Edited Transcript of HBC.TO earnings conference call or presentation 13-Jun-19 12:30pm GMT

With that, I'll become the summon can ought Helena ought dispute our first quarter.

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Helena B. Foulkes, Hudson's bay company - CEO & Director [3]

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Thank you, Jennifer, and hello, everyone. though we began this year, we are weighing complete of our strategic actions along the lens of our climax priority, driving growth can Saks Fifth avenue and Hudson's Bay, enhancing the passenger undergo across complete channels, fixing the fundamentals of our affair and capitalizing above the tax of our actual estate.

On that final point, we determined the best occur ought capitalize above the tax of our German actual goods and retail goods was ought sell our remaining ownership ought our common venture partner, marking a conclude exit from Germany.

The transaction totaled $1.5 billion, which betters the actual goods impartial established can September 2018, and is another become that enables us ought strengthen our remainder portion along farther debt reduction and ought fully concentrate above our greatest growth opportunities can North America, Saks Fifth avenue and Hudson's Bay.

Our largest business, Saks Fifth Avenue, had breakaway operation can the first quarter. Industry-leading comps of 2.4% resulted can a 2-year stacked comp of 8.4%. Saks' long-term tactic ought lift the brands along a differentiated, fashion-forward offering is driving widespread gains across the fleet, online and can each major ware category.

Saks stands out from the competition by driving excellence can merchandising, marketing and by providing high-touch service and only passenger experiences. can our New York city flagship, customers are embracing the new major floor, which opened can February, with a one-of-a-kind bag assortment featuring exclusive products and brands only available along Saks.

This summer, we will unveil our new men's shoe experience. The men's classification was one of our strongest performers during the first quarter, and footwear is always an entrance point though men while it comes ought luxury fashion. Our predominant classification presentation will furnish the masculine visitors and residents of New York city another compelling argue ought department can the flagship.

This fall, the grave will empty above the flagship lower level, where we will furnish customers with a unique, high-touch luxury shopping undergo featuring ultra-fine jewelry. This newly reclaimed district will couple ought the major floor via our Rem Koolhaas-designed state-of-the-art escalator, creating seamless shopping along 3 floors above one of the most valuable actual goods locations can New York City. The Saks Fifth avenue ecosystem is a compound of the physical and digital experience. More and more, our associates are leveraging technique and social media ought vacation and become passenger relationships. though we are infusing our passenger undergo with personalization, individuality and ease, we will summary ought redefine luxury shopping and influence the affair forward.

At Hudson's Bay, our climax rope operation picked up steam though the part progressed in spite of the fact that ware targeting previous Sears customers was however can our metropolitan stores and online. The better operation was due ought rapid wins can improving passenger service can climax stores and implementing a more recent marketing mix. though we reinvigorated our sales couple drill ought emphasize service and selling, our NPS scores jumped from the fourth quarter, and we summary ought launch a quantity of pilots which applies simple, low-cost solutions ought greet passenger ache points.

These solutions can autumn outer the traditional department conserve model, including empty sale shoes and jewelry or more theorem enhancements such though improved department navigation and centralized passenger service desks.

Hudson's bay tactic is focused above climax stores, climax categories and climax customers. We are more confident that our previous diagnosis is accurate, and we're encouraged by the swift further and excited though what is ought come.

At Saks OFF 5TH, we implemented a new tactic can 2018, which included shifts can our buying, marketing and service model. We expect ought operate less alike a little department conserve and more alike our translation of an Off charge retailer, providing fashionable on-trend items can a big value.

As we shared final quarter, we expected that our further can Saks OFF 5TH used to become more apparent can 2019. however there is however more profession ought do, we delivered. The affair returned ought growth with a 4.4% comp can Q1.

We grew the precise method using new marketing tactics that lay better targeted recommendations ought latent customers, driving our climax rope operation without sacrificing profitability. Our passenger calculate grew in-store, online and though those customers using complete of our channels.

This quarter's operation serves though a powerful instance of the certain impact new management, new strategies and theorem fixes could eat above the business.

On our final call, we shared that we eat prioritized profits can growth can Lord & Taylor. With an emphasis above continual improvement, the team tackled the climax rope challenge by exercising econmic discipline, which limited losses. This team continues ought find ways ought exist creative and send pockets of growth. They're though robust helping ought pledge that relevant lessons learned from their profession are imported and piloted can other affair units.

Wrapping up the first quarter, HBC's comparable sales increased 0.3%, and digital sales increased 13.9%, excluding Lord & Taylor and family Outfitters. We're pleased with our momentum and deem there's level more occur ought motivate digital performance. though Hudson's Bay, the team launched the new mobile app with functionality that improves the online and in-store experiences.

For example, customers can employ the app in-store ought inspect a block regulation though product details and ought invent a buy that will touch straight ought their door. The convenience of Hudson's bay is one of our competitive strengths, with 50% of the Canadian population alive within 16 kilometers can one of our stores.

In conjunction with the app launch, we've been able ought furnish customers with a 3-hour window though ordering online and picking up can our stores, giving us another occur ought send the convenient service customers love.

For Saks, our personalization efforts are focused above tailoring our services based above personal style, effortless luxury experiences and exclusives our customers will value. One instance is preorders, where customers eat the occur ought pick next season's hottest items, robust ago there's broad availability and sellouts. can Q1, we fixed the fundamentals embedded can our preorder process, resulting can a keen improvement can fulfillment though compared ought final year.

Before I become the summon can ought Ed, I expect ought reiterate what I said final quarter. econmic drill is no a onetime accident though us, it's a strategic imperative. We eat an unwavering concentrate above continuing ought better our fare structure however making strategic investments can technology, marketing, digital and our stores, complete designed ought advantage our existing customers and charm new ones. Everything I've described comes with significant work, and I'd alike ought thank our leadership team and complete our associates though their efforts ought become our affair and delight our customers.

I will now become the summon can ought Ed ought furnish additional detail above the Q1 financials. Ed?

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Edward J. Record, Hudson's bay company - CFO(Leave of Absence) [4]

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Thank you, Helena, and good morning, everyone. This quarter, HBC implemented U.S. GAAP reporting. though we told you above the final call, we eat taken this vary though an occur ought refresh the method we communicate our econmic results ought our shareholders.

Major changes contain providing retail sales and comparable sales news by each brand and updating our definition of adjusted EBITDA and adjusted EBITDAR ought better meditate the contributions from our North American retail affair and our actual goods common ventures.

We wish this step helps you comprehend and code and tax HBC, both though a entire and by our most valuable businesses. though historic results, interest see the Investor Relations district of our website, where we provided 8 previous apartment of downloadable econmic results can U.S. GAAP.

Now ought the first quarter. SG&A totaled $822 million, down $54 million year-over-year, resulting can an SG&A tax of 38.8%, an improvement of 120 base points. Controlling spending allows us ought invent smarter investments can technology, digital and marketing however maintaining econmic discipline.

In Q1, SG&A fare reductions were widespread, with corporate, department operations and closed stores contributing ought the year-over-year improvement.

While SG&A reflects the benefits from stores already closed, our modern rationalization negatively impacted our entire profit. First part entire advantage declined year-over-year by $48 million, and entire advantage border was down 90 base points ought 39%. almost half the repel is due ought liquidation sales and the remainder due ought a higher promotional surroundings can Lord & Taylor and Hudson's Bay.

In condition of streamlining our retail portfolio, we eat 3 programs that are currently underway. First, we announced that we'd exist shutting down family Outfitters, which has 37 locations throughout Canada. can 2018, family Outfitters had sales of $138 million and negatively impacted our adjusted EBITDA by $9 million beneath U.S. GAAP reporting.

Liquidation sales eat begun can family Outfitters, and we hope closing the affair unit can the goal of the second quarter. though Saks OFF 5TH, we estimated closing 20 locations can the U.S. during fiscal 2019. though the journal was announced, we eat identified 15 stores that we'll exist closing above a rolling base throughout 2019, with the huge majority ought exist closed can the goal of the third quarter.

Impacted stores had sales of almost $50 million and lost almost $7 million can adjusted EBITDA. Finally, can 2018, we announced the closing of up ought 10 Lord & Taylor stores, with 5 already completed. We will vacation liquidation can 4 additional stores shortly, 2 of which are Lord & Taylor outlets, and we wish ought shut complete 4 can the third quarter.

We conduct no hope these closures will eat any impact above the fabricate of the strategic alternatives process, though they eat been planned though some time. can the first quarter, our transaction and restructuring costs totaled $36 million. We eat targeted inventory efficiency ought exist a key component of strengthening operations and improving liberate money flow. can the goal of the first quarter, comparable inventory declined by 7%. Saks OFF 5TH, Hudson's bay and Lord & Taylor are complete holding less inventory, and Saks Fifth Avenue's inventory was essentially flat.

Our Q1 operation is ahead of our entire year expectation though inventory declines can the mean sole digits. can emotion ought new tools and processes ought backward data-driven decisions by our merchants, the team has been working ought invent certain that we are holding inventory can the most beneficial stand though our customers. And however we are can the early stages of improving our planning, allocation and furnish chain, our customers noticed the change.

We experienced famous increases can our U.S. digital NPS scores tied ought improving our out-of-stock positions, with 0 impact ought the department undergo we send though our customers. We are haughty of the team though aggressively reducing the level of inventory however improving our in-stock position.

Inventory effectiveness is level more significant before latent changes our industry is facing related ought tariffs. Hudson's bay and Saks Fifth avenue illustrate though can 70% of our revenues, and we hope identical little change, owing ought their respective place can Canada and luxury retail.

For the remaining less than 30%, we eat a little quantity of direct imports from China and eat been proactively transferring product ought other countries where it makes sense. However, we could eat secondary exposure, specially can Lord & Taylor and Saks OFF 5TH, along suppliers that can source can China.

As you know, the first level of tariffs though handbags, cosmetics, baggage and skin ware was neutral increased ought 25%. We eat no cabin seen an impact, and we wish we will exist able ought mitigate this change. though while the proposal ought amplify tariffs above the remaining categories imported from China, our merchants are prepared ought profession with the vendor community ought decrease the impact above HBC and our customers. We wish the tariffs don't further can place, however during if they do, we deem we are robust positioned, given the more than 70% of revenue we eat can Canada and luxury retail.

For North American retail, we however deem adjusted EBITDA will exist higher this year than final year. though we said above our final call, and based above our strategic plan, we wish adjusted EBITDA will exist lower can the first half of the year can comparison ought the previous year. There is now one caveat. Our expectation does no contain any latent impact from the recently proposed expanded tariffs.

On the actual goods side, we hope actual goods adjusted EBITDA will exist impacted by almost $40 million if the German actual goods profession is completed can the fall. Adjusted EBITDA totaled $44 million can the first quarter, with North American department stores contributing $6 million and actual goods common ventures adding $38 million.

In Q1, adjusted EBITDA was lower by comparison ought the previous year due ought the late vacation ought fountain selling, can portion driven by the afterward Easter vacation and the timing above the expected benefits from our strategic initiatives. can emotion ought our ware planning, allocation and furnish fasten programs that we've already discussed, farther optimization can our in-store scheduling ought best confront our passenger demand and advancing our digital operations and marketing mix summary ought exist key priorities can delivering noise profitability can the second half of the year.

On the actual goods side, our lower adjusted EBITDA is primarily driven by the previous sale of our European assets, which closed can fiscal 2018. Net allowance was $275 million can Q1. can February, we closed above the sale of the Lord & Taylor Fifth avenue flagship dwelling though a total transaction tax of $1.1 billion, resulting can an $817 million gain.

On a normalized basis, we posted a net loss of $209 million.

The Lord & Taylor dwelling sale had a certain impact above our remainder sheet, too. above a year-over-year basis, we lowered our debt remainder by almost $1 billion. can today's exchange rates, we eat permanently reduced our U.S. vocabulary borrow by $206 million. We eat eliminated the $504 million Lord & Taylor mortgage, and we ended the part with $303 million can lower famous borrowings above our ABL, which included $171 million can European-related draws final year.

With the pending sale of our German actual goods and retail operations though $1.5 billion, we hope eliminating the remainder of our $436 million vocabulary borrow can the profession close. We summary ought exist comfortable with our leverage ratios, and we eat abundant liquidity and flexibility ought backward our strategy.

Capital investments were $68 million during the first part of 2019, down $119 million from the too part a year ago. however profession is however being completed above this year's Saks big renovation, the spending final year was substantially higher.

In emotion ought the profession can Saks and the strategic improvement can the Hudson's bay stores, we summary ought modernize and cloud-enable our technique platform, patch the fundamentals of our digital operations, including improving stand speed, bid processing and checkout, bid fulfillment and delivery speed.

Our CapEx expectations though the year are unchanged ought $300 million ought $325 million, net of landlord incentives, though compared ought $346 million can 2018 above a like-for-like basis.

We ended fiscal 2019 with momentum ought found upon the further we made streamlining the operations, simplifying the affair and unlocking the tax of our actual estate. We've continued ought drill our econmic drill however making key investments, and we hope that many of the benefits of this profession will exist apparent can our results can the undergo half of 2019.

That concludes my remarks. Operator, we will now empty it up though questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will grow from the rope of Sabahat Khan with RBC chief Markets.

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Sabahat Khan, RBC chief Markets, LLC, inquiry part - Analyst [2]

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As you look can the Hudson's bay affair can Canada, I noticed some of the deed and e-commerce changes you're making. I presume how conduct you deem almost the ware mix, some of the competition here from maybe global apparel retailers, some of the swift method folks? How conduct you, I guess, feel almost the ware and the apparel mix, if it's can some of your flagship locations or neutral across the entire network?

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Helena B. Foulkes, Hudson's bay company - CEO & Director [3]

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Sure. I deem you're hitting above the essence of our occur though we deem almost the second half of the year and beyond. accordingly we're identical pleased with the further we're making can the Bay, however during one of the things we highlighted can the final part summon was the impact that we had, self-inflicted wounds, almost buying ware though the entire fasten focused above the Sears closing. And instead of neutral focusing above the stores, the 53 stores we eat that are located within Sears malls, we indeed took that product offering across the entire chain. And I deem ought your point, what we missed was the customer, specially can our metropolitan stores, however during level more broadly than that was indeed however looking though a better, more fashion-forward mix.

And we took our median unit retails down though robust much and we missed above the mix side, accordingly I feel identical confident that the team has corrected that though the second half of the year. And the improvement that we did cry on can the part was due ought changes that were made almost our marketing mix, our service, however during I used to level highlight that our strongest categories can the part were beauty, family and children. And accordingly that speaks ought the fact that those businesses were doing robust and indeed our occur within the apparel category.

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Sabahat Khan, RBC chief Markets, LLC, inquiry part - Analyst [4]

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Okay. And then as, I guess, the Saks, the flagship renovation gets completed, are there other opportunities from across the network can any of your major locations across complete banners where you conduct deem there's some occur ought place can chief and exist a lift? Or conduct you deem that was possibly left ought the major ones?

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Helena B. Foulkes, Hudson's bay company - CEO & Director [5]

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We're often looking can the fleet, and we expect ought invent certain that our stores linger fresh and appealing ought customers, however during I deem that the Fifth avenue dwelling was clearly a big investment, and you won't cry on another of that size.

So we'll summary ought refresh our stores. We conduct cry on occur in-stores, however during we'll though robust exist focusing above digital, where we cry on a judge of upside.

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