HBC Reports First Quarter 2019 Financial Results

  • Revenues totaled $2.1 billion, with comparable sales up 0.3%,
    excluding Home Outfitters and Lord + Taylor currently undergoing a
    review of strategic alternatives
  • Saks Fifth Avenue comparable sales up 2.4%, continuing to
    deliver industry-leading results with a two-year stacked comp of 8.4%
  • Saks OFF 5TH returned to growth, with a 4.4% comp in the first
    quarter
  • Net income of $275 million in the first quarter, reflecting the
    $817 million gain on Lord + Taylor New York City flagship building sale
  • Adjusted EBITDA was $44 million in the first quarter
  • HBC solidifies strategic focus on North America with agreement
    to sell remaining stakes in German real estate and retail operations
    for $1.5 billion

TORONTO & NEW YORK–(BUSINESS WIRE)–HBC (TSX: HBC) reported first quarter 2019 results, including continued
industry-leading comparable sales from Saks Fifth Avenue, a return to
comparable sales growth at Saks OFF 5TH, and a $817 million gain from
the sale of the Lord + Taylor flagship building in New York City.

“We are seeing progress on a number of crucial fronts from our continued
work to fix the fundamentals and reposition HBC for the future,” said
Helena Foulkes, HBC CEO. “Strategically, we have simplified the
organization and placed a greater emphasis on our North American retail
operations. We are exercising financial discipline while making the
necessary investments to capitalize on our greatest opportunities –
Hudson’s Bay and Saks Fifth Avenue. Once the European transactions are
complete, we will have finished two real estate transactions at near or
better than our estimated equity values. The real estate transactions
and our pursuit of strategic alternatives for Lord + Taylor, further
demonstrate the bold actions we’ve taken to move the company forward and
we are optimistic about our prospects.”

On June 10th, HBC agreed to sell the company’s remaining stake in its
German real estate joint venture, divest its related retail joint
venture, and assume certain obligations for a total consideration
of $1.5 billion.

Operating Results

HBC’s financial results and comparable sales are for the thirteen
week period ended May 4, 2019, as compared to the thirteen weeks ended
May 5, 2018. In the first quarter of fiscal 2019, the company adopted
U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) for its
consolidated financial statements in place of International Financial
Reporting Standards.
Download updated, unaudited historical
financial results: 
http://investor.hbc.com/gaapconversion.
Certain metrics, including those expressed on an adjusted,
normalized, comparable and/or constant currency basis, are non-GAAP
financial measures.
For more information please refer to the
“Supplemental Information” section of this press release and the
reconciliation tables provided.

First quarter revenues totaled $2.1 billion, a decrease of $72 million
or 3.3 percent primarily due to operating fewer stores than a year ago
and the comparable sales decline at Lord + Taylor. As disclosed in May
2019, HBC is pursuing strategic alternatives for the Lord + Taylor
operating business, including a possible sale or merger, and is closing
Home Outfitters by the end of the second quarter. HBC’s first quarter
comparable sales decreased 2.1 percent and increased 0.3 percent,
excluding Lord + Taylor and Home Outfitters.

  • Saks Fifth Avenue’s first quarter comparable sales grew 2.4
    percent delivering an industry-leading two-year stacked comp of 8.4
    percent. Each major merchandise category grew year-over-year, with
    notable strength in men’s and women’s designer and ready-to-wear.
  • Hudson’s Bay’s comparable sales decreased 4.3 percent in the
    first quarter. Its two-year stacked comp was down 1.1 percent, an
    improvement from the prior quarter’s two-year stacked comp due to
    sequential improvements at our flagship locations.
  • Saks OFF 5TH returned to comparable sales growth for the first
    time since the second quarter of fiscal 2017. First quarter comparable
    sales increased 4.4 percent propelling the business unit to a two-year
    stacked comp of up 0.9 percent. Saks OFF 5TH expanded its marketing
    tactics, which allowed it to reach a broader audience resulting in
    strong new customer growth.

Foulkes continued, “Saks Fifth Avenue’s commitment to the luxury
customer continues to payoff with widespread sales increases across key
merchandise categories and locations, as well as among our top
customers. Our New York City clients have embraced the flagship’s new
main floor, which redefines the luxury shopping experience with a
one-of-a-kind handbag assortment featuring exclusive products and brands
only available through Saks. For Hudson’s Bay, we had some quick wins in
service and marketing which led to sequential improvements in our comps
during each month of the quarter. We are incrementally more confident
that our post-holiday diagnosis was correct and our fall assortment will
better match our customers’ expectations of Hudson’s Bay. While we have
more work to do fixing the fundamentals and strengthening operations, we
will continue to create experiences that customers love.”

First quarter gross profit declined year-over-year by $48 million, which
was offset by a $54 million decrease in selling, general and
administrative expenses (SG&A).

Gross profit margin was 39.0 percent in the first quarter, down 90 basis
points year-over-year. Approximately half of the decline is due to store
closures, with the balance driven by a higher proportion of clearance
sales in this year’s first quarter. SG&A margin improved by 120 basis
points to 38.8 percent, which includes the savings from a lower store
count, including rent.

Net income was $275 million in the first quarter, driven by the $817
million gain from the sale of the Lord + Taylor flagship building in New
York City. In February, HBC sold the flagship for a transaction value of
$1.1 billion, while retaining a preferred equity interest in the
building which is expected to be transformed into a higher use by our
partners. The loss from the EDS Group totaled $133 million in the first
quarter. Excluding one time items, HBC’s normalized net loss1
was $209 million.

Adjusted EBITDA1 totaled $44 million for the first quarter,
with North American department stores contributing $6 million and real
estate joint ventures adding $38 million. As expected, Adjusted EBITDA1
was lower by comparison to the previous year due to a late start to
spring selling, in part driven by the later Easter holiday, and the
timing of the expected benefits from our strategic initiatives.

Adjusted EBITDAR1 was $124 million in the first quarter,
reflecting lower rent adjustments and lower Adjusted EBITDA, as compared
to the same quarter a year ago.

Balance Sheet & Capital Spending

The company ended the quarter with approximately $2.9 billion of debt,
which declined nearly $1 billion from the end of the first quarter in
2018. The company retired the Lord + Taylor mortgage, permanently
reduced its term loan and had lower outstanding borrowings on its Global
ABL.

At May 4, 2019, HBC had the following outstanding loans and borrowings
on its balance sheet:

(in millions)   May 4, 2019   May 5, 2018
Global ABL $709   $1,012
U.S. Term Loan B $436 $642
Lord & Taylor Mortgage $0 $504
Saks Mortgage $1,678 $1,606
Other loans $27   $36
Total Outstanding Loans and Borrowings $2,850 $3,800

HBC anticipates a portion of the European transactions’ net proceeds
will be used to strengthen HBC’s balance sheet by fully repaying its
outstanding $436 million term loan at closing, which is expected in the
fall of 2019.

The company has targeted inventory efficiency as a component of
strengthening operations and improving free cash flow. At the end of the
first quarter, inventory declined by 7 percent year-over-year to $2.7
billion.

Capital investments were $68 million during the first quarter of 2019, a
decline from $119 million from the same quarter a year ago. In fiscal
2019, the company expects its capital expenditures, net of landlord
incentives, to moderate year-over-year, spending between $300 and $325
million.2

Dividend

The Board of Directors of HBC declared the company’s regular quarterly
dividend to be paid on July 15, 2019, to shareholders of record at the
close of business on June 28, 2019. The dividend is in the amount
of $0.0125 per HBC common share and is designated as an “eligible
dividend” for Canadian tax purposes. The declaration of dividends is at
the discretion of HBC’s board.

Conference Call to Discuss Results

Management will discuss the first quarter financial results and other
matters during a conference call on June 13, 2019 at 8:30 am EST.

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

About HBC

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

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

Consolidated Financial Statements and Management’s Discussion and
Analysis

The company’s unaudited interim condensed consolidated financial
statements for the 13-weeks ended May 4, 2019 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 4, 2019
and May 5, 2018 has been prepared in accordance with generally accepted
accounting principles in the United States (“U.S. GAAP”) as issued by
the Financial Accounting Standards Board (“FASB”) beginning on February
3, 2019 on a retrospective basis. In the opinion of the company’s
management, this unaudited financial data reflects all adjustments,
consisting of normal and recurring adjustments, necessary for a fair
presentation of the results for those periods. The results of operations
for interim periods are not necessarily indicative of the results to be
expected for a full year or any future period. The information presented
herein does not contain disclosures required by GAAP for consolidated
financial statements and should be read in conjunction with the
company’s unaudited interim condensed consolidated financial statements
for the thirteen weeks ended May 4, 2019.

INTERIM CONSOLIDATED STATEMENTS OF LOSS

(millions of Canadian dollars, except per share amounts)

  Thirteen week period ended
May 4, 2019   May 5, 2018
Retail sales 2,082 2,154
Credit revenue and other, net 34 34
Total revenue 2,116 2,188
Cost of goods sold (exclusive of depreciation shown separately below) (1,291) (1,315)
Gross profit 825 873
Selling, general and administrative expenses (“SG&A”) (822) (876)
Depreciation and amortization (110) (119)
Gain on sale of property, net 817
Transaction, restructuring and other costs (36) 14
Impairment (7)
Operating income (loss) 674 (115)
Interest expense, net (43) (42)
Loss from equity-method investments – real estate (5) (19)
Loss from investment in the EDS Group (133)
Dilution gain from equity method investments – real estate 1
Income (loss) before income tax 493 (175)
Income tax (expense) benefit (218) 43
Net income (loss) – continuing operations 275 (132)
Net loss – discontinued operations, net of taxes (266)
Net income (loss) for the period 275 (398)
 
Earnings (loss) per share – basic and diluted
Continuing operations 1.15 (0.72)
Discontinued operations (1.45)

INTERIM CONSOLIDATED BALANCE SHEETS

(millions of Canadian dollars)

  May 4, 2019   Feb 2, 2019
Assets
Cash and cash equivalents 22 21
Trade and other receivables 160 157
Inventories 2,704 2,513
Asset held for sale 279
Other current assets 126 171
Total current assets 3,012 3,141
 
Property, plant and equipment 3,776 4,153
Operating lease assets 3,447
Finance lease assets 410
Goodwill 213 207
Other intangible assets 546 617
Pensions and employee benefits 172 170
Deferred tax assets 353 318
Equity-method investments – real estate 753 554
Investment in the EDS Group 152 284
Other assets 88 73
Total assets 12,922 9,517
 
Liabilities
Current portion of loans and borrowings 703 471
Current portion of operating lease liabilities 216
Current portion of finance lease liabilities 29 29
Trade payables 936 988
Other payables and accrued liabilities 792 781
Deferred revenue 97 112
Other current liabilities 82 246
Total current liabilities 2,855 2,627
 
Loans and borrowings 2,091 2,538
Operating lease liabilities 4,297
Finance lease liabilities 322 318
Pensions and employee benefits 178 177
Deferred tax liabilities 406 143
Equity-method investment – real estate 234 239
Other liabilities 538 1,791
Total liabilities 10,921 7,833
 
Shareholders’ equity
Common shares – 184 and 183 million shares issued and outstanding 1,435 1,434
Convertible preferred shares 618 618
Accumulated deficit (638) (931)
Additional paid-in capital 174 170
Accumulated other comprehensive income 412 393
Total shareholders’ equity 2,001 1,684
Total liabilities and shareholders’ equity 12,922 9,517

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(millions of Canadian dollars)

  Thirteen week period ended
May 4, 2019   May 5, 2018
Operating activities
Net income (loss) 275 (398)
Net loss – discontinued operations, net of taxes 266
Net income (loss) – continuing operations 275 (132)
Adjustments to reconcile net income (loss) to cash generated by
operating activities:
Loss from investment in the EDS Group 133
Depreciation and amortization 110 119
Impairment 7
Loss on disposal of assets 8
Net defined benefit pension and employee benefits expense 5 5
Distributions of earnings from equity-method investments – real
estate
32 52
Dilution gains from equity method investment – real estate (1)
Loss from equity-method investments – real estate 5 19
Gain on sale of property, net (817)
Share of rent expense to equity-method investments – real estate (49) (47)
Share based compensation 7 16
Other operating activities (13) (9)
Net change in working capital (41) (158)
Cash inflow (outflow) for operating activities from continuing
operations
(345) (129)
Cash outflow for operating activities from discontinued operations (279)
Net cash used in operating activities (345) (408)
Investing activities
Capital investments (68) (119)
Proceeds on sale of property, net of transaction costs 770
Loans to the EDS group (19)
Investment in equity-method investments – real estate (13)
Other investing activities (13) 1
Cash inflow for investing activities from continuing operations 657 (118)
Cash outflow for investing activities from discontinued operations (69)
Net cash provided by (used in) investing activities 657 (187)
Financing activities
Repayments (515) (2)
Borrowing costs (10)
Long-term loans and borrowings (525) (2)
Net borrowings from asset-based credit facilities 228 452
Borrowing costs (1)
Short-term loans and borrowings 228 451
 
Settlement of share based compensation (2) (2)
Payments on finance leases (10) (8)
Dividends paid (2) (2)
Cash (used in) provided by financing activities – continuing
operations
(311) 437
Cash provided by financing activities – discontinued operations 172
Net cash (used in) provided by financing activities (311) 609
Foreign exchange gain on cash 2
Increase (decrease) in cash and cash equivalents 1 16
Cash and cash equivalents at beginning of year 21 70
Cash and cash equivalents at end of period 22 86

Supplemental Information

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

Supplemental schedules provided include:

Quarterly Adjusted EBITDA & Adjusted EBITDAR Reconciliations

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

Quarterly Combined Adjusted EBITDA & Adjusted EBITDAR Reconciliations

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

Normalized Net Earnings (Loss)

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

Non-GAAP and Quarterly Supplemental Data

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

HBC QUARTERLY ADJUSTED EBITDA AND ADJUSTED EBITDAR RECONCILIATIONS

  Thirteen week period ended
(millions of Canadian dollars) May 4, 2019   May 5, 2018
$

$

Net income (loss) – continuing operations 275 (132)
Interest expense, net 43 42
Income tax expense (benefit) 218 (43)
Depreciation and amortization 110 119
EBITDA (1) 646 (14)
 
Transaction, restructuring and other costs 36 (14)
Impairment 7
Loss from equity-method investments – real estate 5 19
Loss from investment in the EDS Group(3) 133
Dilution gains from equity-method investment – real estate(4) (1)
Gain on sale of property, net (817)
Non-cash share based compensation 4 13
Non-cash pension expense 5 5
Adjustment for store closures (5) 20
Other (1) 8
Adjusted EBITDA (1) – North American
Department Stores
6 43
 
Share of net loss in real estate equity method investments (5) (19)
Interest expense, net 26 22
Income tax benefit 4 4
Depreciation and amortization 13 17
Foreign exchange adjustment 18
Adjusted EBITDA (1) – Real estate equity
method investments
38 42
Adjusted EBITDA (1) 44 85
 
Rent adjustments 80 96
Adjusted EBITDAR (1) 124 181
 
Share of net loss in the EDS Group (133)
Interest expense, net 6
Income tax benefit (31)
Depreciation and amortization 33
Inventory purchase price adjustment included in cost of sales 31
Restructuring 12
Adjusted EBITDA (1) – EDS Group (82)
 
Third party rent expense – EDS Group 91
Adjusted EBITDAR (1) – EDS Group 9
 
Combined Adjusted EBITDA (1) (38) 85
Combined Adjusted EBITDAR (1) 133 181

NORMALIZED NET EARNINGS (LOSS) RECONCILIATION

  Thirteen week period ended
(millions of Canadian dollars) May 4, 2019   May 5, 2018
$ $
Net income (loss) – continuing operations 275 (132)
Gain on sale of property, net (533)
Dilution gains from equity-method investment – real estate (1)
Transaction, restructuring and other costs(5) 25 25
Adjustments to loss on equity method investments – real estate(6) 13
Adjustments to loss from investment in the EDS Group 30
Adjustment for store closure (4) (20)
Other (2) 1
Total adjustments(7) (484) 18
Normalized net loss (1) (209) (114)

HBC QUARTERLY SUPPLEMENTAL DATA

               
                   

May 4,
2019

Feb 2,
2019

Nov 3,
2018

Aug 4,
2018

May 5,
2018

Feb 3,
2018

Oct 28,
2017

Jul 29,
2017

 
Retail sales (in millions)
Hudson’s Bay $599 $938 $683 $641 $631 $1,028 $658 $647
Lord + Taylor $251 $441 $334 $337 $334 $489 $335 $376
Saks Fifth Avenue $879 $1,087 $832 $855 $862 $1,083 $739 $821
Saks OFF 5TH $311 $388 $312 $297 $292 $403 $304 $319
Home Outfitters $42 $35 $31 $36 $35 $56 $45 $52
Total retail sales $2,040 $2,854 $2,161 $2,130 $2,119 $3,003 $2,036 $2,163
 
Comparable sales
Hudson’s Bay (4.3%) (2.9%) 4.3% (0.6%) 3.2% 1.4% 0.1% 2.4%
Lord + Taylor (17.1%) (9.0%) (5.0%) (8.4%) (6.2%) (8.7%) (9.7%) (7.8%)
Saks Fifth Avenue 2.4% 3.9% 7.3% 6.7% 6.0% 3.1% 1.0% 1.9%
Saks OFF 5TH 4.4% (2.1)% (2.3)% (7.6)% (3.5)% (2.0)% (4.1)% 0.2%
Total HBC (2.1)% (1.2)% 3.1% (0.2)% 1.8% (0.5)% (2.0)% (0.2)%
 
Change in comparable digital sales 9.8% 8.7% 8.0% 10.8% 7.4% 9.1% 10.7% 9.0%
 
Store count(8)
Hudson’s Bay 89 89 89 89 89 89 89 90
Lord + Taylor 45 45 48 48 48 50 50 50
Saks Fifth Avenue 42 42 42 42 42 41 41 41
Saks OFF 5TH 129 129 133 132 132 129 129 124
Home Outfitters 37 37 38 39 41 44 50 51
342 342 350 350 352 353 359 356
 
Gross leasable area/square footage(8)
(in thousands)
Hudson’s Bay 15,771 15,771 15,739 15,720 15,720 15,731 15,731 15,837
Lord + Taylor 5,768 5,768 6,705 6,705 6,705 6,930 6,930 6,895
Saks Fifth Avenue 5,217 5,216 5,303 5,303 5,303 5,187 5,188 5,188
Saks OFF 5TH 3,871 3,868 3,998 3,966 3,939 3,879 3,879 3,727
Home Outfitters 1,280 1,280 1,328 1,363 1,427 1,529 1,753 1,793
31,907 31,903 33,073 33,057 33,094 33,256 33,481 33,440
 
Cash rent to joint ventures (in millions) $ 60 $ 62 $ 61 $ 60 $ 59 $ 59 $ 58 $ 61

End Notes

1 These performance metrics have been identified by the company as
Non-GAAP measures. For the relevant definitions and reconciliations,
please refer to the “Non-GAAP Measures” and “Supplemental Information”
sections, respectively, of this release.

2 The capital investment expectations reflect exchange rate assumptions
of USD:CAD = 1:1.31 for the year. Any variation in the 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.

3 Includes the company’s 49.99 percent share of net loss of the EDS
Group for the period ended January 1, 2019 to March 31, 2019 – See also
‘Investment in the European Department Store Group’ in the company’s
Management Discussion and Analysis.

4 Represents gains realized as a result of the changes in ownership
related to the company’s equity method investments in real estate.

5 Relates primarily to one time costs associated with acquisition and
divestitures current restructuring program.

6 Relates to the Company’s share of net non-recurring items incurred by
the equity-method investment entities, which primarily includes
unrealized foreign exchange losses (gains) of the HBS Joint Venture
arising from the translation of certain intra-group monetary assets and
liabilities related to the overall tax and legal structure of the joint
venture.

7 All adjustments are tax-effected as appropriate.

8 The company 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.

Non-GAAP Measures

”EBITDA” is defined as net income (loss) before net interest expense,
income tax expense (benefit) and depreciation and amortization expense.

“Adjusted EBITDA – North American Department Stores” is defined as
EBITDA adjusted to exclude: (A) transaction, restructuring and other
costs, (B) impairment, (C) loss from equity method investments – real
estate, (D) loss from investment in the EDS Group, (E) dilution gains
from equity method investments – real estate, (F) gain on sale of
property, net, (G) non-cash share based compensation expense, (H)
non-cash pension expense (I) adjustments for store closures and (J)
other adjustments not associated with day to day operations.

Contacts

INVESTOR RELATIONS:

Jennifer Bewley
Phone: (646) 802-4631
Email: [email protected]

MEDIA:

Andrew Blecher
Phone: (646) 802-4030
Email: [email protected]

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