Since taking the top job at Hudson's Bay (OTC:HBAYF) about a year ago, CEO Helena Foulkes has been adamant that all options are "on the table" as she works to retool the struggling multinational retail conglomerate. During that time, Foulkes has repeatedly proved that she is serious about doing whatever it takes to fix the company.
Last week, Hudson's Bay revealed its latest bold restructuring move: The company plans to shutter its Home Outfitters chain later this year. It also plans to close up to 20 Saks OFF 5TH off-price stores in the U.S.
Hudson's Bay started to slim down in 2018
A year ago, Hudson's Bay was a sprawling conglomerate. It had more than half a dozen retail banners, with stores in the U.S., Canada, Germany, Belgium, and the Netherlands -- plus the Gilt flash sale e-commerce site. However, many parts of this retail empire were unprofitable.
Last June, the company agreed to sell the money-losing Gilt business for significantly less than what it paid back in 2016. This allowed the management of Hudson's Bay's off-price operations to focus on turning around the more-promising Saks OFF 5TH chain.
At the same time, Hudson's Bay also announced that it would close up to 10 of its 48 Lord & Taylor stores in 2019, as that chain has struggled to compete with rivals like Nordstrom. It has already closed three Lord & Taylor stores this year, including the brand's flagship store in Manhattan.
Hudson's Bay announced its next big move in September: the sale of a roughly 50% controlling stake in its European business to SIGNA Retail Holdings. This deal combined Germany's two biggest department store chains, unlocking potential merger synergies. It also provided cash for Hudson's Bay to pay down debt and simplified the company's business (because the European operations will be managed by SIGNA going forward).
More bold moves
Selling Gilt, moving to a joint venture structure in Europe, and shrinking the Lord & Taylor chain should all help Hudson's Bay going forward. Nevertheless, management expects free cash flow to be negative this year, suggesting that the company is still far from being healthy.
With that as context, Hudson's Bay announced last Thursday that it will shut down the Home Outfitters home furnishings chain and close a number of Saks OFF 5TH stores.
The company operates 38 Home Outfitters stores in Canada, averaging about 35,000 square feet in size. Management hopes to keep many of Home Outfitters' customers, as Hudson's Bay stores include sizable home sections, albeit with a more limited assortment than what Home Outfitters offers. Shutting down this banner could help Hudson's Bay improve the overall productivity of its Canadian store base, which lags behind that of its U.S. stores.
Meanwhile, Hudson's Bay will take more drastic corrective action at Saks OFF 5TH. Following sharp comp sales declines in fiscal 2016 and fiscal 2017, comp sales fell 3.5%, 7.6%, and 2.3% for that business segment in the first three quarters of fiscal 2018. During the same period, Nordstrom Rack posted a 3.4% comp sales gain. Some of the performance gap between Saks OFF 5TH and Nordstrom Rack likely relates to strategic missteps, but the former also overexpanded -- leading to the recent decision to close up to 20 of the chain's 133 locations.
Hudson's Bay has a lot going for it. The Saks Fifth Avenue luxury chain has delivered strong growth recently, and the recent reopening of the main floor of its Manhattan flagship store should add to its momentum. Furthermore, Hudson's Bay owns a vast portfolio of valuable real estate, including flagship locations in key cities like New York, Toronto, and Vancouver and stores at dozens of premier malls.
In the long run, none of that matters if the company continues to bleed cash indefinitely. That's why it's encouraging to see management aggressively cutting the parts of the business that aren't working. (The company expects that its 2019 store closures will give a slight boost to adjusted earnings before interest, taxes, depreciation, and amortization.)
Yet while Hudson's Bay is on the right track, it needs to return to organic sales and earnings growth to produce consistent positive free cash flow. That hasn't happened yet. Management is making the right moves, but whether that will spark a successful turnaround is an open question.
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