HBC Reports Second Quarter 2018 Financial Results
TORONTO & NEW YORK--(BUSINESS WIRE)--Sep 12, 2018--HBC (TSX:HBC) today announced its financial results for the thirteen and twenty-six week periods ended August 4, 2018. 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. Following the Company’s agreements to form a strategic partnership with SIGNA Retail Holdings (“SIGNA”), HBC Europe has been classified as a discontinued operation. Accordingly, the results from this business are excluded from the highlights and summary results discussed in this press release. For more information please refer to the “Supplemental Information” section of this press release and the reconciliation tables below.
“We have emphasized improving bottom line performance across all of our banners, resulting in a significant increase in Adjusted EBITDA during Q2 and year to date. This improvement is encouraging, and was driven by higher gross margins and better inventory management,” said Helena Foulkes, HBC’s Chief Executive Officer. “We have been making the tough decisions necessary to set HBC up for long-term success and see even more opportunity to drive growth and profitability. By strengthening our retail portfolio, including a particular focus on the customer experience, and maximizing the value of our real estate, we expect to drive performance and unlock shareholder value.”
Foulkes added, “We continue to focus on increasing accountability and improving profitability, and our recent results are a step in the right direction. Saks Fifth Avenue’s strong performance is especially encouraging. The business’s ongoing strategy to elevate the brand through enhancement of its fashion offering, increased customer engagement and efforts to bring together the online and offline shopping experience continues to drive traction within the luxury segment. Going forward, we see even greater runway for this business. While earnings have stabilized, there is still significant work to be done to improve our topline at Lord & Taylor and Saks OFF 5TH, which have not met expectations. With the right leadership team now in place, our banners are empowered to develop and implement strategies that will best drive their businesses forward.”
“Our recent strategic partnership in Europe significantly strengthens HBC’s retail portfolio and continues our track record of executing transactions that unlock the value of our real estate portfolio. This transaction highlights the significant value of our European assets, creating more than $1.1 billion in real estate value, and generates cash that will improve our liquidity and overall leverage. The combination of HBC Europe with the next largest retail group in Germany provides the groundwork for this newly formed operating company to stabilize performance and tackle the evolving European retail industry head-on. We look forward to working with our new partner on future initiatives for the European real estate assets, as well as continuing to explore opportunities to capitalize on the value of our assets in North America,” stated Richard Baker, HBC’s Governor and Executive Chairman.
HBC Europe Partnership
As announced on September 11, 2018, HBC entered into definitive agreements with SIGNA to form a strategic partnership encompassing its European retail and real estate assets. HBC Europe’s retail operations will merge with SIGNA’s Karstadt Warenhaus GmbH’s retail operations, with HBC taking a 49.99% interest in the combined businesses. This includes two iconic banners, Galeria Kaufhof and Karstadt, as well as other HBC and SIGNA banners to create a well-capitalized retailer positioned for improved profitability. Together, these businesses generated approximately €5.4 billion in total sales during fiscal 2017. SIGNA will also acquire a 50% interest in HBC’s German real estate assets from HBC and its partners, and a 50-50 joint venture will be formed to own and manage HBC’s German real estate assets. These transactions will generate net proceeds to HBC of €411 million ($616 million). The net proceeds, together with the implied value of HBC’s remaining interest in these real estate assets, net of debt, totals $8.71 per share 2.
Strengthening HBC’s Retail Portfolio
HBC is committed to evaluating all opportunities while focusing its resources on the retail businesses that provide the most opportunity for profitable growth. Aligned with this focus, HBC has taken action to strengthen its European portfolio and stabilize its North American operations. The Company’s recently announced strategic partnership in Europe creates an improved operating platform and provides additional liquidity and enhanced flexibility to execute in North America. This partnership follows the divestment of Gilt, which closed during the quarter.
While Saks Fifth Avenue and Hudson’s Bay have demonstrated solid performance, there is still significant opportunity to improve these businesses. The Company continues to support each banner in leveraging data-driven insights to tailor marketing and digital strategies, delivering a better customer experience in our stores. Earnings at Saks OFF 5TH and Lord & Taylor have stabilized, though overall performance has not met expectations. New leadership teams at these banners are implementing changes that are expected to improve results over time.
Maximizing the Value of HBC’s Real Estate
HBC continues to unlock value from its real estate portfolio with the partial sale of its German real estate assets and the upcoming closing of the sale of the Lord & Taylor Fifth Avenue flagship building. Combined, the close of the partial sale of HBC’s German real estate assets and the Lord & Taylor flagship building are expected to generate total proceeds of at least $1.4 billion over the coming quarters. In addition to these recent activities, the Company continues to explore strategic partnerships and other alternatives that maximize the value of its North American assets.
Second Quarter Summary
All comparative figures below are for the thirteen week period ended August 4, 2018 compared to the thirteen week period ended July 29, 2017. All references to “comparable sales” are made on a constant currency basis. See “Non-IFRS Measures”
During the quarter, the Company committed to a plan to sell its controlling interest in HBC Europe and to form a strategic partnership for its European businesses. As a result, HBC Europe has been classified as a discontinued operation. Accordingly, the results from this business are excluded from the discussion below.
Revenue was $2,160 million, a decrease of $44 million, or 2.0%, from the prior year. Overall comparable sales declined 0.4%, with total comparable digital sales increasing 10.8%. Comparable sales performance at the Company’s banners are highlighted below:Saks Fifth Avenue comparable sales increase of 6.7% DSG (Hudson’s Bay, Lord & Taylor and Home Outfitters) comparable sales decrease of 3.8% Saks OFF 5TH comparable sales decrease of 7.6%
For HBC overall, gross profit 1 as a percentage of revenue was 39.9%, an improvement of 240 basis points compared to the prior year. Higher margins were driven predominantly by improved full price selling margin rates and increased penetration of full price selling versus clearance sales.
SG&A expenses were $870 million compared to $886 million in the prior year. The decrease was primarily driven by $40 million in additional savings from the Company’s restructuring programs, a $34 million reduction in one-time restructuring charges and other smaller items. Partially offsetting this were increased store variable costs driven by the sales mix by banner as well as additional investments in digital resources combined with an increase in fulfillment expenses related to the sales growth in this channel.
Adjusted SG&A 1 expenses, which exclude certain non-cash items and normalizing adjustments consistent with the Company’s other non-IFRS metrics, were $835 million or 38.7% of revenue, compared to $832 million or 37.7% in the prior year. This increase was primarily driven by higher variable store costs and increased investment in digital resources as discussed above, partially offset by $40 million in savings from the Company’s restructuring programs. The increase in Adjusted SG&A 1 dollars combined with the impacts associated with lower comparable sales resulted in an increased Adjusted SG&A 1 expense rate.
Adjusted EBITDAR 1 was $119 million, an increase of $30 million compared to the prior year. The increase in Adjusted EBITDAR 1 can primarily be attributed to an increase in gross profit dollars, partially offset by nominally higher Adjusted SG&A 1 expenses.
Net loss from continuing operations was $147 million compared to a net loss $100 million in the prior year. The increase in loss was primarily driven by a higher reported loss from the Company’s joint ventures, largely driven by the impact of foreign exchange and a decrease in income tax benefits. These impacts were partially offset by higher gross profit dollars and lower SG&A expenses. Normalized net loss 1 was $124 million compared to $97 million in the prior year, driven by lower income tax benefits, increased depreciation and amortization expenses and higher finance costs, partially offset by a reduced operating loss.
HBC Europe, which has been classified as a discontinued operation, generated sales of $970 million, an increase of 1.9% compared to the prior year. Comparable sales declined 4.7%, a sequential improvement from the first quarter of Fiscal 2018. Adjusted EBITDAR was $72 million, compared to $114 million in the prior year, driven by lower comparable sales and gross profit dollars and higher rent expenses, largely driven by new store openings over the last 12 months. Net loss was $121 million, compared to $81 million in the prior year.
Inventory as reported on the balance sheet at the end of the second quarter declined by $690 million compared to the prior year. This reduced balance at the end of the quarter was driven primarily by the divestment of Gilt and the reclassification of inventory related to HBC Europe to assets of discontinued operations held for sale, as well as a 0.7% reduction in comparable inventory at the Company’s North American banners. These impacts were partially offset by translation effects from the depreciation of the Canadian dollar.
Store Network - continuing operations
During the second quarter, HBC closed two Home Outfitters stores in Quebec City, Quebec and St. Bruno, Quebec.
(1) HBC operates one Hudson’s Bay outlet, two Zellers clearance centres and three Lord & Taylor outlets that are excluded from the store count and gross leasable area.
Capital Investments - continuing operations
Capital investments, net of landlord incentives, totaled $46 million during the second quarter, $32 million less than the prior year. HBC continued work on its major renovation at the Saks Fifth Avenue flagship store on Fifth Avenue in New York, and performed smaller renovations at various Hudson’s Bay, Saks Fifth Avenue and Lord & Taylor stores. Technology investments included the completion of the Company’s automated distribution center in Pottsville, as well as other digital related initiatives.
Following the agreement to combine its European operations with SIGNA’s Karstadt, management expects total North American capital investments in Fiscal 2018, net of landlord incentives, to be between $375 million and $425 million. These capital investment expectations reflect exchange rate assumptions of USD:CAD = 1:1.27 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.
As at August 4, 2018, HBC had the following outstanding loans and borrowings on its balance sheet (refer to note 13 of the unaudited interim condensed consolidated financial statements for thirteen and twenty-six week periods ended August 4, 2018):
Including $78 million of additional ABL borrowings at HBC Europe, HBC had $1,155 million in availability under its Global ABL facility at the end of the second quarter, an increase of $94 million in availability compared to the prior year. The partial sale of HBC’s German real estate assets and the close of the Lord & Taylor flagship building sale are expected to generate total proceeds of at least $1.4 billion over the coming quarters. These proceeds will be used to dramatically reduce HBC’s outstanding borrowings, significantly enhancing the Company’s financial flexibility and increasing overall liquidity. Management currently expects to fully repay the Lord & Taylor mortgage, prepay $228 million of the Term Loan B, and end the year with no outstanding borrowings on HBC’s ABL facility.
HBC also announced today that its board of directors has approved HBC’s regular quarterly dividend to be paid on October 15, 2018, to shareholders of record at the close of business on September 28, 2018. 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.
Conference Call to Discuss Results
Management will discuss the second quarter financial results and other matters during a conference call on September 12, 2018 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 twenty-six weeks ended August 4, 2018 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 quarters ended August 4, 2018 and July 29, 2017 has been prepared on a basis consistent with our audited annual consolidated financial statements for Fiscal 2017, respectively. 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 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 4, 2018.
The following table shows additional summary supplemental information – continuing operations for the periods indicated (1):
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