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Luxury Shoppers Weren’t Spending in Q3, HBC CEO Says

Markdowns and gun-shy luxury consumers weighed on Hudson’s Bay’s third-quarter sales, marking what could be the firm’s final publicly disclosed earnings report before a shareholder vote next week to decide whether to go private.

In a Nutshell: Tuesday’s third-quarter report was not the best for HBC, which saw losses widen as revenues declined. The sale of its interest in the European real estate joint venture and strategic changes in vendor relationships also impacted profitability in the quarter.

“In the third quarter, we faced our toughest comp, soft industry-wide luxury sales and the challenge of winning back market share in Canada. Strong digital growth, continued cost containment and inventory control were not enough to deliver the financial performance we wanted,” HBC CEO Helena Foulkes.

The company needs to “quicken the pace of improvement,” she said.

Shareholders are slated to meet on next Tuesday to vote on the company’s board recommendation to accept the plan, from a group led by chairman Richard Baker, that would bring the company under private management.

A report from Institutional Shareholder Services, a leading independent proxy advisory service, had recommended that shareholders vote against the proposed takeover plan, but HBC denounced the report as “flawed” because of errors and reasoning stemming from a misunderstanding of certain terms in the proposal.

Net Sales: For the quarter ended Nov. 2, total revenues fell 2.3 percent to $1.84 billion Canadian dollars ($1.39 billion) from $1.89 billion Canadian dollars ($1.43 billion).

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Retail sales decreased 2.2 percent to $1.82 Canadian dollars ($1.38 billion) from $1.86 billion Canadian dollars ($1.41 billion). The balance of revenue came largely from credit card income.

Comparable sales were down 1.7 percent, including a 15 percent increase in year-over-year digital sales, HBC said. Gross profit margin totaled 38.3 percent, down 120 basis points year-over-year. Excluding liquidating stores, the gross margin rate came in unchanged for the comparable period.

By business segment, comparable sales at Saks Fifth Avenue fell 2.3 percent in the quarter, versus a 7.3 percent increase a year ago. Saks Off 5th saw exceptional growth in digital, ending the quarter with comparable sales up 4.9 percent. At Hudson’s Bay, comparable sales fell 3.9 percent in the quarter.

Earnings: The net loss for the quarter widened to $226 million Canadian dollars ($170.9 million), or $1.23 Canadian dollars (93 cents), from a net loss of $161 million Canadian dollars ($121.8 million), or 88 Canadian cents (66.6 cents), a year ago. Adjusting for discontinued operations, the net loss for continuing operations widened to $175 million Canadian dollars ($132.4 million) from a loss of $70 million Canadian dollars ($52.9 million) a year ago.

Wall Street was expecting a loss of 29 Canadian cents (21.9 cents) on revenue of $1.85 billion Canadian dollars ($1.40 billion).

Discontinued operations for the quarter included results for its former Lord & Taylor operation, which sold to Le Tote in a transaction that hadn’t yet closed when the quarter ended.

CEO’s Take: “Across the country, there was a pullback among luxury consumers, allowing shoppers to more frequently take advantage of markdowns, which ultimately reduced full-price sales. As expected, reigniting sales at Hudson’s Bay is taking time as we replace unproductive brands and improve service,” Foulkes said.

HBC is confident in its strategy, which it is accelerating for the upcoming spring season, following what Foulkes said was good performance with its “more modern merchandise” during the quarter.