Like most of its department store peers, Hudson's Bay (OTC:HBAY.F) has suffered from weak sales trends in recent years. This top-line pressure, combined with the complexity of operating about half a dozen retail banners on two different continents, led to predictably poor bottom-line results.
However, Hudson's Bay installed new management a little over a year ago. New CEO Helena Foulkes and her team have already made solid progress toward getting the company back on track, as evidenced by a rebound in some key profitability metrics last year. Moreover, Hudson's Bay has clear opportunities to make further progress in fiscal 2019 and fiscal 2020.
A year of rapid change
Over the past year, Hudson's Bay has made a number of big changes designed to simplify its business, improve profitability, and shore up its balance sheet.
First, management decided to exit a number of underperforming businesses. During fiscal 2018, Hudson's Bay sold its money-losing Gilt flash-sale site. It also sold roughly 50% of its European real estate and store operations to SIGNA Holding, which owns the other major department store chain in Germany. SIGNA has management control over the new joint venture and has free rein to pursue merger synergies. Most recently, Hudson's Bay decided to shut down the Home Outfitters chain, which has been losing money. The remaining 37 stores will close this summer.
Second, Hudson's Bay is moving to close unprofitable stores operated by its remaining chains. It shuttered three Lord & Taylor stores earlier this year. Last year, management said it may close up to 10 of that chain's locations in 2019. The company also recently announced plans to close about 20 Saks OFF 5TH stores later this year.
Third, Hudson's Bay completed a number of asset sales in the past year -- most notably, the sale of its Lord & Taylor Manhattan flagship store for $725 million in cash plus a $125 million equity stake in the building. This move allowed it to significantly reduce its debt load.
Mixed top-line results but better profitability
These moves, as well as broader efforts to boost sales and reduce costs, are already starting to pay off.
To be sure, sales trends remain weak for most of Hudson's Bay's retail banners. For the full year, comparable store sales slipped 0.2% for Hudson's Bay. This figure consisted of a strong 5.3% comp sales gain for the Saks Fifth Avenue luxury chain, offset by a 4.3% decline for the Saks OFF 5TH off-price chain and a 3.3% decline for the company's other retail banners in North America -- Lord & Taylor, Hudson's Bay, and Home Outfitters.
Nevertheless, all of Hudson's Bay's business units improved their profitability last year -- even those for which sales declined. Better inventory management boosted gross margin, while strong cost control allowed Hudson's Bay to reduce operating expenses as a percentage of sales. As a result, full-year adjusted EBITDA jumped 30% to $338 million Canadian.
Expecting more progress in 2019 and 2020
While nothing is certain in the fast-moving retail world, there's a good chance that Hudson's Bay will be able to build on its nascent turnaround over the next two years.
First, Saks posted strong growth last year despite construction-related disruption at its flagship store for much of the year. The main floor reopened in February, and traffic and sales have been improving since then. The renovation work will continue in other parts of the flagship this year but should be less disruptive to sales.
Second, the Hudson's Bay chain made a big unforced error last year, bringing in too much low-priced merchandise in an attempt to woo former Sears Canada shoppers. This caused a sharp negative change in its sales trend, even though store traffic trends remained solid. Hudson's Bay expects to fix this problem over the next couple of quarters by better tailoring the merchandise mix to customer demographics at each individual store, driving a rebound in sales.
Third, the company's moves to downsize or close underperforming parts of its business should pay dividends later this year and in fiscal 2020, once the changes to its store footprint are fully implemented.
Management still has to figure out whether the struggling Lord & Taylor and Saks OFF 5TH chains can be salvaged or if they should be shut down as well. Fortunately, Foulkes and her team have shown a willingness to move decisively over the past year to address parts of the business that aren't working. With the Saks and Hudson's Bay chains well positioned for future growth -- and Hudson's Bay stock trading near a multiyear low -- the multinational department store group continues to look like an intriguing turnaround bet.