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Hudson’s Bay Looks for Answers After Deep Discounting and Store Closures Widen Q2 Loss

Hudson’s Bay Company stock fell by more than 2 percent Thursday morning after its second-quarter financial report revealed that widening losses are continuing to bite into its profits. However, change could be on the way for Hudson’s Bay and Saks Fifth Avenue as the group’s executive team has made it clear they are willing to look into new revenue streams.

In a Nutshell: Just weeks have passed since HBC sold Lord & Taylor for 132.7 million Canadian dollars ($100 million) and a stake in the buyer, fashion rental business Le Toteand margins and losses have continued to pile up for the group.

At Hudson’s Bay, the company said it would “fix the fundamentals” of its merchandise assortment and strategy in its Canadian stores. During the group’s earnings call, Hudson’s Bay CEO, Helena Foulkes, said the team has already expelled more than 300 unproductive brands from its assortment and replaced those with 100 new brands to help elevate its collections and “deliver a sharper and more exciting assortment.”

On the other side, Saks Fifth Avenue was a bright spot for HBC, though its like-for-like sales growth was modest. Foulkes said the opening of a brand new shoe experience for men was a part of its plan to “double down on men’s” as it remains one of the department store’s strongest categories. The opening of The Vault in September, a high-end jewelry experience, is poised to help the 95-year-old brand capture some new market share, according to Foulkes.

While jewelry and watch sales account for 38 percent of all personal luxury sales, Foulkes said penetration for the category at Saks Fifth Avenue is only 6 percent.

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However, amid a period of “hyper-promotional discounting,” decreasing margins and slow sales growth, Foulkes said her team is open to new ideas.

“We think that the opportunity for a customer to be able to walk inside the store and think about either renting or buying is really innovative,” Foulkes said, noting there is no imminent announcement regarding any of these concepts. “And we’re certainly looking at that not just for Lord & Taylor, but thinking hard about the customers we serve in our other banners and the opportunity for us to bring them new services, whether it’s rental or resale or subscription. And the idea of being a brand that brings you what’s relevant for you is what’s on our mind.”

Sales: Revenue for HBC totaled $1.9 billion in the second quarter, missing the average Wall Street expectation of $2.13 billion. Saks Fifth Avenue reported comparable sales growth of 0.6 percent, which HBC said added to its 7.3 percent growth on a two-year stacked basis. Saks Off 5th, the retailer’s off-price chain, also grew by 3.4 percent over the comparable period. Digital sales were also up 19 percent, year-over-year.

Hudson’s Bay saw its comparable sales drop by 3.4 percent in the second quarter, however. Still, the result was an improvement over the 4.3 percent decline in Q2 of the last fiscal year.

Gross margin fell by 530 basis points, year-over-year, to 34 percent for HBC during the quarter. The retailer said it was a result driven by a multitude of factors, including 110 basis points for store closures related to Saks Off 5th, 110 basis points due to transitions in vendor relationships and 180 points from its alignment with an over-promotional environment.

During the third quarter, HBC also said it would be closing the “vast majority” of the 15 Saks Off 5th stores it has already pegged for discontinuation, leaving it with 245 locations in total.

Earnings: HBC said its loss of $5 million in adjusted EBITDA, including a net loss from continuing operations of $462 million, was a “setback” despite its expectations of lower year-over-year profits in the first half of the year. Normalized for the transition, HBC said the loss was closer to $171 million, compared to the loss of $85 million in the previous year’s second quarter.

Overall, the loss per share of its currently operating business was $2.51 in Q2, though the loss widens to $5.35 per share when taking into account costs concerning its discontinued operations.

CEO’s Take: Foulkes said she would have her team focusing on what in can fix in a time of transition and struggle for the retailer.

“We continue to concentrate on controlling the ‘controllables’serving our customers and lowering expenses and inventory while making strategic investments for our future. While we’ve progressed in simplifying the business and strengthening operations, the second quarter demonstrates that we are still in the early stages of what HBC can become,” Foulkes explained. “This quarter we responded as the market moved early to discount merchandise in both luxury and Canadian retail. Our digital performance was a standout with a sharp increase in growth as our changes in strategy, people and infrastructure are paying off. With the Lord & Taylor sale agreement, our focus is now squarely on Saks Fifth Avenue and Hudson’s Baybusinesses that have the greatest potential for HBC amid the consolidating industry.”