While airport retail and duty-free store operator Hudson Ltd. (HUD) reported healthy third-quarter 2018 earnings on Monday, top-line results fell a bit below recent trend. As the company is relatively new to the public markets, management provided perspective on the revenue weakness during Hudson's postearnings conference call. We'll visit executives' comments below after a recap of headline numbers and vital details from the last three months:

Hudson Ltd.: The raw numbers

Metric Q3 2018 Q3 2017 Growth (YOY)
Revenue $526.6 million $496.6 million 6%
Net income $36.8 million $22.5 million 63.4%
Diluted EPS $0.29 $0.15 48.3%

Data source: Hudson Ltd. EPS = earnings per share.

What happened with Hudson Ltd. this quarter?

  • Organic sales growth of 6.5% represented a sequential slowdown from the 8.8% year-over-year organic growth reported in the first two quarters of 2018. This is also below Hudson's long-term trend of 9%-plus annual organic revenue growth.

  • "Like-for-like" net sales, or comparable sales, improved by 3.3%.  Management pointed out that the year-over-year weakening of the Canadian dollar against the U.S. dollar pressured comparable sales, as roughly one-fifth of company sales occur in Canada (with the balance to the U.S. -- all operations are currently confined to North America). This effect was partially offset by a higher number of transactions in the current quarter versus the prior-year quarter, in which U.S. air travel was notably impacted by hurricanes. In constant currency terms, comparable sales rose by 4.2%.

  • Gross margin improved by 1.6 percentage points to 63.7%, which management attributed to a continued shift of sales to higher-margin categories, as well as the benefit of improved vendor terms.

  • Selling expenses rose 7.2% against the third quarter of 2017 to $121.7 million. This expense category is primarily driven by variable concession fees tied to sales levels. Thus, the uptick in selling expenses stems from top-line growth during the quarter.

  • Hudson's personnel expenses climbed 10.1% to $105.4 million year over year; the company cited the catalysts of wage increases, new hires resulting from store openings, and "additional personnel expense upon becoming a public company."

  • Hudson continues to benefit from the reduction of franchise fees it pays to Swiss-based parent Dufry AG as a consequence of its IPO in January 2018 (Dufry still owns a controlling stake in Hudson). Lower franchise fees helped the organization reduce general and administrative expenses by 18.2% versus the comparable prior-year quarter, to $32.3 million.

  • Much of the disparity between mid-single-digit revenue growth and the double-digit improvements in net income and EPS during the quarter derived from a lower effective tax rate due to last year's U.S. tax legislation. Hudson's income tax expense in the third quarter of $700,000 fell well below last year's total of $11 million.
  • Food and beverage remains the company's largest revenue category and an important source of growth, comprising 38% of sales during the last three months, versus 36% in the same period last year. Within this revenue stream, sales of "grab and go" prepared foods jumped by 49% year over year, maintaining a current-year trend. The company is accelerating the placement of island and wall coolers in airport concession stores to take advantage of rising traveler demand for prepared sandwiches and salads, fresh fruits, beverages, and other packaged foods.

  • During the third quarter, Hudson extended an existing contract at the Chicago Citigroup Center and won a new contract to double its footprint at Philadelphia International Airport to more than 10,000 square feet. The company ended the third quarter with 1.1 million square feet of retail space in its portfolio.

An employee arranges fresh fruit drinks in the "grab and go" section of an airport concessions store.

Image source: Getty Images.

Management's perspective

During Hudson Ltd.'s earnings conference call, CEO Joe DiDomizio gave investors some perspective on the relatively lower top line this quarter versus the company's long-term trend:

We also experienced less contribution from net new business this quarter, as we compare to the first half of the year, which was the function of the timing of new store openings. Variability and the contribution from net new business growth from year-to-year and quarter-to-quarter is typical in our business and the travel retail industry.

In the past, I've compared the cadence of business including the timing of construction and new business opportunities to waves at the beach in order to help give folks a visual picture. With respect to the RFP [request for proposal] cycle and timing of store openings, there are a lot of ebbs and flows and all of the waves are different sizes and crest at different times. In one period, we may see a flurry of new RFP issued and the next thing it can calm down a bit. This is simply a function of the lumpy cycle of contract explorations and the uncertain timing of when airport landlords may issue RFPs and the timing of construction of new stores.

DiDomizio went on to extol the relative stability of Hudson's revenue, noting that airport foot traffic is typically steady throughout the year, as opposed to more traditional retail space, which is often subject to seasonality in shopping patterns. 

Looking forward, Hudson's CEO also discussed industry statistics, which indicate that North American airports will need to invest at least $100 billion in infrastructure upgrades and modernization projects through 2021. DiDomizio specifically cited renovation and upgrade plans at JFK, Newark, and Chicago O'Hare international airports, which together will total nearly $25 billion over the next few years. As a dominant force in the airport retail industry, Hudson will almost certainly add to its retail portfolio via RFPs tied to these expansions.