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HBC Reports First Quarter 2018 Financial Results

June 5, 2018

TORONTO & NEW YORK & COLOGNE, Germany--(BUSINESS WIRE)--Jun 5, 2018--HBC (TSX: HBC) today announced its financial results for the thirteen week period ended May 5, 2018. In addition, the Company provided an update on strategic actions it intends to take to improve profitability, including the decision to divest Gilt and right-sizing Lord & Taylor’s store footprint. 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.

“Results in North America were encouraging, highlighted by better performance across the group and comparable sales growth of 6% at Saks. We have significant opportunity to build on this trend, and are taking action to strengthen the foundation of the Company and position HBC for profitable growth. Our decision to divest Gilt will allow us to focus our time and resources on the businesses with the greatest potential to drive operating performance, and I am confident that the retail operations are moving in the right direction under Helena’s leadership. In addition to making the right strategic decisions to improve our business, we will continue to explore all opportunities to leverage the strength of our real estate portfolio to create value for our shareholders,” stated Richard Baker, HBC’s Governor and Executive Chairman.

Helena Foulkes, HBC’s Chief Executive Officer, added, “Over the last month, we have worked rapidly to put in place a leadership team focused on driving business results, streamlining our processes and fostering a culture of accountability. We need to improve across all areas of the business, and this begins with rededicating ourselves to putting the customer first in everything we do. This customer-focused mindset will dictate how we think about key functions of the business, and I see opportunity to dramatically improve our marketing and digital operations while also refining company wide processes that impact our end to end customer experience. In Europe, we have de-layered management, allowing me to be closer to that business as we take actions that are expected to stabilize the topline and improve our cost structure in this important market. Accountability begins with our leadership team, and I am confident that we now have the right people in place across HBC to drive actions that will result in profitable growth.”

“We are also taking action to reposition Lord & Taylor for improved results and increased profitability. With a new leader dedicated to evolving our experience and merchandise assortment to best meet customer expectations and shopping preferences, we will take advantage of having a smaller footprint to rethink the model and focus on our digital opportunities,” continued Foulkes. “The Lord & Taylor flagship on Walmart.com, which launched last week, is a great example of this and represents how we are thinking about the entire business.”

Gilt Divestment

HBC has entered into agreements to sell Gilt, and the sale of this business is expected to close during the second quarter of 2018. Gilt generated less than 4% of the Company’s total sales in Fiscal 2017, and the disposition is expected to improve Adjusted EBITDA 1 by $10 to $15 million on an annualized basis.

Optimizing Lord & Taylor

An increased focus on driving Lord & Taylor’s digital business, combined with new leadership and an optimized store footprint, is expected to reduce costs and improve the overall performance of this business. To better balance the brand’s brick and mortar presence with its online channels and increase profitability, the Company expects to close up to 10 Lord & Taylor stores through 2019. This reduced store network will allow new leadership to re-think the model and better position Lord & Taylor for future success.

After evaluating best use scenarios for its New York City Fifth Avenue location, the Company has decided not to maintain a presence at this location following turnover of the building to WeWork. Exiting this iconic space reflects Lord & Taylor’s increasing focus on its digital opportunity and HBC’s commitment to improving profitability.

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.

First Quarter Summary

All comparative figures below are for the thirteen week period ended May 5, 2018 compared to the thirteen week period ended April 29, 2017. All references to “comparable sales” are made on a constant currency basis. See “Non-IFRS Measures”

Following the Company’s decision to divest Gilt, this business has been classified as a discontinued operation. Accordingly, the results from this business are excluded from the discussion below.

Revenue was $3,088 million, an increase of $30 million, or 1.0%, from the prior year. Overall comparable sales declined 0.7%, with total comparable digital sales increasing 7.7%. Comparable sales performance at the Company’s banners are highlighted below:

Saks Fifth Avenue comparable sales increase of 6.0% DSG (Hudson’s Bay, Lord & Taylor and Home Outfitters) comparable sales decrease of 0.6% Saks OFF 5TH comparable sales decrease of 3.5% HBC Europe (Galeria Kaufhof and Galeria INNO) comparable sales decrease of 6.6%

For HBC overall, gross profit 1 as a percentage of revenue was 42.1%, an improvement of 20 basis points compared to the prior year. During the quarter, the Company recorded a $16 million inventory reserve related to the planned store closures at Lord & Taylor, and a $4 million markdown charge related to the closure of two Lord & Taylor stores during the quarter. Absent these charges, gross profit as a percentage of sales would have improved 90 basis points.

SG&A expenses were $1,367 million compared to $1,323 million in the prior year. The increase was primarily driven by additional expenses related to new stores opened during the prior 12 months, totaling $68 million, and a $21 million negative foreign exchange impact. Prior year results also included a positive $42 million impact related to a favorable legal verdict. These increases were partially offset by $46 million in additional savings from the Company’s restructuring programs, $32 million of lease termination related to the closure of two Lord & Taylor stores, and a reduction in other non-recurring and one-time charges.

Adjusted SG&A 1 expenses, which exclude certain non-cash items and normalizing adjustments consistent with the Company’s other non-IFRS metrics, were $1,333 million or 43.2% of revenue, compared to $1,292 million or 42.2% in the prior year. The increase in Adjusted SG&A dollars was driven primarily by an increase in rent expense and other costs related to new store openings, and a negative $21 million foreign exchange impact, partially offset by 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 $173 million, an increase of $11 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 higher non-rent Adjusted SG&A 1 expenses.

Net loss from continuing operations was $314 million compared to a net loss $214 million in the prior year. The increase was driven by higher SG&A expenses and depreciation and amortization expenses. A higher increase in the reported loss from the Company’s joint ventures, largely driven by the impact of foreign exchange, and a decrease in the income tax benefit also contributed to the larger loss. Normalized net loss 1 was $286 million compared to $209 million in the prior year, primarily a result of higher Adjusted SG&A expenses, increased depreciation and amortization expense, and lower income tax benefits.

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 first quarter declined by $117 million compared to the prior year. This lower balance at the end of the quarter was driven primarily by foreign exchange rate impacts, the reclassification of inventory related to Gilt to assets of discontinued operations held for sale, and comparable inventory reductions at Hudson’s Bay and HBC Europe. These impacts were partially offset by higher inventory in North America and the opening of new stores.

Store Network

During the first quarter, HBC opened one Saks Fifth Avenue store and one Saks OFF 5TH store in Canada which are located in Calgary, Alberta and Markham, Ontario, respectively. In the United States, the Company opened two Saks OFF 5TH stores located in West Hartford, Connecticut and Bridgewater, New Jersey. In Europe the Company opened one Saks OFF 5TH Europe store in Bonn, Germany and three Hudson’s Bay stores in the cities of Amersfoort, Enschede and Haarlem in the Netherlands. The Company closed two Lord & Taylor stores located in Annapolis, Maryland and Skokie, Illinois and two Home Outfitters stores in Toronto, Ontario and Richmond, British Columbia.

(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. (2) Includes 13 Hudson’s Bay Netherlands stores and eight Saks OFF 5TH Europe stores opened in Germany and the Netherlands.

Capital Investments

Capital investments, net of landlord incentives, during the first quarter totaled $130 million, $21 million less than the prior year. In addition to its European expansion, HBC also 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 Galeria Kaufhof, Hudson’s Bay, Lord & Taylor and Saks Fifth Avenue stores. Technology investments included the build out of the Company’s automated distribution center in Pottsville, as well as other digital related initiatives.

Management continues to expect total capital investments in Fiscal 2018, net of landlord incentives, to be between $450 million and $500 million, compared to $599 million in Fiscal 2017. These 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 May 5, 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 week period ended May 5, 2018):

At the end of the first quarter, HBC had $1,490 million in availability under its Global ABL facility, an increase of $67 million compared to the prior year.

Dividend

HBC also announced today that its board of directors has approved HBC’s regular quarterly dividend to be paid on July 13, 2018, to shareholders of record at the close of business on June 29, 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 first quarter financial results and other matters during a conference call on June 5, 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 weeks ended May 5, 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 May 5, 2018 and April 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 and should be read in conjunction with the Company’s audited annual consolidated financial statements for Fiscal 2017.

The following table shows additional summary supplemental information – continuing operations for the periods indicated (1):

(1) Certain previously reported figures have been restated to exclude the results related to discontinued operations. (2) 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.

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