 4 of the Company’s
unaudited Interim Condensed Consolidated Financial Statements for the Thirteen Weeks Ended May 2, 2015.

 

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(millions of Canadian dollars)

(unaudited)

 
    May 2, 2015   May 3, 2014
Operating activities
Net (loss) earnings for the period (54) 176
Add: Income tax (benefit) expense (27) 10
Add: Finance costs 47 75
Operating (loss) income (34) 261
Net cash income taxes received (paid) 3 (1)
Interest paid in cash (37) (40)
Items not affecting cash flows:
Depreciation and amortization 100 82

Net defined benefit pension and employee
   benefits expense

6 7
Other operating activities 5
Gain on sale and leaseback transaction (308)
Share based compensation 7 3
Changes in operating working capital:
Increase in trade and other receivables (3) (7)
Increase in inventories (166) (29)
Increase in other assets (23) (6)

(Decrease) increase in trade and other payables,
   accrued liabilities and provisions

(43) 10
Decrease in other liabilities (25) (8)
Net cash outflow for operating activities (210) (36)
Investing activities
Capital investments (94) (85)
Proceeds from landlord incentives 40 45
(54) (40)
Proceeds from sale of assets 35
Proceeds from sale and leaseback transaction 650

Net cash (outflow for) inflow from investing
   activities

(54) 645
Financing activities
Long-term loans and borrowings:
Repayments (2) (511)
(2) (511)
Short-term loans and borrowings:

Net borrowings from (repayments to)
   asset-based credit facilities

148 (68)
Net decrease in other short-term borrowings (5) (3)
Dividends paid (9) (9)

Net cash inflow from (outflow for) financing
   activities

132 (591)
Foreign exchange loss on cash (1)
(Decrease) increase in cash (133) 18
Cash at beginning of period 168 21
Cash at end of period 35 39
 
 

Supplemental Information

The following table shows the reconciliation of Net (Loss) Earnings to EBITDA as well as Normalized EBITDA.

   

 

Unaudited

Fiscal Quarter Ended
(millions of Canadian dollars) May 2, 2015   May 3, 2014
Net (Loss) Earnings (54) 176

Finance costs

47 75
Income tax (benefit) expense (27) 10
Non-cash pension expense (1) 6 7
Depreciation and amortization 100 82
Share based compensation (1) 5 3
EBITDA 77 353

Normalization adjustments

Gain on Queen Street Sale - (308)
Saks Acquisition and integration related expenses (1) 9 14
Amortization of Saks inventory purchase price accounting adjustment - 38
Foreign exchange adjustment (1, 2) 5 -
Restructuring and other (1) 5 -
Total normalizing adjustments 19 (256)
 
Normalized EBITDA 96 97
 
(1)  

Item included in the determination of Normalized SG&A. Total for the thirteen week period ended May 2, 2015 was $30 million (May 3,
2014: $24 million).

(2) Represents the impact of unrealized gains related to the translation of U.S. dollar denominated asset and liability balances.

EBITDA is a non-IFRS measure that we use to assess our operating performance. EBITDA is defined as net earnings before finance costs, income tax, non-cash share based compensation expense, depreciation and amortization expense, impairment and other non-cash expenses, and non-cash pension expense. The Company’s Canadian defined benefit pension plan is currently in a surplus position and as a result, pension expense is adjusted as management does not expect to make any payments in the foreseeable future.

Normalized EBITDA is defined as EBITDA adjusted to exclude: (i) business and organization restructuring/realignment charges; (ii) merger/acquisition costs and expenses; (iii) normalizing adjustments, if any, related to transactions that are not associated with day-to-day operations; and (iv) EBITDA related to discontinued operations. Normalized Net Earnings (Loss) is defined as net earnings (loss) adjusted to exclude: (i) business and organization restructuring/realignment charges; (ii) merger/acquisition costs and expenses; (iii) normalizing adjustments, including those related to purchase accounting, if any, related to transactions that are not associated with day-to-day operations; and (iv) net earnings (loss) related to discontinued operations. Normalized SG&A expenses are defined as SG&A expenses adjusted to exclude: (i) business and organization restructuring/realignment charges; (ii) merger/acquisition costs and expenses; (iii) normalizing adjustments, if any, related to transactions that are not associated with day-to-day operations; and (iv) expenses related to discontinued operations. We have included Normalized EBITDA, Normalized Net Earnings (Loss) and Normalized SG&A expenses to provide investors and others with supplemental measures of our operating performance. We believe Normalized EBITDA, Normalized Net Earnings (Loss) and Normalized SG&A expenses are important supplemental measures of operating performance because they eliminate items that have less bearing on our operating performance and thus highlight trends in our core business that may not otherwise be apparent when relying solely on IFRS financial measures. We also believe that securities analysts, investors, rating agencies and other interested parties frequently use EBITDA, Normalized EBITDA, Normalized Net Earnings (Loss) and Normalized SG&A expenses in the evaluation of issuers, many of which present similar metrics when reporting their results. Our management also uses Normalized EBITDA in order to facilitate operating performance comparisons from period to period, prepare annual operating budgets and assess our ability to meet our future debt service, capital expenditure and working capital requirements and our ability to pay dividends on our shares. As other companies may calculate EBITDA, Normalized EBITDA, Normalized Net Loss or Normalized SG&A differently than we do, these metrics are not comparable to similarly titled measures reported by other companies.

About Hudson’s Bay Company

Hudson's Bay Company, founded in 1670, is North America's oldest company. Today, HBC offers customers a range of retailing categories and shopping experiences primarily in the United States and Canada. Our leading banners – Hudson's Bay, Lord & Taylor, Saks Fifth Avenue and Saks Fifth Avenue OFF 5TH – offer a compelling assortment of apparel, accessories, shoes, beauty and home merchandise. Hudson’s Bay is Canada's most prominent department store with 90 full-line locations, two outlet stores and thebay.com. Lord & Taylor operates 50 full-line locations primarily in the northeastern and mid-Atlantic U.S., four Lord & Taylor outlet locations and lordandtaylor.com. Saks Fifth Avenue, one of the world's pre-eminent luxury specialty retailers, comprises 39 U.S. stores, five international licensed stores and saks.com. OFF 5TH offers value-oriented merchandise through 83 U.S. stores and saksoff5th.com. The Company also operates Home Outfitters, Canada's largest kitchen, bed and bath specialty superstore with 67 locations. Hudson’s Bay Company trades on the Toronto Stock Exchange under the symbol “HBC”.

Forward-Looking Statements

Information in this press release that is not current or historical factual information may constitute forward-looking information within the meaning of securities laws, including future-oriented financial information and financial outlooks, such as those described under “Fiscal 2015 Outlook”. This information is based on certain assumptions regarding expected growth, results of operations, performance, and business prospects and opportunities. While the Company considers these assumptions to be reasonable, based on information currently available, they may prove to be incorrect. Forward-looking information is subject to a number of risks, uncertainties and other factors that could cause actual results to differ materially from what the Company currently expects. These risks, uncertainties and other factors include, but are not limited to: credit, market, currency, operational, liquidity and funding risks, including changes in economic conditions, interest rates or tax rates, the timing and market acceptance of future products, competition in the Company’s markets, the growth of certain business categories and market segments and the willingness of customers to shop at the Company’s stores, the Company’s margins and sales and those of the Company’s competitors, the Company’s reliance on customers, risks and uncertainties relating to information management, technology, supply chain, product safety, changes in law, regulations, competition, seasonality, commodity price and business disruption, the Company’s relationships with suppliers and manufacturers, changes to existing accounting pronouncements, the ability of the Company to successfully implement its strategic initiatives, changes in consumer spending, managing our portfolio of brands and our merchandising mix, seasonal weather patterns, economic, social, and political instability in jurisdictions where suppliers are located, increased shipping costs, potential transportation delays and interruptions, the risk of damage to the reputation of brands promoted by the Company and the cost of store network expansion and retrofits, compliance costs associated with environmental laws and regulations, fluctuations in currency and exchange rates, commodity prices, the Company’s ability to maintain good relations with its employees, changes in the law or regulations regarding the environment or other environmental liabilities, the Company’s capital structure, funding strategy, cost management programs and share price, the Company’s ability to integrate acquisitions and the Company’s ability to protect its intellectual property.

For more information on these risks, uncertainties and other factors the reader should refer to the Company’s filings with the securities regulatory authorities, including the Company’s Annual Information Form dated April 30, 2015, which are available on SEDAR at www.sedar.com. To the extent any forward-looking information in this press release constitutes future-oriented financial information or financial outlooks, within the meaning of securities laws, such information is being provided to demonstrate the potential of the Company and readers are cautioned that this information may not be appropriate for any other purpose. Future-oriented financial information and financial outlooks, as with forward-looking information generally, are based on assumptions and subject to risks, uncertainties and other factors. Actual results may differ materially from what the Company currently expects. Other than as required under applicable securities laws, the Company does not undertake to update any forward-looking information at any particular time. The reader should not place undue importance on forward-looking information and should not rely upon this information as of any other date. All forward-looking information contained in this press release is expressly qualified in its entirety by this cautionary statement.

Contacts

Hudson's Bay Company
Media:
Tiffany Bourré, 905-595-7184
Director, External Communications
tiffany.bourre@hbc.com
or
Investor Relations:
416-256-6745
investorrelations@hbc.com

Contacts

Hudson's Bay Company
Media:
Tiffany Bourré, 905-595-7184
Director, External Communications
tiffany.bourre@hbc.com
or
Investor Relations:
416-256-6745
investorrelations@hbc.com