HBC (TSX: HBC):
- Third quarter retail sales decreased
4.2% to $3.2 billion; comparable sales on a constant currency basis
declined by 3.2%
- Saks Fifth Avenue achieves positive
constant currency comparable sales for second consecutive quarter;
Hudson’s Bay extends streak of positive comparable sales for the
29th consecutive quarter
- Progress on HBC’s digital
initiatives include plan to create Lord & Taylor flagship on
Walmart.com, completion of second new automated distribution centre
and introduction of Saks OFF 5TH inventory on Gilt
- Heightened focus on enhancing
margins through improved inventory efficiency combined with reduced
capital investment program expected to significantly improve cash
flow in 2018; HBC’s Transformation Plan remains on track to
generate annual savings of $350 million
- WeWork strategic partnership
highlights strategy to maximize productivity of real estate assets
and create more dynamic retail destinations; agreement to sell Lord
& Taylor Fifth Avenue building continues track record of
realizing the underlying value of HBC’s real estate assets
HBC (TSX: HBC) today announced its third quarter financial
results for the thirteen and thirty-nine week periods ended October
28, 2017. Unless otherwise indicated, all amounts are expressed in
Canadian dollars. Certain metrics, including those expressed on an
adjusted, normalized, comparable and/or constant currency basis,
are non-IFRS financial measures. For more information please refer
to the “Supplemental Information” section of this press release and
the reconciliation tables below.
“We are making the necessary changes in our retail operations to
drive performance across our banners, and took dramatic steps
during the third quarter to continue the transformation of HBC and
ensure that we are well positioned to succeed in a rapidly evolving
retail environment. Our multifaceted strategic partnership with
WeWork will provide a unique way to better utilize our physical
space while increasing traffic and improving the economics at our
stores. The investment by Rhône Capital and sale of the Lord &
Taylor Fifth Avenue building will generate total proceeds of $1.6
billion and substantially strengthen our balance sheet. This will
allow us to navigate our rapidly changing industry from a position
of strength. At the same time, we continue to focus more on
digital. Our agreement to create a Lord & Taylor flagship on
Walmart.com significantly extends the reach of this business, and
we know that all of our banners have meaningful runway to continue
to grow their online presence,” stated Richard Baker, HBC’s
Governor and Executive Chairman and Interim CEO.
Ed Record, HBC's Chief Financial Officer, added, “While Saks
Fifth Avenue and Hudson’s Bay are performing well, our overall
third quarter results did not meet our expectations. The workforce
reductions made as part of our Transformation Plan caused some
operational challenges, particularly in our digital business, which
we are working to address. We know we can do better, and our
highest priorities include increasing comparable sales, improving
margins, and prioritizing our capital investments as we focus on
further developing our digital business. Our emphasis on digital
continues to grow, and we are re-allocating resources to improve
HBC’s digital platforms and online capabilities. We also plan on
reducing total inventory as part of an effort to moderate
promotional activity and increase full price selling. Finally, our
Transformation Plan remains on track to generate annual savings of
$350 million, and we continue to look at other ways to become more
efficient. These savings, combined with our planned reductions in
inventory and capital investments are expected to significantly
improve cash flow in 2018.”
Third Quarter Summary
All comparative figures below are for the thirteen week period
ended October 28, 2017 compared to the thirteen week period ended
October 29, 2016. DSG refers, collectively, to the Hudson’s Bay,
Lord & Taylor 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.
Retail sales were $3,160 million, a decrease of $140 million, or
4.2%, from the prior year. The decrease was driven primarily by
lower overall comparable sales of approximately $104 million and
negative foreign exchange impacts of $64 million. Additionally,
closed stores had a $34 million negative impact on overall sales.
These impacts were partially offset by the opening of new stores,
which added approximately $61 million in sales during the
quarter.
Consolidated comparable sales trends softened during the
quarter, decreasing by 3.2% on a constant currency basis and 5.1%
as reported. On a constant currency basis, comparable sales at Saks
Fifth Avenue grew for the second consecutive quarter, increasing by
0.2%. Comparable sales at Saks Fifth Avenue have been positive on a
constant currency basis for three of the last four quarters, while
comparable sales at Hudson’s Bay grew for the 29th consecutive
quarter. On a constant currency basis, comparable sales declined by
3.0% at HBC Europe, 3.7% at DSG and 7.6% at HBC Off Price.
Comparable sales during the quarter were impacted by lower traffic
across HBC’s banners, higher promotional activity, operational
challenges described below and the effects of the hurricanes in
Texas, Florida and Puerto Rico.
On a constant currency basis, digital sales increased by 2.1%,
or by 9.0% excluding Gilt. The workforce reductions that were made
as part of HBC’s Transformation Plan caused some marketing and
merchandising challenges during the quarter. These challenges had
an adverse impact on the business, particularly digital, and
process changes are underway to improve operations. Separately, the
Company continues to work on transitioning Gilt into a more intent
based shopping destination and, subsequent to the quarter end,
began selling inventory from Saks OFF 5TH on Gilt.com. This
milestone represents an important step in leveraging the potential
of these two banners, both of which will benefit from a shared pool
of common inventory.
For HBC overall, gross profit1 as a percentage of retail sales
was 41.6%, a decline of 60 basis points compared to the prior year.
This decrease was driven primarily by more promotional and
clearance activity at a majority of the Company’s banners.
SG&A expenses were $1,339 million compared to $1,342 million
in the prior year. The reduction was driven primarily by $50
million in savings from the Company’s Transformation Plan, $25
million in beneficial foreign exchange impacts and the absence of
certain one-time charges. The reductions in SG&A were offset by
an increase in European expansion and new store related expenses of
$55 million, $19 million of which is related to pre-opening
expenses, higher restructuring costs of approximately $13 million
and various other items.
Adjusted SG&A1 expenses, which exclude certain non-cash
items and normalizing adjustments consistent with the Company’s
other adjusted non-IFRS metrics, were $1,261 million or 39.9% of
retail sales, compared to $1,284 million or 38.9% in the prior
year. This decrease in SG&A dollars was driven primarily by $50
million in savings from the Company’s Transformation Plan and $25
million in beneficial foreign exchange impacts. These reductions
were partially offset by increased expenses related to the
Company’s European expansion of $36 million. Despite the reduction
in Adjusted SG&A1 dollars, the impacts associated with lower
comparable sales resulted in an increased Adjusted SG&A1
expense rate.
Adjusted EBITDA1 was $34 million, a decrease of $55 million
compared to the prior year. The decline in Adjusted EBITDA1 can
primarily be attributed to a decline in gross profit dollars
partially offset by decrease in Adjusted SG&A1 expenses as
discussed above.
Net loss was $243 million compared to $125 million in the prior
year. The higher net loss is primarily due to lower gross margin
dollars combined with higher finance costs, higher depreciation and
amortization expenses and a lower income tax benefit. Normalized
Net Loss1 was $203 million compared to $102 million in the prior
year, primarily as a result of similar factors.
Note:1 These performance metrics have been identified by the
Company as Non-IFRS measures. For the relevant definitions and
reconciliations, please refer to the “Non-IFRS Measures” and
“Supplemental Information” sections, respectively, of this
release.
Inventory
Inventory at the end of the third quarter declined by $64
million compared to the prior year. The lower balance at the end of
the quarter was driven primarily by lower comparable store
inventory and foreign exchange rate impacts, partially offset by
higher overall inventory at HBC Europe, largely as a result of the
expansion of Hudson’s Bay in the Netherlands and Saks OFF 5TH in
Germany.
Store Network
During the third quarter, HBC opened two Saks OFF 5TH stores in
Canada, which are located in Vancouver, British Columbia and
Montreal, Quebec. In the U.S., the Company opened three Saks OFF
5TH stores located in New York City, New York; Seattle, Washington
and East Hanover, New Jersey. The Company also opened ten Hudson’s
Bay stores in the Netherlands located in the cities of Amsterdam,
Rotterdam, The Hague, Leiden, Breda, Maastricht, Almere, Zwolle,
Tilburg and Den Bosch and one Saks OFF 5TH store in Rotterdam. The
Company closed one Hudson’s Bay Store in Quebec City, Quebec, one
Home Outfitters store in Kitchener, Ontario, one Galeria Kaufhof
store in Berlin, Germany and one Sportarena store in Dresden,
Germany.
Store information as at October 28, 2017 Store
Count(1) Gross Leasable Area (1)
/
Square Footage (000s)
Hudson’s Bay
89 15,731 Lord & Taylor
50 6,930 Saks Fifth Avenue
41 5,188
Saks OFF 5TH
129 3,879 Home Outfitters
50
1,753 HBC Europe (2)
136 29,282
Total
495 62,763
(1) HBC operates one Find @ Lord & Taylor store, one
Hudson’s Bay outlet, two Zellers clearance centres and two Lord
& Taylor outlets that are excluded from the store count and
gross leasable area.(2) Includes ten Hudson’s Bay Europe stores and
one Saks OFF 5TH Europe store opened in the Netherlands during the
quarter.
Capital Investments
Capital investments, net of landlord incentives, during the
third quarter totaled $143 million, $10 million less than the prior
year. In addition to new store openings, HBC also continued work on
its major renovation at the Saks Fifth Avenue flagship store on
Fifth Avenue in New York, completed the installation of robotic
technology at its distribution centre in Pottsville, Pennsylvania
and performed smaller renovations at various Hudson’s Bay, Lord
& Taylor and Saks Fifth Avenue stores.
HBC is dedicated to prudent capital management and, given the
current retail environment, is focusing its capital investment
program on in-progress and expected high-return projects, as well
as its digital business. Net capital investments through the third
quarter were $485 million, driven by outsized investments in the
Company’s expansion into the Netherlands and the delayed receipt of
various landlord incentives. Management now expects total capital
investments in Fiscal 2017, net of landlord incentives, to be
between $575 million and $625 million, compared to $657 million in
Fiscal 2016.
The above capital investment expectations reflect exchange rate
assumptions of USD:CAD = 1:1.27 and EUR:CAD = 1:1.48 for the
remainder of the year. Any variation in these foreign exchange rate
assumptions and/or other material assumptions and factors described
in the “Forward-Looking Statements” section of this press release
could impact the above outlook.
Debt Summary
As at October 28, 2017, HBC had the following outstanding loans
and borrowings on its balance sheet (refer to note 10 of the
unaudited interim condensed consolidated financial statements for
the thirteen and thirty-nine weeks ended October 28, 2017):
(millions of Canadian dollars) TOTAL ($)
Global ABL
1,741 U.S. Term Loan B
644 Lord &
Taylor Mortgage
508 Saks Mortgage
1,609 Other loans
13 Total Outstanding Loans and Borrowings
4,515
At the end of the third quarter, HBC had more than $800 million
in availability under its Global ABL facility. The closing of the
Rhône Capital equity investment and sale of the Lord & Taylor
Fifth Avenue building are expected to generate total proceeds of
$1.6 billion and increase liquidity by $1.1 billion following the
repayment of the Lord & Taylor Mortgage.
Conference Call to Discuss Results
Management will discuss the third quarter financial results and
other matters during a conference call on December 6, 2017 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.
Consolidated Financial Statements and Management’s Discussion
and Analysis
The Company’s unaudited interim condensed consolidated financial
statements for the thirteen and thirty-nine weeks ended October 28,
2017 and Management’s Discussion and Analysis (“MD&A”) thereon
are available under the Company’s profile on SEDAR at
www.sedar.com.
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 periods
ended October 28, 2017 and October 29, 2016 has been
prepared on a basis consistent with our audited annual consolidated
financial statements for Fiscal 2016. In the opinion of the
Company’s 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 audited annual consolidated financial statements for
Fiscal 2016.
CONDENSED CONSOLIDATED STATEMENTS OF
LOSS
(millions of Canadian dollars, except per
share amounts)
(Unaudited)
Thirteen week period ended Thirty-nine week
period ended October 28, 2017 October 29, 2016
October 28, 2017 October 29, 2016 Retail sales
3,160 3,300
9,654 9,855 Cost of sales
(1,846
) (1,908 )
(5,681 ) (5,729 )
Selling, general and
administrativeexpenses
(1,339 ) (1,342 )
(4,104 ) (4,023 )
Depreciation and amortization
(173 ) (164 )
(519 ) (476 )
Gain on sale of investments in
jointventures
— —
— 45
Operating loss (198 ) (114 )
(650 ) (328 ) Finance costs, net
(62 )
(48 )
(172 ) (149 ) Share of net loss in joint
ventures
(44 ) (51 )
(67 ) (104 )
Dilution gains from investments in
jointventures
7 6
10 18
Loss before income tax (297 ) (207 )
(879 ) (563 ) Income tax benefit
54
82
214 199
Net
loss for the period (243 ) (125 )
(665 ) (364 )
Loss per common
share Basic and diluted
(1.33 ) (0.69 )
(3.65 ) (2.00 )
The following table shows additional summary supplemental
information for the periods indicated (1):
Thirteen week period ended Thirty-nine week
period ended October 28, 2017 October 29, 2016
October 28, 2017 October 29, 2016 Adjusted
EBITDAR (1) 228 276 603 789 Adjusted EBITDA (1) 34 89 29 232
Adjusted SG&A (1) 1,261 1,284 3,889 3,833 Normalized net loss
for the period (1) (203 ) (102 ) (584 ) (315 )
Normalized net loss per Common Share
—basic and diluted (1)
(1.11 ) (0.56 ) (3.20 ) (1.73 ) Declared dividend per Common Share
0.01 0.05 0.07 0.15
(1) See below for relevant definitions and tables for
reconciliations of net loss to EBITDA, Adjusted EBITDA and Adjusted
EBITDAR, SG&A to Adjusted SG&A and net loss to Normalized
net loss. These performance metrics have been identified by the
Company as Non-IFRS measures. For the relevant definitions, please
refer to the “Non-IFRS Measures” section of this release and for
the relevant reconciliations of the nearest IFRS measures, please
refer to the “Supplemental Information” section of this
release.
CONDENSED CONSOLIDATED BALANCE
SHEETS
As at October 28, 2017 and
October 29, 2016
(millions of Canadian dollars)
(Unaudited)
October 28, 2017 October 29, 2016
restated (1)
Assets Cash
97 86 Trade
and other receivables
361 509 Inventories
4,070 4,134
Asset held for sale
275 — Other current assets
175
191
Total current assets 4,978 4,920
Property, plant and equipment
5,228 5,429 Intangible
assets and goodwill
1,749 2,000 Pensions and employee
benefits
167 158 Deferred tax assets
354 318
Investments in joint ventures
606 619 Other assets
22
22
Total assets 13,104
13,466
Liabilities Loans and borrowings
1,727
1,240 Finance leases
30 23 Trade payables
1,760 1,716
Other payables and accrued liabilities
1,083 1,122 Deferred
revenue
114 121 Provisions
192 169 Other liabilities
145 157
Total current liabilities
5,051 4,548 Loans and borrowings
2,696 2,796
Finance leases
505 493 Provisions
52 66 Pensions and
employee benefits
705 675 Deferred tax liabilities
535 724 Investment in joint venture
44 11 Other
liabilities
1,792 1,551
Total
liabilities 11,380 10,864
Shareholders’
equity Share capital
1,426 1,422 (Deficit) retained
earnings
(201 ) 638 Contributed surplus
139
104 Accumulated other comprehensive income
360
438
Total shareholders’ equity 1,724
2,602
Total liabilities and shareholders’ equity
13,104 13,466
(1) Subsequent to the acquisition of Gilt, the Company
identified measurement period adjustments related to the
acquisition based on new information. Due to this change, certain
previously reported figures have been restated. For more
information, please refer to Note 4 of the Company’s unaudited
interim condensed consolidated financial statements for the
thirteen and thirty-nine week periods ended October 28,
2017.
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
For the 39 weeks ended October 28, 2017
and October 29, 2016
(millions of Canadian dollars)
(Unaudited)
October 28, 2017 October 29, 2016
Operating
activities Net loss for the period
(665 ) (364 )
Income tax benefit
(214 ) (199 ) Dilution gains from
investments in joint ventures
(10 ) (18 ) Share of
net loss in joint ventures
67 104 Finance costs, net
172 149 Operating loss
(650
) (328 ) Net cash income taxes received (paid)
19 (21
) Interest paid in cash
(145 ) (127 ) Distributions
of earnings from joint ventures
159 152 Items not affecting
cash flows: Depreciation and amortization
519 476 Net
defined benefit pension and employee benefits expense
22 23
Other operating activities
(16 ) (4 ) Share of rent
expense to joint ventures
(267 ) (276 ) Gain on sale
of investments in joint ventures
— (45 ) Share based
compensation
29 23 Settlement of share based compensation
grants
(3 ) (3 ) Changes in operating working capital
(505 ) (541 )
Net cash outflow for
operating activities (838 ) (671 )
Investing activities Capital investments
(715
) (834 ) Proceeds from landlord incentives
230
342 Capital investments less proceeds from landlord
incentives
(485 ) (492 ) Proceeds from lease
terminations and other non-capital landlord incentives
2 —
Proceeds on disposal of assets
3 84 Proceeds from sale of
investments in joint ventures
— 65 Acquisition of Gilt
Groupe Holdings Inc., net of cash acquired
— (325 ) Return
of capital from joint venture
39 6 Other investing
activities
(16 ) 1
Net cash outflow
for investing activities (457 ) (661 )
Financing activities Long-term loans and borrowings:
Issuance
7 522 Repayments
(5 ) (328 )
Borrowing costs
— (16 )
2 178
Short-term loans and borrowings: Net borrowings from asset-based
credit facilities
1,305 807 Borrowing costs
(3
) (13 )
1,302 794 Payments on finance leases
(25 ) (27 ) Dividends paid
(13 )
(27 )
Net cash inflow from financing activities 1,266
918 Foreign exchange gain (loss) on cash
4 (7 ) Decrease in cash
(25 )
(421 )
Cash at beginning of year 122
507
Cash at end of period 97 86
Supplemental Information
The following table presents the
reconciliation of net loss to EBITDA , Adjusted EBITDA and to
Adjusted EBITDAR:
Thirteen week period ended Thirty-nine week
period ended (millions of Canadian dollars)
October 28, 2017
October 29, 2016
October 28, 2017
October 29, 2016
$ $ $ $
Net loss for the period (243 ) (125 )
(665 ) (364 ) Finance costs, net
62 48
172 149 Income tax benefit
(54 ) (82 )
(214 ) (199 ) Depreciation and amortization
173 164
519
476
EBITDA (1) (5) (62 ) 5
(188 ) 62 Certain non-cash items (2)
54
56
113 75 Normalization adjustments (3)
61 47
159 156 Net rent expense to joint ventures (4)
41 41
127 121 Cash rent to joint ventures
(114 )
(112 )
(341 ) (334 ) Cash distributions from joint
ventures
54 52
159
152 Total adjustments
96 84
217 170
Adjusted EBITDA (5) 34 89
29 232
Rent adjustments Third party rent expense
134
127
392 375 Cash rent to joint ventures
114 112
341 334 Cash distributions from joint ventures
(54
) (52 )
(159 ) (152 )
Adjusted EBITDAR (5) 228 276
603
789 Notes: (1) Since the fourth quarter of Fiscal
2016, EBITDA as previously reported has been redefined to exclude
the add back for ‘Certain non-cash items’. These add backs are
summarized in footnote 2 and are now included as part of the
adjustments to calculate Adjusted EBITDA. See the definition of
EBITDA in the “Non-IFRS measures” section of this release. (2)
Certain non-cash items consist of: Share of net loss in joint
ventures 44 51 67 104 Gain on sale of investments in joint ventures
— — — (45 ) Dilution gains from investments in joint ventures (i)
(7 ) (6 ) (10 ) (18 ) Non-cash pension expense 7 9 22 23 Impairment
and other non-cash items (1 ) (8 ) 4 (16 ) Share based compensation
11 10 30 27 54 56
113 75 (i) Represents gains realized as a result of the changes in
ownership related to the Company’s investments in the joint
ventures. (3) Normalization adjustments consist of: Acquisition and
integration related expenses (i) 2 9 10 41 Lease guarantee
provision (ii) — (2 ) — 14 Foreign exchange adjustment (iii) 5 5
(24 ) 8 Restructuring (iv) 26 13 114 47 Credit card chargeback
expense (v) — 1 1 11 European expansion (vi) 23 4 73 8 Onerous
lease provisions (vii) — (8 ) 9 (8 ) Other (viii) 5
25 (24 ) 35 61 47 159 156
(i) Includes acquisition and integration
expenses related to the acquisitions of Kaufhof and Gilt. (ii)
Represents the Company’s expected share of costs associated with
default on subleases guaranteed by the Company. (iii) Represents
the impact of unrealized losses (gains) resulting from the
translation of certain intra-group monetary assets and liabilities
related to the overall tax and legal structure of the Company. (iv)
Restructuring includes expected costs associated with the
Transformation Plan, the $75 million initiative announced in
February and programs initiated by HBC Europe to optimize operating
efficiencies. (v) Represents additional non-recurring credit card
chargeback expenses attributed to industry legal liability changes
effective October 2015. (vi) Includes one-time start-up and
expansion costs related to HBC Europe’s opening of Hudson’s Bay and
Saks OFF 5TH stores in the Netherlands and Germany. (vii)
Represents provisions for the estimated costs associated with
certain leased locations in excess of anticipated recoveries.
(viii) Other normalized expenses for the thirteen week period ended
October 28, 2017, includes insurance claim expenses of $3 million
and other smaller items totaling a net of $2 million. Other
normalized income for the thirty-nine week period ended October 28,
2017 includes $42 million received in the first quarter of Fiscal
2017 for a favourable verdict with respect to a 2013 lawsuit
brought forth by the Company relating to White Flint mall, which
was partly offset by duplicative costs associated with the U.S.
office consolidation of $8 million, insurance claim expenses of $3
million and other smaller items totaling a net of $7 million. Prior
year balances primarily represent duplicative costs associated with
the U.S. office consolidation of $22 million and $36 million for
the thirteen and thirty-nine week periods ended October 29, 2016,
respectively, and other smaller items totaling a net of $3 million
and $7 million for the thirteen and thirty-nine week periods ended
October 29, 2016 respectively, and share based compensation expense
adjustment of $8 million for the thirty-nine week period ended
October 29, 2016.
(4) Rent expense to the joint ventures net of reclassification
of rental income related to the Company’s ownership interest in the
joint ventures (see note 9 to the Company’s unaudited interim
condensed consolidated financial statements for the thirteen and
thirty-nine week periods ended October 28, 2017).(5) These
performance metrics have been identified by the Company as Non-IFRS
measures. For the relevant definitions, please refer to the
“Non-IFRS Measures” section of this release.
The following table presents the reconciliation of SG&A to
Adjusted SG&A:
Thirteen week period ended
Thirty-nine week period ended (millions of Canadian
dollars)
October 28, 2017
October 29, 2016
October 28, 2017
October 29, 2016
$ $ $ $
SG&A 1,339 1,342
4,104 4,023
Certain non-cash items (1)
(17 ) (11 )
(56 ) (34 ) Normalization adjustments (2)
(61
) (47 )
(159 ) (156 )
Total adjustments
(78 ) (58 )
(215 )
(190 )
Adjusted SG&A (3) 1,261
1,284
3,889 3,833
Adjusted SG&A (3) as
a percentage of retail sales 39.9 % 38.9 %
40.3 % 38.9 % Notes: (1) Certain
non-cash items consist of: Non-cash pension expense (7 ) (9 ) (22 )
(23 ) Impairment and other non-cash items 1 8 (4 ) 16 Share based
compensation (11 ) (10 ) (30 ) (27 ) (17 ) (11
) (56 ) (34 ) (2) Normalization adjustments consist of:
Acquisition and integration related expenses (i) (2 ) (9 )
(10 ) (41 ) Lease guarantee provision (i) — 2 — (14 ) Foreign
exchange adjustment (i) (5 ) (5 ) 24 (8 ) Restructuring (i) (26 )
(13 ) (114 ) (47 ) Credit card chargeback expense (i) — (1 ) (1 )
(11 ) European expansion (i) (23 ) (4 ) (73 ) (8 ) Onerous lease
provisions (i) — 8 (9 ) 8 Other (i) (5 ) (25 ) 24
(35 ) (61 ) (47 ) (159 ) (156 ) (i) For details refer
to footnote 3 to the reconciliation of net loss to EBITDA, Adjusted
EBITDA and to Adjusted EBITDAR table above. (3) This performance
metric has been identified by the Company as a Non-IFRS measure.
For the relevant definition, please refer to the “Non-IFRS
Measures” section of this release.
The following table presents the reconciliation of net loss to
Normalized net loss:
Thirteen week period ended
Thirty-nine week period ended (millions of Canadian
dollars)
October 28, 2017
October 29, 2016
October 28, 2017
October 29, 2016
$ $ $ $
Net loss for the period (243 ) (125 )
(665 ) (364 ) Certain non-cash items (1)
(4 ) (3 )
(6 ) (41 ) Normalization
adjustments (2)
40 19
112 93 Financing related
adjustments
— —
— 2 Adjustments to share of net loss
in joint ventures (3)
4 7
(25 ) (5 ) Total adjustments (4)
40 23
81 49
Normalized net loss (5) (203
) (102 )
(584 ) (315 ) Notes:
(1) Certain non-cash items consist of: Gain on sale of investments
in joint ventures — — — (28 ) Dilution gains from investments in
joint ventures (4 ) (3 ) (6 ) (13 ) (4 ) (3 )
(6 ) (41 ) (2) Normalization adjustments consist of: Acquisition
and integration related expenses and finance costs (i) 2 (1 ) 6 14
Restructuring (ii) 19 9 77 32 Foreign exchange adjustment (iii) 2 —
(13 ) 10 Lease guarantee provision (iv) — (2 ) — 10 Credit card
chargeback expense (v) (1 ) 1 — 7 European expansion (vi) 16 1 51 4
Onerous lease provisions (vii) — — 6 — Other (viii) 2
11 (15 ) 16 40 19 112 93
(i) Includes acquisition and integration
expenses related to the acquisitions of Kaufhof and Gilt. In
addition, includes the recognition of non-cash finance income
related to Common Share purchase warrants of nil and $1 million for
the thirteen and thirty-nine week periods ended October 28, 2017,
respectively (thirteen and thirty-nine week periods ended October
29, 2016: $7 million and $15 million, respectively).(ii)
Restructuring includes expected costs associated with the
Transformation Plan, the $75 million initiative announced in
February and programs initiated by HBC Europe to optimize operating
efficiencies.(iii) Represents the impact of unrealized losses
(gains) resulting from the translation of certain intra-group
monetary assets and liabilities related to the overall tax and
legal structure of the Company.(iv) Represents the Company’s
expected share of costs associated with default on subleases
guaranteed by the Company.(v) Represents additional non-recurring
credit card chargeback expenses attributed to industry legal
liability changes effective October 2015.(vi) Includes one-time
start-up and expansion costs related to HBC Europe’s opening of
Hudson’s Bay and Saks OFF 5TH stores in the Netherlands and
Germany.(vii) Represents provisions for the estimated costs
associated with certain leased locations in excess of anticipated
recoveries.(viii) Other normalized expenses for the thirteen week
period ended October 28, 2017, includes insurance claim expenses of
$2 million. Other normalized income for the thirty-nine week period
ended October 28, 2017 includes $42 million ($25 million net of
tax) received in the first quarter of Fiscal 2017 for a favourable
verdict with respect to a 2013 lawsuit brought forth by the Company
relating to White Flint mall, which was partly offset by
duplicative costs associated with the U.S. office consolidation of
$4 million, insurance claim expenses of $2 million and other
smaller items totaling a net of $4 million. Prior year balances
primarily represent duplicative costs associated with the U.S.
office consolidation of $13 million and $22 million for the
thirteen and thirty-nine week periods ended October 29, 2016,
respectively, offset by other smaller items totaling $2 million for
the thirteen week period ended October 29, 2016 and share based
compensation expense adjustment of $6 million for thirty-nine week
period ended October 29, 2016.
(3) Relates to the Company’s share of net non-recurring items
incurred by the HBS Joint Venture, which is primarily represents
the impact of unrealized losses (gains) resulting from the
translation of certain intra-group monetary assets and liabilities
related to the overall tax and legal structure of the joint
venture.(4) All adjustments are tax-effected as appropriate.(5)
This performance metric has been identified by the Company as a
Non-IFRS measure. For the relevant definition, please refer to the
“Non-IFRS Measures” section of this release.
Non-IFRS Measures
Gross profit, EBITDA, Adjusted EBITDA, Adjusted EBITDAR,
Normalized Net Loss and Adjusted SG&A are non-IFRS measures
that the Company uses to assess its operating performance. Gross
profit is defined as retail sales less cost of sales. EBITDA is
defined as net earnings (loss) before net finance costs, income tax
expense (benefit) and depreciation and amortization expense. EBITDA
as previously reported has now been defined to exclude the add back
for ‘certain non-cash items’. These add backs are summarized above
and in note 2 to the reconciliation of net loss to EBITDA, Adjusted
EBITDA and Adjusted EBITDAR in the “Supplemental Information”
section of this press release. As a result of this change, previous
references to EBITDA have been updated to conform to this
basis.
EBITDAR is defined as EBITDA before rent expense to third
parties and net rent expense to joint ventures.
Adjusted EBITDA is defined as EBITDA adjusted to exclude: (A)
certain non-cash items which include: (i) share of net (earnings)
loss in joint ventures, (ii) gain on contribution of assets to
joint ventures, (iii) gain on sale of investments in joint
ventures, (iv) dilution gains from investments in the joint
ventures, (v) non-cash pension expense, (vi) impairment and other
non-cash items and (vii) non-cash share based compensation expense;
(B) normalization adjustments which include: (i) business and
organization restructuring/realignment charges, (ii)
merger/acquisition costs and expenses and (iii) adjustments,
including those related to purchase accounting, if any, related to
transactions that are not associated with day-to-day operations and
joint venture adjustments. Adjusted EBITDAR is defined as Adjusted
EBITDA before third party rent expense, cash rent to joint ventures
and cash distributions from joint ventures.
Adjusted SG&A is defined as selling, general &
administrative expenses adjusted to exclude: (A) certain non-cash
items which include: (i) non-cash pension expense, (ii) impairment
and other non-cash items and (iii) non-cash share based
compensation expense, and (B) normalization adjustments which
include: (i) business and organization restructuring/realignment
charges and (ii) merger/acquisition costs and expenses and (iii)
adjustments, if any, related to transactions that are not
associated with day-to-day operations. Normalized net earnings
(loss) is defined as net earnings (loss) adjusted to exclude: (A)
certain non-cash items which include: (i) impairment of goodwill,
(ii) gain on contribution of assets to joint ventures, (iii) gain
on sale of investments in joint ventures and (iv) dilution gains
from investments in joint ventures; (B) normalization adjustments
which include: (i) business and organization
restructuring/realignment charges; (ii) merger/acquisition costs
and expenses and (iii) adjustments, including those related to
purchase accounting, if any, related to transactions that are not
associated with day-to-day operations and tax related adjustments;
(C) financing related adjustments and (D) adjustments to share of
net (earnings) loss in joint ventures.
For further clarity, please refer to the detailed tables
reconciling net (loss) earnings to Adjusted EBITDA and to Adjusted
EBITDAR, reported SG&A to Adjusted SG&A and net (loss)
earnings to Normalized net earnings (loss).
The Company uses these non-IFRS measures to provide investors
and others with supplemental measures of its operating performance.
The Company believes these non-IFRS measures are important
supplemental measures of operating performance because they
eliminate items that have less bearing on the Company’s operating
performance and thus highlight trends in its core business that may
not otherwise be apparent when relying solely on IFRS financial
measures. The Company also believes that securities analysts,
investors, rating agencies and other interested parties frequently
use these non-IFRS measures in the evaluation of issuers, many of
which present similar metrics when reporting their results. The
Company’s management also uses Adjusted EBITDAR in order to
facilitate retail business operating performance comparisons from
period to period, prepare annual operating budgets and assess the
Company’s ability to meet its future debt service, capital
expenditure and working capital requirements and the Company’s
ability to pay dividends on its Common Shares. As other companies
may calculate these non-IFRS measures differently than the Company,
these metrics may not be comparable to similarly titled measures
reported by other companies.
This press release makes reference to certain comparable
financial results expressed on a constant currency basis, including
comparable sales, comparable digital sales and comparable store
inventory. The Company calculates comparable sales on a
year-over-year basis from stores operating for at least thirteen
months and includes digital sales and clearance store sales. In
calculating the sales change, including digital sales, on a
constant currency basis where applicable, prior year foreign
exchange rates are applied to both current year and prior year
comparable sales. Additionally, where an acquisition closed in the
previous twelve months, comparable sales change on a constant
currency basis incorporate results from the pre-acquisition period.
This enhances the ability to compare underlying sales trends by
excluding the impact of foreign currency exchange rate fluctuations
as well as by reflecting new acquisitions. The Company
calculates comparable inventory levels on a year-over-year constant
currency basis and does not include (i) acquisitions not closed
prior to the end of the same comparable quarter of the prior fiscal
year and (ii) new store openings after the end of the same
comparable quarter of the prior fiscal year. Definitions and
calculations of comparable sales financial results differ among
companies in the retail industry. The Company notes that results
from acquisitions are only incorporated in the Company’s reported
consolidated financial results from and after the respective
acquisition date.
For further discussion of the Company’s financial and operating
results, please refer to the MD&A of Financial Condition and
Results of Operations for the thirteen and thirty-nine weeks ended
October 28, 2017.
About HBC
HBC is a diversified global retailer focused on driving the
performance of high quality stores and their all-channel offerings,
growing through acquisitions 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 more than 480 stores and over 66,000 employees
around the world.
HBC's leading banners across North
America and Europe include Hudson's
Bay, Lord & Taylor, Saks Fifth Avenue, Gilt, Saks OFF
5TH, Galeria Kaufhof, the largest department store group
in Germany, and Belgium's only department store
group Galeria INNO.
HBC has significant investments in real estate joint ventures.
It has partnered with Simon Property Group Inc. in the HBS
Global Properties Joint Venture, which owns properties
in the United States and Germany. In Canada, it
has partnered with RioCan Real Estate Investment Trust in the
RioCan-HBC Joint Venture.
Forward-Looking Statements
Certain statements made in this news release, including, but not
limited to, the benefits of the Company’s model of combining world
class real estate assets with diverse retail businesses, Rhône's
equity investment in HBC, the sale of the Lord & Taylor
building to WeWork, the expectation that Rhône's equity investment
and the sale of the Lord & Taylor building will generate a
total proceeds of $1.6 billion and increase total liquidity by $1.1
billion, plans to create Lord & Taylor flagship on Walmart.com,
the ability to enhance margins through improved inventory
management and a reduced capital investment program, significant
improvement on cash flow in 2018, the anticipated benefits and
annualized savings from HBC’s Transformation Plan, including the
anticipated timing of realizing such savings, ongoing digital
initiatives including plans to grow the Company’s online presence,
the Company’s plan to reduce total inventory, the Company’s ongoing
exploration and evaluation of real estate strategies and its
ability to generate value from HBC’s extensive real estate
portfolio, including increased traffic and improved economics
through better utilization of physical space, the ongoing
integration of Gilt and Saks OFF 5TH including the introduction of
Saks OFF 5TH inventory on Gilt and the expected increase in reach
of offerings and benefit from a shared pool of common inventory,
the Company’s anticipated gross capital investments and capital
investments, net of landlord incentives, for Fiscal 2017, and the
intended use of such capital investments, efforts to moderate
promotional activity and increase full price selling, the Company’s
prospects for future growth opportunities and other statements that
are not historical facts, are forward-looking. Often but not
always, forward-looking statements can be identified by the use of
forward-looking terminology such as “may”, “will”, “expect”,
“believe”, “estimate”, “plan”, “could”, “should”, “would”,
“outlook”, “forecast”, “anticipate”, “foresee”, “continue” or the
negative of these terms or variations of them or similar
terminology.
Implicit in forward-looking statements in respect of capital
investments, including, among others, the Company’s anticipated
Fiscal 2017 total capital investments, net of landlord incentives,
to be between $575 million and $625 million, are certain
assumptions regarding, among others, the overall retail environment
and currency exchange rates for Fiscal 2017. Specifically, the
Company has assumed the following exchange rates for the remainder
of Fiscal 2017: USD:CAD = 1:1.27 and EUR:CAD = 1:1.48. These
current assumptions, although considered reasonable by the Company
at the time of preparation, may prove to be incorrect. Readers are
cautioned that actual capital investments could differ materially
from what is currently expected and are subject to a number of
risks and uncertainties, including, among others described below,
general economic, geo-political, market and business conditions,
changes in foreign currency rates from those assumed, the risk of
unseasonal weather patterns and the risk that the Company may not
achieve overall anticipated financial performance.
Although HBC believes that the forward-looking statements in
this news release are based on information and assumptions that are
current, reasonable and complete, these statements are by their
nature subject to a number of factors that could cause the
Company’s actual results, level of activity, performance,
achievements, future events or developments to differ materially
from management’s expectations and plans as set forth in such
forward-looking statements, including, without limitation, the
following factors, many of which are beyond HBC’s control and the
effects of which can be difficult to predict: ability to execute
retailing growth strategies including better utilization of
physical space, ability to continue comparable sales growth,
challenges associated with implementation of our Transformation
Plan, changing consumer preferences, marketing and advertising
program success, damage to brands, dependence on vendors, ability
to realize synergies and growth from strategic acquisitions,
ability to make successful acquisitions and investments, successful
inventory management, loss or disruption in centralized
distribution centres, ability to upgrade and maintain the Company’s
information systems to support the organization and protect against
cyber-security threats, privacy breach, risks relating to the
Company’s size and scale, loss of key personnel, ability to attract
and retain qualified employees, implementation of changes to the
Company’s capital investment program, deterioration in labour
relations, ability to maintain pension plan surplus, funding
requirement of Saks’ pension plan, funding requirement of the HBC
Europe pension plan, limits on insurance policies, loss of
intellectual property rights, insolvency risk of parties which the
Company does business with or their unwillingness to perform their
obligations, exposure to changes in the real estate market,
successful operation of the joint ventures to allow the Company to
realize the anticipated benefits, loss of flexibility with respect
to properties in the joint ventures, exposure to environmental
liabilities, changes in demand for current real estate assets,
increased competition, change in spending of consumers including
the impact of unfavourable or unstable political conditions and
terrorism, international operational risks, fluctuations in the
U.S. dollar, Canadian dollar, Euro and other foreign currencies,
increase in raw material costs, seasonality of business, extreme
weather conditions or natural disasters, ability to manage
indebtedness and cash flow, risks related with increasing
indebtedness, restrictions of existing credit facilities reducing
flexibility, ability to maintain adequate financial processes and
controls, ability to maintain dividends, ability of a small number
of shareholders to influence the business, uncontrollable sale of
the Company’s Common Shares by significant shareholders could
affect share price, constating documents discouraging favorable
takeover attempts, increase in regulatory liability, increase in
product liability or recalls, increase in litigation, developments
in the credit card and financial services industries, changes in
accounting standards, risks associated with the Company’s strategic
initiatives, including the Transformation Plan, risks associated
with the Private Placement and other risks inherent to the
Company’s business and/or factors beyond its control which could
have a material adverse effect on the Company.
HBC cautions that the foregoing list of important factors and
assumptions is not exhaustive and other factors could also
adversely affect its results. For more information on the risks,
uncertainties and assumptions that could cause HBC’s actual results
to differ from current expectations, please refer to the “Risk
Factors” section of HBC’s Annual Information Form dated April 28,
2017, the “Risk Factors” section of HBC’s MD&A dated December
6, 2017, as well as HBC’s other public filings, available at
www.sedar.com and at www.hbc.com.
The forward-looking statements contained in this news release
describe HBC’s expectations at the date of this news release and,
accordingly, are subject to change after such date. Except as may
be required by applicable Canadian securities laws, HBC does not
undertake any obligation to update or revise any forward-looking
statements contained in this news release, whether as a result of
new information, future events or otherwise. Readers are cautioned
not to place undue reliance on these forward-looking
statements.
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version on businesswire.com: http://www.businesswire.com/news/home/20171206005594/en/
Hudson’s Bay CompanyINVESTOR RELATIONS:Elliot
Grundmanis, (646)
802-2469elliot.grundmanis@hbc.comorMEDIA:Andrew Blecher,
(646) 802-4030andrew.blecher@hbc.com