Hudson’s Bay Q3 Hurt By Overzealous Cost Cutting

Hudson’s Bay Company cost cutting went a bit too deep, it acknowledged, and cost the company in a third quarter when losses increased.

In the quarter, ended October 28, net loss was $243 million, or $1.33 per share, compared to a net loss of $125 million, or 69 cents per share, in the prior-year period. Dollar amounts are in Canadian currency unless otherwise indicated. In terms of U.S. dollars, net loss was $190 million, or $1.04 per share, compared to $98 million, or 54 cents per share, in the previous-year period.

The higher net loss primarily resulted from lower gross margin dollars combined with higher finance costs, higher depreciation and amortization expenses, and a lower income tax benefit. Adjusted net loss was $203 million versus $102 million in the year-earlier period.

Consolidated comparable sales declined 3.2% on a constant currency basis in the quarter versus the year-before period and 5.1% as reported. On a constant currency basis, comparable sales at Saks Fifth Avenue grew for the second consecutive quarter from the 2016 period, up 0.2%, while comps at the department store group, including Hudson’s Bay stores, Lord & Taylor and Home Outfitters, declined 3.7%. Comps at HBC Europe declined 3% and those at the off price division declined 7.6% in the quarter year over year. Lower traffic across HBC’s banners, higher promotional activity, operational challenges and the effects of the hurricanes in Texas, Florida and Puerto Rico hurt comps in the third quarter.

On a constant currency basis, digital sales advanced 2.1%, or 9% when excluding Gilt results, as the company works to transition Gilt into a more intent-based shopping destination. In related online initiatives, HBC said it had progressed on plans to create a Lord & Taylor flagship on Walmart.com, to complete a second new automated distribution center and to introduce of Saks Off 5th inventory on Gilt.

HBC posted retail sales of $3.16 billion, or U.S. $2.47 billion, for the quarter, down 4.2%, primarily due to lower comps, negative foreign exchange effects and location closures, partially offset by new store openings.

“While Saks Fifth Avenue and Hudson’s Bay are performing well, our overall third quarter results did not meet our expectations,” said Ed Record, HBC’s CFO. “The workforce reductions made as part of our transformation plan caused some operational challenges, particularly in our digital business, which we are working to address. We know we can do better, and our highest priorities include increasing comparable sales, improving margins, and prioritizing our capital investments as we focus on further developing our digital business. Our emphasis on digital continues to grow, and we are re-allocating resources to improve our digital platforms and online capabilities. We also plan on reducing total inventory as part of an effort to moderate promotional activity and increase full-price selling. Our transformation plan remains on track to generate annual savings of $350 million, and we continue to look at other ways to become more efficient. These savings, combined with our planned reductions in inventory and capital investments are expected to significantly improve cash flow in 2018.”