Real estate deals return HBC to profit but strategic initiatives push up expenses

TORONTO – Real estate deals helped Hudson’s Bay Co. (TSX:HBC) return to profit despite substantially higher spending on strategic initiatives in the second quarter, which HBC’s chairman says was a “transformative” period for the iconic Canadian retailer.

The latest quarter included a $107-million gain from HBC’s contributions of properties to real estate joint ventures. On a normalized basis, HBC had a $53-million loss in the quarter — up from a $28-million loss a year earlier.

The higher normalized loss was largely driven by higher overhead expenses, referred to as SG&A, which grew by $131 million from a year ago to $752 million.

HBC said the increased costs included strategic investments in its digital business, which includes online and mobile sales, as well as the introduction of its Saks brand to Canada and the expansion of its Saks Off 5th chain in the United States.

Nevertheless, HBC’s governor and executive chairman said HBC’s businesses are “in excellent shape” for the fall and holiday quarters — typically the most important part of the year for retailers.

The Toronto-based company remains on track to achieving between $9 billion and $9.3 billion of revenue this fiscal year, HBC chairman Richard Baker told analysts Thursday.

He said HBC had been able to reduce its debt by $1 billion with proceeds from the transfer of some real estate to joint ventures with Simon Properties in the United States and RioCan (TSX:REI) in Canada.

Baker added that an agreement to acquire German department store chain Galeria Kaufhof for $3.36 billion — the company’s first move outside North America — remains on track to close in the current quarter.

“We are also continuing to experience significant growth in digital sales, which were up 30 per cent during the quarter, and are pleased with the traction that our digital businesses are achieving,” Baker said.

HBC — which traces its history to the fur trade before Canada was a country — operates the Hudson’s Bay and Home Outfitters stores in Canada, Lord & Taylor in the United States and Saks Fifth Avenue, a global luxury brand based in the United States.

HBC’s net income for the second quarter ended Aug. 1 was $67 million, which compared with a loss of $36 million in the second quarter of 2014 and $33 million in the first quarter of 2015.

HBC’s retail sales under all banners totalled $2.04 billion — up $269 million or 15.2 per cent from a year earlier.

Part of the increase in retail sales was due to the higher value of the U.S. dollar and an increase in digital sales. There was also same-store sales growth at some banners, including Off 5th — although the Saks brand saw flat revenues.

Jerry Storch, HBC’s chief executive officer, said Saks Fifth Avenue “continues to struggle a bit with the global tourist and the slowdown in spending because of the strong (U.S.) dollar.”

In contrast to Saks, the Off 5th brand was one of the fastest-growing segments of the HBC business in the quarter.

HBC bought Saks and Off 5th nearly two years ago. Storch, a former Toys R Us chief executive who joined HBC in January, said plans are on track to open the first Saks and Off 5th stores in Canada next spring — as previously announced.

Chief financial officer Paul Beesley said that the company is on track to achieve $100 million in “synergies” from the Saks purchase — a term that usually refers to expense reductions and sometimes to increased opportunities.

In addition to synergies, Beesley said is working on a program to cut sales, general and administration expenses starting in the current quarter, although he declined to provide analysts with details on how the savings would be achieved.

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