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HBC’s new leaders to focus on turning around weakest businesses as sales drop

Canadian department-store retailer Hudson’s Bay Co. is focused on turning around its weakest businesses under new leaders while beefing up its digital and other operations in a race to bolster its sagging financial fortunes.

Toronto-based HBC said on Wednesday its second-quarter loss widened amid continuing declining sales at its Lord & Taylor chain in the United States and its discount Saks OFF 5th business. Even sales at its namesake Hudson’s Bay stores in Canada uncharacteristically slipped a bit in the quarter, although – in a bright spot – sales at its luxury Saks Fifth Avenue division were strong.

“I knew that this was a complicated business, and I’ve been trying to simplify the company so we can really focus on areas that are really big wins for us,” Helena Foulkes, who was named chief executive officer of HBC in February, said in an interview on Wednesday. “A lot of it is fixing some of the fundamentals.”

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HBC has grappled with its own missteps – including in its e-commerce and discount initiatives – a fast-changing retail environment and a shift to online shopping, resulting in red ink for all but one of the last 10 quarters, as well as a series of executive changes and restructurings.

To help stanch the losses and pay down debt, the company announced this week a joint venture for its ailing European business with its main German rival. It also sealed a deal last year to sell its flagship Lord & Taylor store to workplace-sharing startup WeWork, a deal which – together with the joint-venture transaction – is expected to generate $1.4-billion for HBC by the end of its fiscal year.

Ms. Foulkes said that with this week’s agreement with Signa Holding GmbH, which runs retailer Karstadt Warenhaus in Germany, to form a joint venture with HBC’s Galeria Kaufhof – also in that market – she can now focus on shoring up HBC’s North American business. The joint venture will be led by Karstadt’s CEO, who has helped improve that chain’s operations.

“I wasn’t sure when I arrived, because this is a different sector for me,” said Ms. Foulkes, who previously was an executive at major U.S. drugstore retailer CVS Health Corp., where she was known for making bold moves.

“But I can assure you there is a lot of low-hanging fruit here, and I’m confident we’ll get after it … I feel really good actually about the progress we’re making.”

Investors seemed encouraged. In late morning trading, HBC’s shares rose more than 4 per cent to $11.05 on the Toronto Stock Exchange.

Under her leadership, HBC has already decided to close 10 of its Lord & Taylor stores, including the flagship in New York, and sell its Gilt.com flash-sale fashion site.

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Ms. Foulkes emphasized from the start that “everything is on the table.”

She said on Wednesday that she sees opportunities for improvements at HBC’s stronger chains – Saks and Hudson’s Bay – although a turnaround at Lord & Taylor and Saks OFF 5th will take longer. The performance of those two chains has not met expectations, she said, without elaborating on how long a turnaround will take.

She said she counts on Saks OFF 5th operating in an attractive, growing retail discount segment but needs to sharpen the chain’s pricing, promotions and merchandise strategies and “work on the basics.”

At Lord & Taylor, she is looking at shrinking store space and beefing up its e-commerce business under a new leader who has both digital and in-store experience, she said. Still, the turnaround “will take some time,” she told an analyst conference call.

Edward Record, HBC’s chief financial officer, told analysts the company improved its profit margins in the second quarter following a major restructuring and cost cuts. He said both Lord & Taylor and Saks OFF 5th have suffered from a “clearance hangover,” presenting an opportunity to boost the bottom line with fewer, more strategic price markdowns.

Including HBC’s European business, the retailer posted a second-quarter loss of $264-million or $1.12 a share from $201-million or $1.10 a year earlier. Sales dipped to $2.16-billion from $2.2-billion.

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In its North American operations, HBC reported a loss of $147-million, or 62 cents a share, from a loss of $100-million, or 55 cents, a year earlier.

Its stock price has fallen 9.7 per cent this year up until Tuesday’s closing, compared with a 1.3 per cent decline in the benchmark S&P/TSX Composite index.

Second-quarter same-store sales at HBC’s department-store group, which includes its Hudson’s Bay and Lord & Taylor chains, dropped 3.8 per cent, while those sales at Saks OFF 5th, which carries discounted designer merchandise, fell 7.6 per cent.

Still, same-store sales, an important retail measure, jumped 6.7 per cent at Saks Fifth Avenue, joining other retailers that are enjoying a consumer spending comeback in past months.

Gross margins rose 2.4 per cent, lifting adjusted earnings before interest, taxes, depreciation and amortization, to $33-million from $3-million a year ago, the company said.

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