In recent years, multinational department store giant Hudson's Bay (OTC:HBAYF) has reported consistently bad results. In fiscal 2015, it posted an adjusted profit of just 55 million Canadian dollars -- down 43% year over year -- despite generating more than CA$11 billion of revenue.
That was a relatively good performance compared to the past two years. Annual revenue has surpassed CA$14 billion due to the company's expansion into Europe. However, Hudson's Bay posted a normalized net loss of CA$313 million in fiscal 2016 and CA$564 million in fiscal 2017.
On Tuesday, Hudson's Bay's reported another batch of weak quarterly results. But there may be a light at the end of the tunnel, as newly appointed CEO Helena Foulkes is making some of the tough decisions that she promised a few months ago.
Subpar results once again
In the first quarter of fiscal 2018, total sales rose 1% at Hudson's Bay, reaching CA$3.1 billion. However, comp sales slipped 0.7% year over year. This flattish sales performance masked some wide variations across the company's various retail banners. On the one hand, the Saks Fifth Avenue luxury chain had a strong quarter, with comp sales up 6%, while the Hudson's Bay chain in Canada notched its 31st consecutive quarter of positive comp sales.
On the other hand, comp sales declined at the struggling Lord & Taylor chain, which again failed to keep up with top rival Nordstrom (NYSE:JWN). Comp sales rose 0.7% for Nordstrom's full-line business last quarter. The Saks OFF 5TH off-price chain struggled, too, with comp sales down 3.5%. (Nordstrom Rack has also had a rough time lately, but it eked out a 0.4% comp sales gain in Q1.) Lastly, Hudson's Bay's European operations had another awful quarter, as comp sales plunged 6.6%.
Not surprisingly, these mediocre sales results led to poor earnings. Hudson's Bay posted a normalized net loss of CA$286 million last quarter, compared to a normalized net loss of CA$209 million a year earlier.
Downsizing at last
While Hudson's Bay's Q1 results were nothing to write home about, the silver lining for investors is that CEO Helena Foulkes has moved quickly in her first few months to fix the business. She has appointed several experienced executives to fill out her management team. Foulkes also restructured Hudson's Bay's European operations so she can have more contact with that part of the company and speed up decision-making.
An even more dramatic move came on Monday, when Hudson's Bay announced a deal to sell its loss-making Gilt subsidiary (which specializes in online flash sales) to Rue La La. Hudson's Bay acquired Gilt in 2016 for about $250 million. That may have seemed like a bargain, given that Gilt's valuation peaked at more than $1 billion. However, Hudson's Bay is now dumping the unit for "well below $100 million," according to The Wall Street Journal (subscription required).
Getting rid of the Gilt subsidiary seems wise. It will allow the off-price management team to focus on turning around the more promising Saks OFF 5TH business. Additionally, this move will boost the bottom line by at least CA$10 million on an annual basis.
Hudson's Bay also announced this week that it will continue shrinking the Lord & Taylor chain. The company closed two Lord & Taylor stores in April and had already announced the closure of a third store next January. (Tellingly, all three stores were located in malls that have full-line Nordstrom stores.)
Hudson's Bay now plans to shutter up to 10 of the remaining 48 Lord & Taylor stores over the next year or so. This includes the Chicago-area store closure that was already announced. It also includes the Lord & Taylor flagship store in Manhattan, which was sold to a WeWork affiliate for a staggering $850 million.
The company hasn't yet made final decisions about the other stores to be closed. However, CFO Ed Record said that in aggregate, they are running slightly below breakeven. Most of these stores are in good malls, so the real estate is valuable. Closing the stores will also free up working capital.
A good start -- but there's more work to be done
The key to the bull case for Hudson's Bay is that its real estate is probably worth two or three times the company's enterprise value. Yet Hudson's Bay has been burning cash rapidly, and Sears Holdings provides a cautionary tale about betting on a retailer with great real estate but persistently negative cash flow.
Indeed, in recent years, Hudson's Bay's strategy has seemed more like empire-building than an organized plan to grow earnings. This growth made the company difficult to manage -- a fatal flaw in today's fast-moving retail landscape. The result has been a string of ugly losses.
In this context, Foulkes' decision to focus on what's fixable and sell off the rest comes across like a breath of fresh air. Her strategy of simplifying the company, monetizing excess real estate, and cutting costs could finally make Hudson's Bay a winner for its long-suffering investors.