Hudson's Bay Company Reports Second Quarter 2013 Financial Results; Declares Quarterly Dividend and

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Hudson's Bay Company Reports Second Quarter 2013 Financial Results;
Declares Quarterly Dividend and Prepares for Acquisition of Saks

Strong Sales at Hudson's Bay and Growing E-commerce Drive Performance


TORONTO--(BUSINESS WIRE)-- Hudson's Bay Company ("HBC" or the "Company") (TSX: HBC) reported today its results for the 13-week period ended August 3, 2013 (the "second quarter"). Consistent with the first quarter of fiscal 2013, the second quarter was characterized by strong same store sales growth at Hudson's Bay and rising e-commerce sales. These strengths were partially offset by a decline in same store sales at Lord & Taylor.

Second Quarter Highlights (13-week period ended August 3, 2013)

  • Consolidated sales of $947.7 million, a 3.9% increase compared to the second quarter of 2012.
  • Same store sales:
    • Consolidated same store sales grew 3.5%, or 3.0% on a constant currency basis.
    • Hudson's Bay same store sales grew 6.2%.
    • Lord & Taylor same store sales declined 1.2% on a U.S. dollar basis.
  • E-commerce sales were $37.3 million, an increase of 56.1% compared to the second quarter of 2012.
  • Normalized EBITDA was $58.0 million, a decrease of $0.9 million compared to the second quarter of 2012.
  • Normalized net earnings were $0.03 per share, compared to a loss of $0.02 per share in the second quarter of 2012.
  • On July 29, 2013, the Company and Saks Incorporated ("Saks") announced that they entered into a definitive merger agreement (the "Merger Agreement") whereby the Company agreed to acquire all of the issued and outstanding shares of Saks in an all-cash transaction valued at approximately U.S. $2.9 billion, including debt (the "Acquisition").
  • Subsequent to the end of the second quarter, on August 20, 2013, the Company announced that it had entered into an underwriting agreement with a syndicate of underwriters to sell 16,050,000 subscription receipts (the "Subscription Receipts") at a price of $17.15 per Subscription Receipt, for aggregate gross proceeds of $275.3 million. The Company will use the proceeds from the Subscription Receipts offering to finance a portion of the Acquisition.
  • On August 30, 2013 the Company announced that it has been notified of the early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended ("HSR Act") applicable to the Acquisition.
  • On September 6, 2013, the "go-shop" period outlined in the Merger Agreement expired. Saks is now subject to customary "no-shop" provisions which are outlined in the Merger Agreement.
  • A dividend of $0.09375 per common share of the Company ("Common Share") was declared, payable on October 15, 2013 to shareholders of record on September 30, 2013. Subsequent to the closing of the Acquisition, the Company expects to reduce its quarterly dividend to $0.05 per share to accelerate deleveraging of debt in the short-term.

"Hudson's Bay continues to demonstrate industry-leading sales growth," stated Richard Baker, HBC's Governor and Chief Executive Officer. "This performance has been driven by a continued focus on our stated strategic initiatives. We are seeing strong performance from stores and departments that have recently received capital investments. We are also pleased by the continued growth of our e-commerce sales, which accelerated in the second quarter and are up approximately 45% year-to-date following our re-launch of both banner websites. Our online business was a key factor in our results, and reflects our increased investment in this component of our business. We are confident that our inventory is well-positioned for the Fall season and expect stronger financial performance from Lord & Taylor and the overall business in the back half of the year."

Financial Results

Throughout this news release, the terms "Normalized EBITDA" and "Normalized Net Earnings (Loss) - Continuing Operations" have been used to refer to financial results that have been adjusted to exclude certain non-recurring items and charges. For a full explanation of the Company's use of non-IFRS measures, please refer to Note 1 of the Summary Consolidated Financial Information section of this news release. For further discussion of the Company's financial and operating results, please refer to our Management's Discussion and Analysis of Financial Condition and Results of Operations (the "MD&A").

13-week period ended August 3, 2013

All comparative figures below and in the "Highlights" section are for the 13-week period ended August 3, 2013 compared to the 13-week period ended July 28, 2012.

Retail sales were $947.7 million for the 13-week period ended August 3, 2013, an increase of $35.8 million, or 3.9%, from $911.9 million for the 13-week period ended July 28, 2012. Consolidated same store sales grew by 3.5% (3.0% excluding the impact of foreign exchange). Hudson's Bay same store stores grew 6.2%, and same store sales at Lord & Taylor declined 1.2% excluding the impact of foreign exchange.

Sales at Hudson's Bay were driven by strong performance of ladies' and men's apparel, ladies' shoes, handbags and accessories, the continued growth of e-commerce and our five Topshop/Topman stores. Sales growth was particularly strong at recently renovated locations, including our Vancouver Flagship store. Sales at Lord & Taylor were impacted by lower customer traffic compared to the second quarter of 2012. Relative strength in men's apparel and shoes, handbags and watches and the continued growth of e-commerce was offset by underperformance in ladies' apparel and other seasonal merchandise. Reflecting the Company's strategic focus on growing its e-commerce channel, online sales once again contributed strongly to sales growth in the quarter, rising to $37.3 million, an increase of 56.1% when compared to the second quarter of 2012.

Gross profit was $368.1 million, or 38.8% of retail sales, for the 13-week period ended August 3, 2013, compared to $364.6 million, or 40.0% of retail sales, for the 13-week period ended July 28, 2012. Both Hudson's Bay and Lord & Taylor experienced gross margin rate deterioration caused by higher markdowns from liquidating seasonal inventories.

Selling, General & Administrative Expenses ("SG&A") were $359.6 million, or 37.9% of retail sales, for the 13-week period ended August 3, 2013, compared to $345.5 million, or 37.9% of retail sales, for the 13-week period ended July 28, 2012. Adjusting for non-recurring expenses of $9.2 million in both periods, SG&A as a percentage of retail sales would have been 37.0% and 36.9%, respectively. The dollar increase in SG&A was primarily driven by four factors: increased depreciation and amortization costs related to capital investments including investments in our online/omni-channel platform, an increase in non-cash share-based compensation, an increase in costs associated with our strategic initiatives (including Topshop/Topman) and a decreased return from credit operations related to the wind down of Zellers. Expense reductions of $7.5 million realized as a result of rightsizing our corporate infrastructure due to the wind down of Zellers offset this increase.

Normalized EBITDA was $58.0 million, or 6.1% of sales, in the 13-week period ended August 3, 2013, compared to $58.9 million, or 6.5% of sales, in the 13-week period ended July 28, 2012, a decrease of $0.9 million or 40 basis points as a percentage of retail sales.

Finance costs were $76.9 million for the 13-week period ended August 3, 2013 compared to $24.9 million for the 13-week period ended July 28, 2012, an increase of $52.0 million. This increase is driven by non-cash expenses of $66.4 million, $59.9 million of which is attributed to the pending Acquisition, and $5.8 related to deferred financing charges written off in relation to the current quarter re-financings. In connection with the Acquisition, we have issued and plan to issue warrants related to the equity commitments we received from an entity affiliated with Ontario Teachers' Pension Plan and a fund advised by West Face Capital Inc. Due to the variability of the Common Share issue price and certain other features including potential price protection provisions, the equity commitments have been recognized as forward contracts ("Equity Commitment Forwards") that are accounted for as derivative financial instruments. The non-cash charges associated with the warrants and Equity Commitment Forwards will fluctuate with changes in the Common Share price and other factors, as they require mark-to-market adjustments each reporting period. For the 13-week period ended August 3, 2013, we have recorded as finance costs the mark-to-market valuation adjustment of these warrants and Equity Commitment Forwards based upon their end of period valuations. Offsetting these non-cash Acquisition-related increases are lower average outstanding loans and borrowings as well as favourable loan terms from multiple re-financings in Fiscal 2012 and 2013.

Normalized net earnings for the 13-week period ended August 3, 2013 were $3.9 million, compared to a normalized net loss of $2.0 million in the 13-week period ended July 28, 2012. Normalized net earnings per share were $0.03 in the second quarter, compared to a normalized net loss of $0.02 per share in the 13-week period ended July 28, 2012.

26-week period ended August 3, 2013

All comparative figures below are for the 26-week period ended August 3, 2013 compared to the 26-week period ended July 28, 2012.

Retail sales were $1,831.7 million for the 26-week period ended August 3, 2013, an increase of $71.6 million, or 4.1%, from $1,760.1 million for the 26-week period ended July 28, 2012. Consolidated same store sales increased by 3.8% (3.1% excluding the impact of foreign exchange). Hudson's Bay same store stores grew 6.9%, and same store sales at Lord & Taylor declined 1.3% excluding the impact of foreign exchange.

Sales at Hudson's Bay were driven by strong performance of ladies' and men's apparel, ladies' shoes, handbags and accessories, the continued growth of e-commerce and our five Topshop/Topman stores. Sales at Lord & Taylor were impacted by lower customer traffic compared to the same period in 2012. Relative strength in men's apparel, handbags and watches and the continued growth of e-commerce were offset by underperformance of ladies' apparel and shoes. E-commerce sales grew to $68.4 million, an increase of 44.6% compared to the twenty-six weeks ended July 28, 2012.

Gross profit for the 26-week period ended August 3, 2013 was $724.3 million, or 39.5% of retail sales, compared to $705.7 million, or 40.1% of retail sales, for the 26-week period ended July 28, 2012. Margin rate deterioration at both Hudson's Bay and Lord & Taylor was caused by higher markdowns from liquidating seasonal inventories.

SG&A was $731.3 million, or 39.9% of retail sales, for the 26-week period ended August 3, 2013 compared to $726.8 million, or 41.3% of retail sales, for the 26-week period ended July 28, 2012. Adjusting for non-recurring expenses of $17.2 million for the 26-week period ended August 3, 2013 and $45.6 million for the 26-week period ended July 28, 2012, SG&A as a percentage of retail sales would have been 39.0% and 38.7%, respectively. The dollar increase in SG&A was primarily driven by four factors: increased depreciation and amortization costs related to capital investments including investments in our online/omni-channel platform, an increase in non-cash share-based compensation, an increase in costs associated with our strategic initiatives (including Topshop/Topman) and a decreased return from credit operations related to the wind down of Zellers. Expense reductions of $16.5 million realized as a result of rightsizing our corporate infrastructure due to the wind down of Zellers offset this increase.

Normalized EBITDA was $89.0 million, or 4.9% of retail sales, in the 26-week period ended August 3, 2013 compared to $85.0 million, or 4.8% of retail sales, in the 26-week period ended July 28, 2012, an increase of $4.0 million, or 10 basis points as a percentage of retail sales.

Finance costs were $89.0 million for the 26-week period ended August 3, 2013 compared to $49.7 million for the 26-week period ended July 28, 2012, an increase of $39.3 million. This increase is driven by non-cash expenses of $67.6 million, $59.9 million of which is attributed to the pending Acquisition, and $5.8 related to deferred financing charges written off in relation to the current quarter re-financings. As discussed above, we have recorded as finance costs the mark-to-market valuation adjustment of Acquisition-related warrants and Equity Commitment Forwards based upon their end of period valuations. Offsetting these non-cash Acquisition-related increases are lower average outstanding loans and borrowings as well as favourable loan terms from multiple re-financings in Fiscal 2012 and 2013.

Normalized net loss from continuing operations was $10.4 million in the 26-week period ended August 3, 2013, compared to a normalized net loss of $25.2 million in the 26-week period ended July 28, 2012. Normalized net loss per share was $0.09 in the 26-week period ended August 3, 2013, compared to a normalized net loss per share of $0.24 in the 26-week period ended July 28, 2012.

Acquisition of Saks

On July 29, 2013, HBC and Saks announced that they had entered into the Merger Agreement whereby HBC will acquire all of the issued and outstanding shares of Saks in an all-cash transaction valued at approximately U.S.$2.9 billion, including debt. The transaction has been approved by each company's board of directors and is expected to close before the end of the calendar year, subject to approval by Saks shareholders and other customary closing conditions.

The Acquisition will bring together three of the retail industry's most iconic brands—Hudson's Bay, Lord & Taylor and Saks Fifth Avenue—to create a leading North American retailer addressing a broad consumer spectrum across the luxury, mid-tier and outlet retail sectors. The combined company will operate 321 stores, including 179 full-line department stores, 73 outlet stores and 69 home stores in prime retail locations throughout the U.S. and Canada, along with three e-commerce sites. The combined company would have generated pro forma sales and normalized EBITDA in fiscal 2012 of approximately $7.2 billion and $600 million, respectively, before any synergies. The Company expects to achieve $100 million of annual synergies within three years.

Subsequent Events

On August 20, 2013 the Company announced that it had entered into an underwriting agreement with a syndicate of underwriters to sell 16,050,000 Subscription Receipts at a price of $17.15 per Subscription Receipt, for aggregate gross proceeds of $275.3 million (the "Offering"). The Company also granted the underwriters an over-allotment option to purchase up to an additional 1,605,000 Subscription Receipts for additional gross proceeds of up to $27.5 million. The Company will use the proceeds from the Offering to finance a portion of the consideration in connection with the Acquisition. The Company announced the closing of the Offering on September 10, 2013.

On August 30, 2013 the Company announced that it has been notified by the Premerger Notification Office of the U.S. Federal Trade Commission of the early termination of the waiting period under the HSR Act, thereby satisfying such closing condition in the Merger Agreement.

The Merger Agreement contains a 40-day "go-shop" period during which Saks was permitted to solicit alternative proposals from third parties. The Merger Agreement provides that within three business days of the end of the "go-shop" period, Saks will provide the Company with a list of "Excluded Parties," which means any party that submitted a written proposal during the "go-shop" period that the Saks Board of Directors determined either constitutes or could reasonably be expected to constitute a superior proposal. The "go-shop" period expired on September 6, 2013. On September 10, 2013, Saks announced that no party has been designated as an "Excluded Party." Saks is now subject to customary "no-shop" provisions which are outlined in the merger agreement. The Merger Agreement provides the Company certain information and matching rights in connection with other third party proposals.

Quarterly Dividend

The Company announced that its Board of Directors has approved a quarterly dividend for holders of Common Shares in the amount of $0.09375 per Common Share. The dividend will be paid on October 15, 2013 to shareholders of record at the close of business on September 30, 2013 and is designated as an "eligible dividend" for Canadian tax purposes. Subject to completion of the Acquisition, holders of Subscription Receipts will be entitled to receive, among other things and without payment of additional consideration or further action, payment in the amount of $0.09375 per Subscription Receipt.

Conference Call to Discuss Results

Richard Baker, Governor and Chief Executive Officer, and Michael Culhane, Chief Financial Officer, will discuss the quarter's financial results during a conference call on September 12, 2013 at 8:30 am EDT.

The conference call will be accessible by calling the participant operator assisted toll-free dial-in number (877) 852-2926 or international dial-in number (253) 237-1123. A live webcast of the conference call will be accessible on HBC's website at: http://investor.hbc.com/events.cfm. The audio instant replay will be available via this link until October 12, 2013.

Unaudited Interim Condensed Consolidated Financial Statements and Management's Discussion and Analysis

The Company's unaudited interim condensed consolidated financial statements for the thirteen and twenty-six weeks ended August 3, 2013 and the Management's Discussion and Analysis thereon will be available under the Company's profile on SEDAR at www.sedar.com.

Summary Consolidated Financial Information

The following tables set out summary unaudited consolidated financial information and supplemental information for the periods indicated. The summary financial information set out below has been derived from unaudited interim condensed consolidated financial statements prepared in accordance with IFRS for the thirteen week and twenty-six week periods ended August 3, 2013. The financial information presented has been prepared on a basis consistent with our audited consolidated financial statements for Fiscal 2012 except for the new accounting standards described in Note 2 of the unaudited interim condensed consolidated financial statements. In the opinion of our management, such unaudited financial data reflects all adjustments, consisting of normal and recurring adjustments, necessary for a fair presentation of the results for those periods. The results of operations for interim periods are not necessarily indicative of the results to be expected for a full year or any future period.

  13-week period ended  26-week period ended
(millions of Canadian dollars except per share amounts)

August 3, 2013

 

(restated(7))
July 28, 2012

August 3, 2013

 

(restated(7))
July 28, 2012

$ %$ %$ %$ %
Earnings Results
Retail sales947.7100.0%911.9100.0%1,831.7100.0%1,760.1100.0%
Cost of sales(579.6)(61.2%)(547.3)(60.0%)(1,107.4)(60.5%)(1,054.4)(59.9%)
Gross profit368.138.8%364.640.0%724.339.5%705.740.1%
SG&A(359.6)(37.9%)(345.5)(37.9%)(731.3)(39.9%)(726.8)(41.3%)
Operating income (loss)8.50.9%19.12.1%(7.0)(0.4%)(21.1)(1.2%)

Total interest expense, net

(17.0)(1.8%)(24.9)(2.7%)(29.1)(1.6%)(49.7)(2.8%)
Acquisition-related costs(59.9)(6.3%)-0.0%(59.9)(3.3%)-0.0%
Finance costs(76.9)(8.1%)(24.9)(2.7%)(89.0)(4.9%)(49.7)(2.8%)
Loss before income tax(68.4)(7.2%)(5.8)(0.6%)(96.0)(5.3%)(70.8)(4.0%)
Income tax benefit1.40.2%2.70.3%7.80.4%20.71.2%
Net loss for the period — continuing operations(1)(67.0)(7.0%)(3.1)(0.3%)(88.2)(4.9%)(50.1)(2.8%)
Net (loss) earnings for the period — discontinued operations, net of tax

(15.3)

25.3

(74.8)

(57.4)

Net (loss) earnings for the period(82.3)22.2(163.0)(107.5)
 
Net (Loss) Earnings per Common Share — Basic and Diluted(2)
Continuing operations(0.56)(0.03)(0.74)(0.48)
Discontinued operations(0.13)0.24(0.62)(0.55)
(0.69)0.21(1.36)(1.03)

Weighted average Common Shares outstanding — basic and diluted (millions)

120.0

104.7

120.0

104.7

 
Supplemental Information - Continuing Operations
EBITDA(1)48.85.1%49.95.5%71.83.9%42.62.4%
Normalized EBITDA(1)58.06.1%58.96.5%89.04.9%85.04.8%
Normalized net earnings (loss) for the period(1)3.90.4%(2.0)(0.2%)(10.4)(0.6%)(25.2)(1.4%)
Normalized net earnings (loss) per Common Share — basic and diluted(2)

0.03

(0.02)

(0.09)

(0.24)

Declared dividend per Common Share(3)0.09375-0.18750-
 

Same Store Sales Percentage Change(4)

Continuing operations

 

3.5%

3.9%3.8%5.7%
Continuing operations (excluding impact of foreign exchange)

 

3.0%

2.0%3.1%4.3%
Hudson's Bay

 

6.2%

3.2%6.9%5.2%

Lord & Taylor(5)

 

(1.2%)

 

1.5%(1.3%)4.3%
 

Store Information

Store count(6)
Hudson's Bay9091

Lord & Taylor

48

48

Home Outfitters6969
Total square footage ('000)
Hudson's Bay

16,118

 

16,358

Lord & Taylor

    6,710

 6,710

Home Outfitters

    2,515

    2,515

             
 
(restated(7))
Balance SheetAugust 3, 2013        July 28, 2012    February 2, 2013
$$$
Cash26.346.848.3
Trade and other receivables62.264.974.3
Inventories1,015.8964.2994.3
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