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HBC shares tumble as staff cuts hit digital unit’s bottom line

Hudson's Bay Company’s flagship department store in Toronto, Ont.

Mark Blinch/REUTERS

Hudson's Bay Co. spilled more red ink in its third quarter as staff cutbacks hurt the department-store retailer's digital business, while discounting and the effects of U.S. hurricanes also pinched sales.

As part of a wider effort to slash costs, HBC let go more than 900 employees in June, leaving some staff in new positions in its digital division alongside outsourced staff. The insufficient staff training and other changes resulted in disruptions in HBC's e-commerce business, although company executives said the situation has improved in its fourth quarter.

The Toronto-based retailer, which also owns Saks Fifth Avenue and Lord & Taylor in the United States and Galeria Kaufhof in Europe, saw progress at Saks and its namesake Hudson's Bay chain in Canada, Richard Baker, executive chairman and interim chief executive officer of parent HBC, told an analyst conference call on Wednesday.

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Nevertheless, "overall third-quarter results did not meet our expectations," Mr. Baker said. "We are making the necessary changes in our retail operations to drive performance across our banners."

Investors were concerned: HBC's shares tumbled 13 per cent to close at $10.35 on the Toronto Stock Exchange.

In the quarter ended Oct. 28, HBC's net loss grew to $243-million or $1.33 a share from $125-million or 69 cents a share a year earlier.

HBC sales fell 4.2 per cent to $3.16-billion as existing-store sales declined at all but its Saks Fifth Avenue and Hudson's Bay chains. Those existing-store sales, a key retail measure, dropped 3.2 per cent on a constant currency basis, with its "off-price" discount division (mainly Saks Off 5th) suffering the biggest reduction of 7.6 per cent. Digital sales rose just 2.1 per cent.

HBC faces a sagging department-store sector, waves of discounting and a shift among consumers to digital shopping at such heavyweights as Inc. At the same time, HBC has been on its own shopping spree in acquiring new chains, such as Kaufhof, adding to the complexity of its operations at a time of enormous change in the sector.

Still, Mr. Baker, a U.S. real estate investor, has overseen some major property and other deals that have helped cushion the blow of a difficult retail industry.

In October, HBC announced a series of transactions under which it is selling its coveted Lord & Taylor flagship store building on Fifth Avenue in New York for $850-million (U.S.) to office-sharing startup WeWork. As part of those deals, HBC announced on Wednesday it has closed a $500-million equity investment in the retailer by Rhône Capital, which has partnered with WeWork. HBC will use the proceeds to repay debt, helping to reduce its interest expenses and strengthen its balance sheet.

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Also as part of the deals, HBC will shrink the size of its Lord & Taylor store on Fifth Avenue by about three-quarters and WeWork will operate its head office and work-sharing space there as well as on the top floors of three other HBC stores in Canada and Germany – and at other HBC stores in the future, Mr. Baker has said.

As well, HBC last month teamed up with discount giant Wal-Mart Stores Inc. in a deal that will see the upscale Lord & Taylor next year run a storefront on in a bid to give that regional chain a national e-commerce presence (and lead the way to Wal-Mart introducing high-end fashions online).

HBC's recent transactions "illustrate the types of options that are available to us" in other parts of its business, Mr. Baker said.

But other options will be considered by a new leader: Following the end of HBC's third quarter, its chief executive officer, Gerald Storch, unexpectedly left the company, which is now looking to replace him. HBC has been under growing pressure from U.S. activist shareholder Jonathan Litt to sell some of its considerable real estate holdings and other assets to improve its share price or go private.

Industry watchers were disappointed with HBC's third-quarter results, despite a few bright spots. "While the real estate deals are encouraging, the performance of the retail business continues to face material headwinds," Mark Petrie, retail analyst at CIBC World Markets, said in a note.

Mr. Baker reiterated on Wednesday that HBC is staking its future on its strategy of "combining world-class real estate assets with our diverse retail businesses" to generate "long-term value for shareholders."

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He said he expects the Hudson's Bay chain in Canada to benefit from rival Sears Canada Inc.'s failure and, by next year, complete closing. HBC's wider transformation plan, including laying off a total of 2,000 employees and saving an annual $350-million (Canadian) by the end of 2018, is on track and expected to benefit its overall results most next year, he said.

Already the cost-cutting generated $50-million in savings in its third quarter. But it wasn't enough to offset higher expenses from its European expansion and other costs, the company said.

"The retail industry is undergoing a period of rapid change," Mr. Baker said. "I believe we remain well-positioned to succeed in the long term."

He said HBC is constantly evaluating the best use of its retail and real estate assets to create shareholder value and "will consider any action that is accretive."

Even so, Mr. Baker has stopped short of saying he would sell HBC's valuable Saks flagship store in New York, located about 10 blocks north of the Lord & Taylor store. Mr. Litt is among shareholders who have been pushing Mr. Baker to consider such a move as well as selling off its troubled European division. HBC is about halfway through a $250-million (U.S.) renovation of the Saks flagship store to perk up its performance.

On a more positive note, the retailer is enjoying "a really good start" to the crucial holiday season, Edward Record, its new chief financial officer, said. And HBC is pleased with its November results including its end-of-month Black Friday promotional weekend, he said.

The retailer's digital business has also bounced back in the fourth quarter, Mr. Record said. "So we feel good about where we are, but there was clearly some disruption as we got there."

If it were to do it again, HBC would probably have done a better job at transitioning some teams and training new replacements while staggering the outsourcing, he said. "But I think we're comfortable with the level of adjustments that we made and cuts that we made and where we are today."

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