Hudson's Bay Company (NASDAQOTH:HBAYF) has posted poor results for the past several years. Management's attention was stretched thin by the multinational department store giant's global footprint, particularly because several of its main businesses encountered problems at the same time. A bungled cost-cutting plan added to its woes last year.

However, Hudson's Bay brought in a new CEO earlier this year. Since joining the company in February, Helena Foulkes has taken aggressive steps to simplify the company and improve its profitability. This week, Hudson's Bay announced another modest improvement in its underlying earnings along with the planned sale of half of its European business at an attractive valuation. This represents another important step toward turning the business around.

Changing course in Europe

Three years ago, Hudson's Bay entered the European market by buying the Galeria Kaufhof chain. Hudson's Bay hoped to unlock synergies by combining Kaufhof with its North American business, but real estate was a driving factor behind the acquisition. As was the case for his previous department store acquisitions, Hudson's Bay Executive Chairman Richard Baker believed that Galeria Kaufhof's real estate was undervalued.

While he may have been right about the real estate, the European retail market has been weak in recent years. Comp sales for the HBC Europe segment declined 2.4% in fiscal 2017, following a 1.2% decline in fiscal 2016. This has put pressure on Galeria Kaufhof's profitability.

On Tuesday, Hudson's Bay confirmed long-running speculation that it would sell a roughly 50% interest in its European business to SIGNA Retail Holdings, which owns Karstadt, Galeria Kaufhof's main competitor in Germany.

Men's clothing displays in a department store.

Image source: Getty Images.

The deal is structured as a complicated three-part transaction including two different sets of properties and a retail subsidiary. The net result is that Hudson's Bay will own a 50% stake in one or two real estate joint ventures controlling dozens of properties in Germany. Meanwhile, it will own a 49.99% interest in a new retail joint venture with SIGNA.

The two companies will have equal representation on the joint venture's board, but the Karstadt management team will be in charge. That's important, because it will allow Foulkes and her team to focus all of their energy on turning around the weaker parts of Hudson's Bay's North American operations.

The balance sheet is set to improve dramatically

Hudson's Bay will contribute the proceeds of selling the European retail business to the new retail joint venture so that the latter will start with a strong balance sheet. However, Hudson's Bay will be able to use the real estate sale proceeds -- estimated at 411 million euros after taxes -- to pay down debt. It expects to repay about $175 million of term loan borrowings and reduce its asset-backed loan (ABL) balance by $298 million.

Hudson's Bay is also on track to close the sale of the Lord & Taylor Manhattan flagship building in late 2018 or early 2019. It has already received deposits totaling $100 million out of the $850 million sale price. Closing the sale will allow it to repay a $400 million mortgage on the property and further reduce its ABL borrowings.

By the end of fiscal 2018, Hudson's Bay expects to have no outstanding ABL borrowings. This implies that it will cut its corporate-level debt by about 45% over the next two quarters. (Two of its real estate joint ventures have additional debt.)

Hudson's Bay has also been evaluating a sale of its Vancouver flagship. A deal to sell the building for $675 million Canadian dollars (reported a few months ago) seems to have fallen through, but the property is clearly extremely valuable.

Mixed performance continues in Q2

On Wednesday morning, Hudson's Bay reported its results for the second quarter, with the HBC Europe division now classified as discontinued operations. Comparable store sales -- excluding HBC Europe -- declined 0.4% year over year.

Once again, there was wide variation in performance between Hudson's Bay's retail banners. The Saks Fifth Avenue luxury chain maintained its strong trajectory with a 6.7% comp sales gain. However, the company's other department store banners combined for a 3.8% comp sales decrease, and the Saks OFF 5TH off-price chain posted a steep 7.6% comp sales decline.

Gross margin improved significantly last quarter, relative to the prior-year period, more than offsetting an increase in operating expenses. As a result, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) reached CA$33 million, compared with CA$3 million in the second quarter of fiscal 2017 (restated based on Hudson's Bay's recent M&A activity).

More work to be done

Hudson's Bay has a long way to go to return to health. Even after last quarter's big jump in adjusted EBITDA, the company's adjusted EBITDA margin was a meager 1.5%.

The Saks OFF 5TH chain will get some much-needed management attention in the coming year. Yet while Foulkes believes in the brand's potential, there's no quick fix for its problems. As for the struggling Lord & Taylor chain, a plan to close about 10 stores in early 2019 should help comp sales trends and profitability, but that alone may not be enough to get results to acceptable levels.

Nevertheless, investors should be encouraged by the pace of change at Hudson's Bay. Foulkes started at Hudson's Bay less than seven months ago and she has already put her stamp on the company in that short window of time. Over the next year or so, Hudson's Bay is positioned to become a leaner business with a much better balance sheet -- potentially paving the way for a more durable turnaround.

Adam Levine-Weinberg owns shares of Hudson's Bay Company. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.