Hudson's Bay Co. could face continuing difficulties at its U.S. Saks Fifth Avenue business in 2016 even as the retailer prepares to launch its first Saks stores in Canada in February.
In a tough retail environment, HBC executives lowered the company's outlook for 2015 and 2016 and are being conservative in their merchandise purchases, reducing inventory levels. The terrorism threat at HBC's newly acquired retailer in Belgium and Germany, which led to recent store closings, also weighs on the Toronto-based company.
And the appreciation of the U.S. dollar relative to the Canadian and other foreign currencies has dampened tourism to the United States and squeezed Saks's business, HBC chief executive officer Jerry Storch said on Friday.
"Although these headwinds may persist in 2016, we are very positive about the long-term prospects of Saks Fifth Avenue," Mr. Storch said. "… We believe that the headwinds facing the retail space today are temporary challenges, which we are actively addressing at HBC."
Investors sent the retailer's shares down more than 12.5 per cent to $17.40 on the Toronto Stock Exchange.
HBC's troubles come as it continues to make gains in Canada, where it is gearing up for its first Saks launch in 2016. It is betting that the currency shifts that are giving it headaches south of the border will work in its favour in this country.
But as Saks prepares to enter Canada, other high-end players, including Seattle-based Nordstrom Inc., also are expanding here in a more crowded market.
Richard Baker, executive chairman of HBC, said in an interview that he expects the weak loonie will spur more shopping here at Saks. The first two Saks stores in Toronto will be "the most luxurious and largest" upscale stores in their Toronto downtown and west-end respective areas. "We're very optimistic."
He said the Saks stores in Canada will be tweaked to appeal to a domestic customer. For example, they will have a larger and more prominent display of Dsquared fashions by Canadian designers Dean and Dan Caten.
Already, Canadians make up the largest group of foreign customers to the U.S. Saks, he said. And the entry of Nordstrom to Canada has "helped make Hudson's Bay a better company because we prepared ourselves for the competition."
HBC, which will open its discount Saks Off 5th as well in Canada in 2016, said total third-quarter same-store sales – a key retail measure – rose 2 per cent on a constant currency basis cent in the quarter. Overall online sales jumped 23.9 per cent on a constant currency basis.
And while Saks Off 5th has been a bright spot for HBC, even its momentum has slowed, also hit by lower U.S. tourist sales, Mr. Storch said. That chain's same-store sales rose 2.8 per cent in the quarter compared with a 16.6-per-cent lift a year earlier. Saks Off 5th stores near the Canadian border, and in Florida, are feeling the effects of fewer Canadian shoppers, chief financial officer Paul Beesley said.
Even so, Saks is not alone among U.S. luxury retailers to feel the pain of the strong U.S. greenback and reduced tourism, Mr. Storch said. Saks is struggling with the "disappearance" of high-spending Russians as well as Brazilians, he added. But he emphasized the problems are "temporary and transient."
In Europe, where HBC bought Germany's Kaufhof department store chain this year, the company is feeling the fallout of last month's Paris terrorist attack, he said. Traffic declined markedly at Kaufhof stores, some of which were closed many days, and "it's taking a long time for traffic to recover," he said, adding that shoppers are starting to return.
To add to HBC's troubles, it is operating in North American locations that are seeing record warm temperatures this fall, pinching sales of cold-weather goods, such as coats, he said.
Still, Oliver Chen, retail analyst at Cowen & Co., said HBC experienced "good results in a tough environment."
Meantime, HBC is being very conservative in its purchasing orders to try to limit the amount of unsold goods that would have to be cleared out at a discount, hurting margins, Mr. Storch said.
"The biggest mistake you could make in that business is to buy too much inventory and end up having to take the markdowns," he said. "It's not inventory that is easy to sell at a profit if it doesn't sell early on. So we're planning conservatively. And again, that's reflected in our guidance."
On the e-commerce front, hbc.com is rapidly expanding its e-commerce, although it's also experiencing some logistical snags as it races to keep up with "tremendous" demand, Mr. Baker said. "Our systems will get better and better."
HBC cut its 2015 sales forecast range to between $10.7-billion and $11.2-billion from $11-billion and $11.5-billion. It scaled back its 2016 sales guidance range to between $14.2-billion and $15.2-billion from $14.5-billion and $15.5-billion.
Its third-quarter profit was $1-million or 1 cent a share, compared with a loss of $13-million or 7 cents a share a year earlier. Excluding one-time items, the company posted a loss of 4 cents a share. Its total sales rose to $2.57-billion from $1.91-billion.