Challenged Hudson's Bay Co. is looking to further slash costs and spending in what it says will be a major reinvention of its business as it steels itself for more tough times in the department-store sector.
The approach to look for savings and big operational changes follows HBC's release this week of its fourth-quarter results, which showed a $152-million loss in its key fourth-quarter holiday season.
The Toronto-based retailer – which owns its namesake chain, Saks Inc. and Gilt.com – disclosed it was taking a one-time $116-million hit tied to its ailing Saks OFF 5th and Gilt "off-price" discount chains, with plans to shift their merchandise offerings upmarket and combine their online selling.
"We're planning as if the environment is not going to improve," Jerry Storch, chief executive officer of HBC, told analysts on Wednesday. "If it does improve, that's great. But that's why we're focused so heavily on cost reduction, capital reduction etc. – so that whatever happens in the future, we're prepared for it."
HBC is struggling in a declining department-store segment with setbacks in almost all of its divisions even as the retailer looks for more global acquisitions in the field.
Now investors are waiting for Richard Baker, executive chairman of HBC and a real estate mogul, to make a move that would see the company benefit from the value of its significant array of properties within its retail portfolio.
On Wednesday, investors seemed relieved at HBC's efforts to turn around its business. Its shares were up about 8 per cent in midday trading to $10.48 on the Toronto Stock Exchange, after having dropped more than 10 per cent the preceding two days before the company released its results late Tuesday.
Mr. Baker has overseen a series of retail acquisitions in the United States (Saks and Gilt.com) and Europe (Galleria Kaufhof) and made complex real estate deals which can help support a volatile retail business. Still he acknowledged on Wednesday that, in hindsight, HBC perhaps should have spun off its real estate into separate initial public offerings (IPOs) six or eight months ago.
"But the value of that real estate still is there," he added.
He said the "tremendous value" of the properties can be monetized in various ways, such as spinning them off into a real estate investment trusts (as other retailers such as Canadian Tire Corp. and Loblaw Cos. Ltd. have done) or selling off buildings or financing buildings.
Steven Salz, an analyst at M Partners, said HBC has created value by setting up real estate joint ventures with landlord partners. But HBC "must surface this value through a public structure or provide an independent updated marker on the real estate to re-inforce it," he added.
To surface value, HBC could seek a third-party appraisal or sell additional equity in its joint ventures, which "validates current cap rates," or create a public real estate investment trust, he said.
Mr. Salz noted assets in the joint venture are "marquee assets and not reliant on the particular success of the tenant (HBC currently.)"
In response to an analyst's question, Mr. Baker said HBC is not looking to close stores on any large scale, as U.S. rivals Macys Inc. and J.C. Penney are doing, to get rid of unprofitable outlets as e-commerce powerhouses put more pressure on brick-and-mortar retailers.
HBC stores are in the 100 best U.S. sites and "we think there's a good long-term future in those locations," Mr. Baker said.
Unlike chains such as Macys, HBC doesn't have hundreds of underperforming stores, Mr. Storch added. It has only 41 Saks Fifth Avenue and 50 Lord & Taylor stores in the United States, where a wide range of chains are closing stores.
Mr. Baker said HBC is focused on improving its existing business but is still looking for acquisitions if the deals can boost its bottom line.
"We do view ourselves as a global consolidator," he said.
HBC is in talks with U.S. luxury retailer Neiman Marcus Group to take over its struggling business, sources have said. Earlier this year, HBC abandoned talks to acquire U.S. giant Macy', they said.
Analysts questioned why HBC was having trouble with its recent acquisitions of Gilt.com (acquired in early 2016) and Saks OFF 5th (acquired in late 2013, ) forcing it to take the writedown.
"The writedown is still somewhat surprising," Mark Petrie, retail analyst at CIBC World Markets, said in a note late Tuesday.
Mr. Storch said the company was taking longer than it expected to combine the online systems of Gilt and Saks OFF 5th, but he said Gilt is still a strong brand especially among the potentially lucrative millennial customers.
After moving to stock lower-priced inventory, Saks OFF 5th is now shifting to upmarket designer brands to lure back shoppers, HBC said. Overall, HBC is not looking at simply "tinkering" with reducing its costs but rather "we're looking at major reinvention and change in the business," he said.
In its fourth quarter, HBC reported a loss of $152-million or 83 cents a share, compared with a profit of $370-million or $2.03 a share a year earlier. Sales rose to $4.6-billion from $4.49-billion.
HBC's latest loss includes the one-time non-cash goodwill impairment charge of $116-million while the prior-year profit included a $333-million gain tied to the sale of investments in joint ventures.
HBC is caught in the storm of the fast-shifting retail segment, which is being hit by discounters touting cheap-chic fashions and digital players that constantly lower prices to take on titan Amazon.com Inc. In Canada, HBC faces tougher competition in the luxury segment following the arrival of U.S.- based Nordstrom Inc. a few years ago as well as launching Saks here in 2016.
The non-cash goodwill impairment charge of $116-million related to writing down the goodwill associated with HBC's off-price discount business. The charge was prompted by recent sales weakness at Saks OFF 5th and Gilt.com, which resulted in the company "prudently lowering its future earnings expectations as compared to initial internal estimates," it said.
While overall sales at stores open a year or more – a key retail measure – dropped 1.2 per cent at HBC, they declined 5.9 per cent at its off-price division.
The retailer said it felt the pinch of discounting among its competitors. And its Gilt sales were hurt by fewer visitors to its site, while those at Saks OFF 5th were squeezed partly by its decision to introduce lower priced apparel last year.
Saks OFF 5th anticipates to have its new pricier product mix in place by the third quarter of this fiscal year. And by the end of this year, the retailer plans to combine the inventory at Saks OFF 5th and Gilt so that the Saks offerings will be sold online through Gilt, it said.
"Rest assured, as we remain focused on the continued growth of our company, we are aggressively positioning HBC to adapt to the changing retail environment," Mr. Storch said.
Mr. Baker said the retailer took important steps to position itself for industry leadership. "We believe our winning model of combining world class real estate assets, which are less impacted by short-term trends, with our diverse retail businesses will continue to provide value for the company and our shareholders," he said.
The company said it expected to save $75-million annually from its recently announced efficiency measures and is looking to reduce overhead further.
It said it expects capital spending for fiscal 2017 to come in between $450-million and $550-million, about $150-million less than a year earlier. Those capital investments will focus on already launched initiatives and "expected high-return projects," including European expansion and renovations around the world.
At Hudson's Bay in Canada and Lord & Taylor in the United States, the company is focusing on expanding key categories such as dresses, active wear and home goods. In Europe, it plans to introduce Saks OFF 5th and Hudson's Bay stores; at Saks Fifth Avenue, it is focused on stepping up its digital sales and launching a buy-online-pick-up-in-store program in the fall.
It said it strengthened its balance sheet by taking advantage of favourable lending conditions during the year to refinance its mortgage on its Lord & Taylor flagship store in New York and reduce the interest rate on its term loan. It said it ended the year with about the same amount of total debt on its balance sheet as at the beginning of fiscal 2016. Its loans and borrowings were $2.744-billion in the year ended Jan. 28 compared with $2.729-billion a year earlier.