United States / Canada – Hudson’s Bay Company., announced its results for the 13-week period ended August 2, 2014 (the “second quarter”).
Second Quarter Highlights (13-week period ended August 2, 2014)
HBC’s financial results for the second quarter of 2014 include Saks Incorporated.
Consolidated same store sales grew by 1.9% on a local currency basis.Digital sales were $162 million, including $116 million from Saks and growth of over 80% at DSG.
Hudson’s Bay and Lord & Taylor (together, “Department Store Group” or “DSG”) grew by 1.1%.
Saks Fifth Avenue grew by 2.2%.
Saks Fifth Avenue OFF 5TH (“OFF 5TH”) grew by 14.9%.
Normalized EBITDA was $81 million, or 4.6% of sales, compared to $60 million, or 6.3% of sales, in the second quarter of Fiscal 2013.
Four new OFF 5TH locations opened: Boston, Massachusetts; San Diego, California; Charlotte, North Carolina; and Louisville, Kentucky.
“HBC’s quarter was characterized by strong performance from the higher end of our businesses, demonstrating the sustained strength of affluent consumers, and softer performance from our more moderate businesses. OFF 5TH, buoyed by its new digital business, experienced outsized same store sales growth for the quarter,” stated Richard Baker, HBC’s Governor and Chief Executive Officer. “We continued to invest in HBC Digital, where we witnessed tremendous sales growth. Based upon our results for the first half of the year and our positioning for the back-to-school and holiday quarters, we are affirming our outlook for full-year Fiscal 2014.”
“We continue to execute on the five core strategies of our long-range plan to grow our sales and expand our EBITDA margin – driving digital sales across all our banners, growing Saks OFF 5TH, bringing Saks Fifth Avenue and OFF 5TH to Canada, driving outsized growth at our top doors and driving synergies and efficiencies across our business. In the second quarter, we made important progress on each of these strategies, including continued strength from digital sales.”
Strategic Update
During the second quarter, HBC began the integration of the Home Outfitters business with the Home business of the Hudson’s Bay banner. “Joining our two Home businesses not only allows us to create a more powerful Home destination, but also drives efficiency by combining our merchandising and marketing efforts and organizations,” statedDonald Watros, HBC’s President. HBC is currently in the process of assessing its Home Outfitters locations and previously announced the closing of locations in Mississauga, Ontario and Abbotsford, British Columbia in December 2014 and January 2015, respectively. Beginning with this year’s third quarter results, Home Outfitters will be included in HBC’s Department Store segment.
Locations
During the second quarter, the Company opened four new OFF 5TH stores located in Boston, Massachusetts; San Diego, California; Charlotte, North Carolina and Louisville, Kentucky. During the third quarter, HBC expects to open aLord & Taylor store in Albany, New York, OFF 5TH stores in Eagan, Minnesota, Costa Mesa, California and Columbus, Ohio and a Hudson’s Bay Outlet in Mirabel, Quebec.
HBC also recently announced the planned opening of a Saks Fifth Avenue store in the fall of 2016 at Brickell City Centre in downtown Miami, Florida. Previously, the Company has announced plans for Saks Fifth Avenue stores in San Juan, Puerto Rico in the spring of next year and in Honolulu, Hawaii in the spring of 2016.
Second Quarter Summary
All comparative figures below and in the “Highlights” section are for the 13-week period ended August 2, 2014compared to the 13-week period ended August 3, 2013.
Retail sales were $1,769 million, an increase of $821 million or 86.6% from $948 million for the prior year. The increase is primarily attributable to the inclusion of Saks. On a local currency basis, consolidated same store sales increased by 1.9%, with increases of 1.1% at DSG, 2.2% at Saks Fifth Avenue and 14.9% at OFF 5TH. Digital commerce sales totaled $162 million, including $116 million from Saks and growth of 82.2% at DSG.
In terms of merchandise category performance, sales growth at DSG was driven by men’s apparel, home and cosmetics. Sales growth at Saks Fifth Avenue was led by menswear, gifts and accessories. Sales growth at OFF 5TH was strong across the majority of categories.
Gross profit was $700 million, an increase of $332 million from $368 million for the prior year. The increase is primarily attributable to the inclusion of Saks. Adjusted to exclude purchase price accounting charges related to the acquisition of Saks, gross profit as a percentage of retail sales was 39.7%, an increase of 90 basis points. The increase was driven by the inclusion of Saks, which contributed higher gross profit as a percentage of retail sales than Legacy HBC. Gross profit as a percentage of retail sales at Legacy HBC was flat.
SG&A was $652 million, an increase of $325 million from $327 million for the prior year. The increase is primarily attributable to the inclusion of Saks. Excluding normalization items of $31 million, SG&A as a percentage of retail sales was 35.1% compared to 32.5% for the prior year, an increase of 260 basis points. This increase was a result of strategic investments in the HBC digital business, higher occupancy costs associated with the Queen Street sale and leaseback transaction and expected deleverage of the store expenses, partially offset by synergies and the inclusion of Saks, which runs a lower SG&A rate than Legacy HBC. Management believes that HBC remains on track to realize approximately $50 million in synergy savings in Fiscal 2014, which will be principally reflected in SG&A.
Normalized EBITDA was $81 million, an increase of $21 million from $60 million for the prior year. These figures include positive impacts of $6 million and $2 million, respectively, due to the required implementation of IFRIC 21. Normalized EBITDA as a percentage of retail sales was 4.6%, compared to 6.3% for the prior year.
Finance costs were $29 million, a decrease of $48 million from $77 million for the prior year. The decrease is comprised primarily of the expiration of equity commitment forwards related to financing the Saks acquisition that resulted in $49 million for mark-to-market charges in the second quarter of Fiscal 2013 as well as a net decrease of$18 million in non-cash charges for mark-to-market of outstanding warrants. These cost reductions were partially offset by $24 million of incremental interest expense from debt financing for the acquisition of Saks.
26-Weeks Ended August 2, 2014 Summary
All comparative figures below are for the 26-week period ended August 2, 2014 compared to the 26-week period ended August 3, 2013.
Retail sales were $3,624 million, an increase of $1,792 million or 97.8% from $1,832 million for the prior year. The increase is primarily attributable to the inclusion of Saks. On a local currency basis, consolidated same store sales increased by 2.3%, with increases of 1.8% at DSG, 2.4% at Saks Fifth Avenue and 15.0% at OFF 5TH. Digital commerce sales totaled $369 million, including $278 million from Saks and growth of 95.9% at DSG.
In terms of merchandise category performance, sales growth at DSG was driven by men’s apparel and beauty. Sales growth at Saks Fifth Avenue was led by menswear, gifts and accessories. Sales growth at OFF 5TH was strong across all categories.
Gross profit was $1,416 million, an increase of $692 million from $724 million for the prior year. The increase is primarily attributable to the inclusion of Saks. Adjusted to exclude purchase price accounting charges related to the acquisition of Saks, gross profit as a percentage of retail sales was 40.2%, an increase of 70 basis points. The increase was driven by the inclusion of Saks, which contributed higher gross profit as a percentage of retail sales than Legacy HBC, partially offset by a slight reduction in gross profit as a percentage of retail sales at Legacy HBC.
SG&A was $1,333 million, an increase of $662 million from $671 million for the prior year. The increase is primarily attributable to the inclusion of Saks. Excluding normalization items of $55 million, SG&A as a percentage of retail sales was 35.3% compared to 34.7% for the prior year, an increase of 60 basis points. This deleveraging was driven in part by strategic investments in their HBC digital business and higher occupancy costs associated with the Queen Street sale and leaseback transaction, partially offset by the inclusion of Saks, which runs a lower SG&A rate than Legacy HBC, and synergies.
Normalized EBITDA was $178 million, an increase of $89 million from $89 million for the prior year. These figures include adverse impacts of $2 million and nil, respectively, due to the required implementation of IFRIC 21 (see below). Normalized EBITDA as a percentage of retail sales was 4.9%, flat to the prior year.
Finance costs were $104 million, an increase of $15 million from $89 million for the prior year. The increase is comprised primarily of $51 million of incremental interest expense from debt financing for the acquisition of Saks and$30 million for the non-cash write-off of deferred financing costs and early payment penalties for the retirement of debt utilizing proceeds from the Queen Street sale and leaseback. These cost increases were partially offset by the expiration of equity commitment forwards related to financing the Saks acquisition that resulted in $49 million for mark-to-market charges in the 26 weeks ended August 3, 2013 as well as a net decrease of $14 million in non-cash charges for mark-to-market of outstanding warrants.
Outlook
Based upon HBC’s results for the first half of Fiscal 2014 as well as management’s views on the operating environment and their ongoing initiatives, management reaffirms Fiscal 2014 guidance as follows:
Total sales of $7.8 billion to $8.1 billion. This implies low-to-mid single-digit consolidated same store sales growth calculated on a local currency basis, driven in part by strong digital sales growth.
Normalized EBITDA of $580 million to $620 million.
Capital investments of $380 million to $420 million, net of landlord incentives.
This guidance reflects a U.S. dollar exchange rate assumption of USD:CAD = 1:1.09 for Fiscal 2014. Significant variation in this exchange rate assumption would impact the guidance. In the 26-week period ended August 2, 2014, the exchange rate incorporated in the Company’s financial results was USD:CAD = 1:1.09.
Finance Organization
As previously announced, Paul Beesley joined the Company during the second quarter as Chief Financial Officer. Subsequent to the second quarter, John Caplice joined HBC as Senior Vice President, Treasury and Investor Relations on September 2. Mr. Caplice has extensive experience in financial management and strategic communications development, most recently serving as Senior Vice President, Treasurer & Investor Relations at Shoppers Drug Mart Corporation, Canada’s largest retail drug store chain with annual sales in excess of $11 billion, from 2000 to 2014.
To view the full report click here
Source: Hudson’s Bay Company