Hudson's Bay Company's (HBAYF) CEO Gerald Storch on Q4 2015 Results - Earnings Call Transcript

| About: Hudson's Bay (HBAYF)

Hudson's Bay Co. (OTC:HBAYF) Q4 2015 Results Earnings Conference Call April 5, 2016 8:30 AM ET

Executives

Elliot Grundmanis - IR

Richard Baker - Governor & Executive Chairman

Gerald Storch - CEO

Paul Beesley - CFO

Analysts

Sabahat Khan - RBC Capital Markets

Mark Petrie - CIBC

Oliver Chen - Cowen & Company

Patricia Baker - Scotiabank

Wayne Hood - BMO Capital

Derek Dley - Canaccord Genuity

David Hartley - Credit Suisse

Steven Salz - M Partners

Operator

Good day, ladies and gentlemen, and welcome to the Hudson's Bay Company presents the Q4 and Full Year 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions]

I would now like to introduce your host for today's conference call, Mr. Elliot Grundmanis. You may begin.

Elliot Grundmanis

Thank you. Good morning everyone, and thank you for joining us today. On behalf of Hudson's Bay Company I would like to welcome all you to our fourth quarter conference call.

With me on the call today are Richard Baker, Governor and Executive Chairman; Jerry Storch, Chief Executive Officer; and Paul Beesley, Chief Financial Officer. Yesterday we issued a news release on our fourth quarter and full year results for fiscal 2015. We also posted complete financial statements to our website and filed them on sedar.com. In a moment I'll pass the call over to Richard, Jerry and Paul to make a few comments on our results, and then we'll open up the call to questions.

Before doing so, allow me to provide a disclaimer regarding forward-looking statements. Certain statements made during this conference call regarding HBC's current and future plans, expectations and intentions, results, levels of activities, performance goals or achievements, or any other future events or developments, including outlook for fiscal 2016 constitute forward-looking statements.

Forward-looking statements are based on current estimates and assumptions made by management in light of its experience and perception of historical trends, current conditions and expected future developments, as well as other factors that management currently believes are appropriate and reasonable under circumstances.

However, there can be no assurance that such estimates and assumptions will prove to be correct. Many factors could cause HBC's actual results, levels of activities, performance goals or achievements, or future events or developments to differ materially from those expressed or implied by the forward-looking statements.

For a discussion of these factors we refer you to the risk factors set forth in the company's fourth-quarter MD&A dated April 4th, 2016, as well as HBC's other public filings available on SEDAR at sedar.com and our own website, hbc.com. Listeners should not place undue reliance on forward-looking statements made on this call. Please note that unless otherwise stated all financial figures on this conference call will be expressed in Canadian dollars.

I would now like to pass the call over to Richard.

Richard Baker

Thank you, Elliot, and good morning everyone. I would like to begin by saying that I'm extremely proud of all that we have accomplished this year. I would like to thank all of our associates around the world for their efforts, passion and dedication to HBC.

Over the course of 2015, HBC transformed itself into a truly global retailer with 10 distinct banners and operations in four different countries. The fourth quarter caps off this exciting growth story with consolidated retail sales increasing by more than 70% and adjusted EBITDAR increasing by $239 million compared to the prior year, primarily as a result of the addition of HBC Europe.

Not only did we accomplish this transformation, but we also ended the year with roughly the same amount of [net debt] [ph] on HBC's balance sheet. This demonstrates our ability to utilize our real estate portfolio to provide us with flexible financing for mergers and acquisition activities, as well as ongoing business operations.

During the year we have had many accomplishments worth highlighting. At the beginning of the year we announced the formation of two real estate joint ventures, one with Simon Properties in the US and the other with RioCan REIT in Canada.

The proceeds from the close of these transactions allowed us to pay down more than $1 billion of debt on HBC's balance sheet, while also placing a third party marker on the value of the company's real estate contributed to the joint ventures.

Following that we used our joint venture with Simon to help acquire the GALERIA Kaufhof and GALERIA INNO department store chains in Europe. This acquisition further diversified our business mix geographically and established a footprint for us in Europe.

As part of the series of related transactions we sold a portion of our equity in that joint venture to three premier real estate investors for US$533 million. This transaction provided another third-party validation of the value of our real estate and we used the proceeds to repay debt on HBC's balance sheet, yet another example of how we use our real estate to enhance our financial flexibility.

In our retail business we made great progress in growing our top line while reducing normal course expenses. For the year HBC generated comparable store sales growth of 2.5% on a constant currency basis while realizing $39 million in synergies related to the integration of Saks and an additional $23 million from our North American realignment initiative.

We also opened 15 new OFF 5TH stores and 1 new Saks Fifth Avenue store. We look forward to realizing the full benefit of all of these initiatives in the year ahead. On February 1 of this year we closed the acquisition of Gilt Group. I would like to take this opportunity to welcome Gilt to the HBC family. Gilt's on trend brand and expertise in mobile technology and personalization will complement the ongoing growth of OFF 5th and represents our first big accomplishment of 2016. Overall I am very pleased with the year HBC has had. Our organization has a very strong position to continue our ambitious goals of profitable growth.

I would now like to pass the call to Jerry, who will provide a more detailed update on our retail priorities and initiatives during the quarter.

Gerald Storch

Thank you, Richard. We are proud in the progress we have made in the fourth quarter and throughout the year in what was a challenging operating environment. The future of HBC has never been brighter and we are excited about the opportunities that lie ahead.

We continue to drive growth today while executing on our strategic initiative to build our business and invest in our long-term vision of HBC.

During the fourth quarter the company delivered consolidated comparable store sales growth of 1.8% on a constant currency basis. We benefited from our unique group of retail banners, which are diversified across both geography and retail concepts.

Our department store group performed extremely well, given market conditions, delivering comparable store sales growth of 4% on a constant currency basis. We also saw positive results from HBC Europe and our off-price business at OFF 5th, partially offset by weakness in the luxury sector which impacted Saks Fifth Avenue.

Digital sales continued to drive growth across all banners and were up approximately 23% on a constant currency comparable basis during the quarter. Gilt's leading mobile and personalization technology should ensure that we continue to gain further traction in this channel as we make ongoing investments to both our systems and distribution networks.

The continued strength of the US dollar and the unseasonably warm weather had a meaningful impact on our business during the quarter, impacting both overall sales and gross margins. Despite this, I am very proud of how our team reacted by delivering results and staying focused on our strategic plans.

As we move into the new fiscal year we feel confident that our fourth quarter results have HBC in a great position to continue to execute on our 2016 strategic priorities and initiatives. These initiatives are key part of HBC's growth plans and we look forward to realizing the benefits of these investments in coming quarters.

In Canada we have already opened our first two Saks Fifth Avenue stores and our first two OFF 5th stores. We have announced a total of seven new Saks OFF 5th stores in Canada. Our first Saks full line store to open in Canada is in our Queen Street Hudson Bay location. We were able to carve out a piece of the Queen Street Hudson Bay and transform it into a full-line Saks store.

This enabled us to make better use of all of available space, with the Saks store providing a stage for our unique retail offerings. The opening was a huge success and was one of the best openings in Saks' history.

Not only did the new Saks store get off to a great start, but since its opening the Queen Street Hudson Bay location has seen an increase in both traffic and sales. Customers appear to be coming to see the new Saks and shopping there and then they make their way to the Queen Street Hudson Bay store.

In March we opened our first four OFF 5th stores in Canada, as well is our first OFF 5th store in Manhattan, as we continue to bring this banner to urban locations. In the US we opened six new OFF 5th locations during the quarter and continue to see exciting opportunity for an expansion of this banner, both inside and outside of the United States.

Since the close of our Gilt acquisition on February 1st we've been working rapidly to integrate the Gilt team into the OFF 5th business. We've implemented a new return policy for Gilt merchandise across our entire OFF 5th fleet of stores.

We also opened our first physical Gilt shop inside of a new New York City OFF 5th store on March 3rd. The pairing of these two brands allows us to bring an all-channel shopping experience to Gilt customers while improving inventory management at Gilt and introducing the OFF 5th brand to Gilt's loyal and devoted millennial membership. We feel better than ever about our ability to advance our all-channel model and continue to grow our successful off price business.

As you've seen from our press release yesterday, we expect 2016 to be another year of growth at HBC with consolidated sales up between 33% and 42%, which implies overall low single digit comparable store sales growth on a constant currency basis.

To drive this growth and prepare HBC for the future we are making significant capital investments in growth initiatives. These investments include the major remodel of ours Saks Fifth Avenue flagship store, upgrades to our consumer-facing technology, as well as the technology in our distribution centers.

We are focused on improving our presence online, enhancing our in-store experience, and increasing the efficiency of our shipping in order to deliver a seamless all-channel experience. These initiatives will help prepare HBC for the growth ahead of us and ensure that we are well positioned to take advantage of evolving trends in the retail industry.

I will now turn the call over to Paul to provide more detail on this and our Q4 and full year financials. Paul?

Paul Beesley

Thank you, Jerry, and good morning. Since Jerry has already discussed the top-line results, I'll begin by highlighting gross profit which was $1.782 billion in the quarter, a $771 million increase over the prior year's comparable amount. This increase in gross profit dollars was primarily related to the addition of HBC Europe during the quarter, as well as higher sales at the department store group.

On a comparable rate basis gross profit as a percentage of consolidated retail sales increased by 30 basis points. I would like to remind everyone that the cost structure in Europe is such that gross profit margins are generally higher than those seen in North America.

This in turn is offset by a higher expense structure, driven partly by higher labor costs. As a result, the corresponding gross profit and SG&A rates reported by HBC going forward will not be directly comparable to historical results.

Normalized SG&A expenses for the quarter were $1.372 billion or 30.6% of retail sales, compared to 28.7% in the prior year. Normalized SG&A expenses increased primarily due to the additional rent paid to the joint ventures which account for 70 basis points, and the inclusion of HBC Europe which accounted for 50 basis points.

Additionally we are investing for growth which included opening new stores in Canada and the United States, and making investments in our digital business. Without these items SG&A as a percentage of sales would have been 20 basis points lower than the prior year.

Expense reduction is a constant focus here at HBC and this quarter we realized total operating synergies of $19 million associated with the ongoing integration of Saks, as well as our North American realignment initiative announced last quarter.

In aggregate we have now achieved approximately $95 million of our stated goal of $100 million in synergies by the end of fiscal '16 and view this integration as largely complete with the remainder of the synergies expected to be realized over the course of fiscal 2016.

Our recent actions to better align the cost structure of our North American operations led to $15 million in savings during the quarter and we expect to meet our goal of $75 million in annualized savings during fiscal 2016.

Turning back now to our financial results. Following the creation of the real estate joint ventures, we believe that adjusted EBITDAR best reflects our performance of - the performance of the retail business.

This metric provides the most consistent view of our retail performance as it is not impacted by, among other things, HBC's ownership levels of the joint ventures and the resulting impact on net rents. We believe that adjusted EBITDA is less useful when you value in the retail performance of the business, but will continue to disclose it for reference purposes.

Adjusted EBITDAR for the fourth quarter was 630 million compared to $391 million in the prior period. Adjusted EBITDAR as a percentage of retail sales was 14% in the fourth quarter compared to 14.9% in the prior year.

Adjusted EBITDA was $455 million during the quarter compared to $325 million in the prior year. Adjusted rents paid by the company to our joint ventures with Simon Property group and RioCan REIT have the effective lowering relative to EBITDA growth, while also increasing the seasonality of the company's earnings cadence due to the fixed nature of the rent.

Finally net earnings were $370 million in the quarter compared to $115 million in the fourth quarter of fiscal 2014. Our normalized net earnings in the period were $145 million compared to $157 million in the prior year.

In the quarter, we sold a portion of our equity in HBS properties for $533 million, allowing us to meaningfully delever our balance sheet. As of today we actually have roughly the same amount of net debt on HBC's balance sheet than we did at the same time last year, despite adding a business with approximately €3 billion in annual sales.

Based on current trends in the overall retail environment and HBC's results in fiscal 2015 we are confirming our adjusted EBITDAR and EBITDA outlook for 2016, the same as previously announced and increasing our sales outlook for the inclusion of the Gilt Group acquisition which closed on February 1st 2016.

This outlook is fully qualified by the forward-looking statements contained in yesterday's press release and accompanying MD&A. In fiscal 2016 total sales are expected to be between $14.9 billion and $15.9 billion, which implies overall low single digit comparable store sales growth.

Adjusted EBITDAR is expected to be between $1.560 billion and $1.710 million which includes the full year impact of HBC Europe, our two joint ventures, as well as the acquisition of Gilt Group.

This is an increase of approximately 35% over fiscal 2015. We currently expect adjusted EBITDA growth to be further weighted towards the second half of the year due to flat rent associated with the company's joint ventures, which is spread evenly over the course of the year. Adjusted EBITDAR, which management believes is more reflective of the underlying performance of the retail business does not include these rent expenses.

As Jerry mentioned previously, 2016 will see us invest a higher than normal amount in growth initiatives. We expect capital expenditures, net of landlord incentives in fiscal 2016 to be between $750 million and $850 million with approximately 70% related to growth expenditures. Of the investment related to growth expenditures approximately 40% is expected to be related to store innovations, including the renovation of the Saks New York flagship and renovations to our HBC Europe stores.

Another 30% is expected to be related to the opening of new stores. We anticipate opening a total of 7 Saks Fifth Avenue stores and approximately 32 OFF 5th stores. The remaining 30% is related to digital and other technology investments designed to further advance our all-channel initiatives.

These investments include the implementation of robotic automation in our Toronto distribution center, as well as a new distribution center in the US. Please see our fourth-quarter and full year MD&A for a further breakdown of our updated guidance.

I'll now turn the call back to Richard.

Richard Baker

Thank you, Paul. Based upon the progress and momentum of our strategic priorities initiatives, as well as our performance during the fourth quarter and fiscal 2015 we remain confident in our ability to execute as we head to the bulk of 2016.

Before I conclude, I would like to thank our associates who have been working tirelessly to make HBC one of the premier department store operators in the world. It is their dedication, commitment and efforts that make this company successful. This is especially true of our store associates who serve our customers every day. I'm extremely excited about what we are going to accomplish together and look forward to many more successful quarters.

Operator, we are now ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Sabahat Khan with RBC Capital Markets.

Sabahat Khan

Hi, thanks. So just a quick question on the CapEx. You said this a bit higher than normal level. Should we maybe expect this to continue at least for a couple of years as those renovations will last a few years or do you expect it to moderate starting next year?

Gerald Storch

I would expect that it would last probably for the next few years, maybe one to three years, think about it that way. A couple of things I want to highlight is that we are very rigorous in evaluating our capital expenditures and any investment we make needs to clear easily our cost of capital. And we [indiscernible] the investments we've we made, and we see that they are accomplishing that.

So we believe that these are great investments for the future, and particularly with the evolution towards an all-channel model we want to make sure that we're absolutely state-of-the-art when it comes to the Internet on the front end with a customer and also on the back end with the [indiscernible].

The other point I'd like to highlight is that quite a bit of the increase is due to the addition of Kaufhof. Keep in mind that we've grown our company by over 50% in this one year between adding Kaufhof and adding Gilt to the company.

And then additionally that the impact of the strong US dollar has also tended to inflate the Canadian dollar denominated capital expenditures. So it's not really quite as large as it seems in terms of increase.

Sabahat Khan

All right. Thanks. Just on the HBC Europe renovation that you talked about, could you maybe provide some detail on some of the specific things that you're looking to do at that banner?

Richard Baker

Hi, it's Richard. As we've discussed, our plans are to experiment in Germany with the rollout that we did in Canada. So in Canada we went in and we right-sized the different departments and we grew different businesses, but we tested it first.

That is exactly what we're doing in Germany where we see huge opportunities in full service women shoes, in full service cosmetics, in handbags and the other traditional department store businesses that we are very successful with in Germany. So that's a piece of the capital expenditures.

Additionally we have announced that we're going to open up to 40 Saks OFF 5th stores in Germany and we will be opening our first stores in 2017, and that takes a certain amount of capital and we'll be progressing. Those stores will all be within our existing infrastructure of buildings. So it will be our capital that will be spent to create those stores.

Sabahat Khan

Thanks. One last one from me. You called out a little bit of weakness at the Saks Fifth Avenue full-line banners. Can you maybe talk about what you saw during the quarter, how Q1 is trending. And when you might expect to start lapping some of the pullback in tourist traffic that we saw in 2015? Thanks.

Gerald Storch

Yes, there is no doubt that the luxury market is the most challenging market we participate in right now and you've seen that in the results of companies across the luxury spectrum. And there are several causes for this, most notably for us in the United States, the strong US dollar has significantly reduced the amount of international tourists who come to the US and their purchases at Saks Fifth Avenue in those luxury gateway cities.

And we see that whether it's New York and the Europeans and Canadians not coming or whether or not it's down in South Florida and it's the Brazilians who aren't coming anymore.

So we do believe you look at where the euro is now, we are starting to annualize that and in general we are far more sanguine about the back half of the year. And what we saw last year, if you recall the cadence, was everybody was feeling really good about how things were going in the first quarter. In the second quarter it was okay.

And then it's when we hit the summer and particularly August, September timeframe that things started to slow down in retail and luxury more specifically. So we'll start to annualize that in that third quarter. So we have a high degree of positive feelings about the back half of this year.

Also retailer after retailers has talked about the historically warm winter that we had last year. So it would be impossible to have another warmest winter in history, it seems to me, back to back with the one that just occurred.

If we all mean what we said and that one warm weather impacted retailing, then we should see the positive start to flow back when we get to the back half of the year.

Richard Baker

Also just as an additional add-on. Our competitors in the entire environment is very full of inventory for this first half of the year. We expect the second half of the year to be much more disciplined throughout our business and throughout our competitors' business with the amount of inventory. So that should create hopefully a less promotional environment in the second half of the year as well.

Sabahat Khan

Thank you.

Operator

Our next question comes from Mark Petrie with CIBC.

Mark Petrie

Hi. Good morning, guys. So actually just following up on that inventory comment. You gave a bit of color in the release. But could you talk about your inventory levels today, how that looks by geography and what the plans are there?

Gerald Storch

Right. We feel our inventory levels are healthy. We did end the year a little heavier than we would have preferred, but we're hardly alone in that. And we think that's a consequence obviously of the tough fourth quarter that everyone saw in retail.

So a little higher than we thought. But when you take a look at it, we don't believe that there are significant liabilities in that inventory. And a lot of it is what we call continuative product that we will continue selling throughout the year. And we have a good handle on it and feel, again great, about where we're going to be for the second half of the year here.

So there was little more than we wanted, but again hardly alone. It’s part of the reason why we believe that this year is going to be one of greater opportunity in the second half of their across all of retailing, including ourselves.

Mark Petrie

And that's spread across the banners and the various…

Gerald Storch

No. I think the - certainly we are heavier in the areas that had more sales weakness, such as Saks Fifth Avenue. The other thing I want to highlight, when you look at our inventory, just please don't forget the two factors that we keep mentioning, one is the significant appearance of increase in inventory due to the appreciation of the US dollar and the corresponding depreciation of the Canadian dollar and the fact that we book our results in Canadian dollars. So a lot of the increase is due to currency, and then of course the giant increase of Kaufhof and adding - growing the company so significantly.

Mark Petrie

Okay. Thanks. And then back to the capital plan. Could you just give a little bit more color in terms of the digital and technology growth investments that you're doing and what you would expect, or when you would expect to see returns from that? And is that part of the element that will continue for one to three years?

Gerald Storch

Yes. And so one of the areas that I'm most excited about, is that we are introducing new robotic technology to our distribution Center for Internet fulfillment. There have been robots, we have robots, the traditional Kiva robots, in our distribution center for Saks Fifth Avenue already.

But this new robotics technology is faster and better by far than even the Kiva robots that are well known and that operate in a number of DCs around the world. So this is a technology, some people call it k-shuttle, that the real trade name is Perfect Pick. But basically it's robots that do most of the work and they allow you to utilize the cube of the DC very efficiency, so that you don't have to keep investing over future years in additional DC capacity. All you do is just add more arrays of this high base shelving with the robots that go up there and pick the product for you.

So this will put us at the absolute forefront of Internet distribution technology. There is no one more advanced in the technology that we're putting in and very few people actually even have it.

So we're really excited about that, and that's one of the big enhancements that I would highlight. And we're starting in just a few months in our Ontario distribution center, [indiscernible] using this technology.

So it’s fantastic. At some point it would be great thing to have an analyst tour, by the way, because it's really, really very cool and no one can beat it. So that’s something we're very excited about, because we know that the Internet is growing in importance. We want to make sure that we're leading there, not just chasing.

And then additionally we're continuing to improve the front end of our Internet sites and we're working to get all of our banners onto a common Internet platform and we're basing that on the Saks Fifth Avenue website, which is far and away our premier website here at Hudson Bay.

And so we're putting the Bay and Lord and Taylor up on that same technology, which will give all the functionality that we have at Saks Fifth Avenue and we continue to invest to improve that technology.

Additionally we'll be adding significant personalization capabilities to our websites and this is one of the reasons we brought Gilt is because they're absolutely premier when it comes to personalization and mobile. And so we're going to be focusing on both of those areas, mobile technology and personalization.

And we feel that with the Gilt acquisition we bought a company that was A1-plus in terms of skill sets when it comes to mobile, which is the most rapidly growing part of the Internet and personalization. We're going to be transferring that technology to our other websites and we see a lot of growth ahead there.

Finally, I want to highlight that HBC Europe had a fairly undeveloped Internet presence. And we see an opportunity for significant growth in Germany, for example through the GALERIA and Kaufhof website as we begin to work with them and invest in that capability and transfer technology over to Europe. So look, we know the Internet is the most transformational and important development in retail today, and we're going to be leaders in that.

Mark Petrie

Okay. Thanks, Jerry. That's really helpful. My last question would just be around the balance sheet. I mean, with the elevated or higher CapEx, can you just talk about the leverage, and maybe what we should expect in terms of potential further sales in terms of the real estate or changes in the capital structure?

Paul Beesley

Yes. In terms of the leverage, we don't anticipate significant increase in leverage in fiscal 2016. Our plans are to fund the capital program out of working capital and sale of non-core assets, although I would hastened to add that we don't anticipate selling additional ownership in either JV and a very small increase in our ABL.

Mark Petrie

Okay. Thanks very much.

Paul Beesley

You're welcome.

Operator

Our next question comes from Oliver Chen with Cowen & Company

Oliver Chen

Hi. Great results in a tough environment. What do you guys - regarding the guidance and how we think about what happened in fourth quarter with the gross margin and the merchandise margins underlying the 30 basis point change, could you brief us on merch margins in the quarter, and then what you're thinking for your margin expansion and merchandise margins next year?

Also related to your prepared remarks, I just wanted a little more detail on what you mentioned about upgrading the in-store experience and operational efficiencies and best practices. If you could just help us understand which banners might have the best opportunities there, that would be helpful?

Paul Beesley

So I'll start and then Jerry will carry on. In terms of our margin during the fourth quarter, we are pleased with what we saw. I really want to emphasize that going forward, whether this current quarter and going forward the addition of HBC Europe, results in higher margins, gross margins and also higher SG&A. On a net basis the impact is - nets out largely and the overall margins are similar to what we - net would be similar to what we experienced in North America.

We made good progress on SG&A. Clearly this has been a focus of the - for the last couple of quarters and will continue to be so, and we made improvements on that front. So I'll turn over to Jerry for the rest of the question.

Gerald Storch

Sure. We believe that we have to run great stores in this all-channel era. A lot of people say, why would people come to stores? It's because the store experience is so fantastic. And for those of you who have had a chance, I know we have a lot of people from Toronto on the phone today, if you not gone to our Queen Street location and seen it recently, then you haven't seen Queen Street.

And this is - as we talk about what we're going to do in Europe, what we're going to do around the world, this is the model for how to proceed in innovative fashion to create a fantastic shopping experience.

So to remind you, in the Queen Street store we had a base store that was our flagship and we've consistently grown the sales in that store since acquiring the company and that we made huge investment in it in order to improve the experience there, and when you go and visit that store, it feels brand new.

We were able to take out the unproductive space and put the Hudson Bay store in one part of the building and then we had enough space left over to add a Saks Fifth Avenue to the same piece of real state. So it's almost a store within a store. Think about it as getting a free location for a Saks Fifth Avenue in downtown Toronto, and in one of the best locations one could ever imagine.

And what we found as we put the store within a store is not only are both stores really world-class shopping experiences, but there's a lot of cross traffic between the stores, and the customer like the ability to shop the complete range of fashion from the highest end of Saks Fifth Avenue to the most approachable fashion and home goods as well at a Hudson's Bay store. So it's truly an innovative experience. I'm not aware that anyone's done anything like it in the world.

And as we talk to our German colleagues, we said have you thought about this, have you thought about that? And they're very open, and again, we never do anything in Germany unless our German team wants to do it too because we don't want to be sort of Americans who think we know better.

But when they came over and saw the Toronto store and saw Queen Street, they said that's what we want; we love it. We said, will that work in Germany, what do you think? And they said, it'll work in Germany fantastic.

And so – and recently, just to tell you a little more inside story here, we took our board to Germany, and we visited our stores at Kaufhof. And every one of them kept saying the same thing. Wow, this reminds us of Hudson Bay before you made it so amazing. And if we do the same thing here that we did in Hudson's Bay, it's going to have similar fantastic results.

So we all believe that it will work as we take the Hudson Bay experience and bring it to the Kaufhof stores and improve the handbags and the shoes and the cosmetics and really make it a fantastic place along the lines of that Queen Street store.

So if you want to know what we mean when we talk about making investments in stores and making a truly exciting shopping experience that competes very favorably in today's all-channel world, just visit Queen Street, walk around and you'll see what we're talking.

And by the way, even as we renovated that store and had it all ripped up, the sales at the Hudson Bay never comped anything but positive. They were only positive throughout the entire renovation and we added a Saks Fifth Avenue store. So the productivity there is tremendous.

So I know there's a lot of talk about, are there too many stores in the retail world in this Internet era? And we think there are too many bad stores, that's the real answer. And if we make them all as great as that store, we're going to fantastic and the other guys are the ones that are going to suffer.

But we do like the idea of making more intensive use of the same real estate, in essence getting two stores in the physical location of one. That's another way of being more efficient with real estate in this era. So that gives you some idea…

Oliver Chen

Thanks, Jerry. Another factor we've been noticing in our channel checks and our coverage here in the US is other retailers engaging in price matching and some other retailers are somewhat over inventoried.

So how do you expect promotions to trend on a dynamic basis in terms of what you may face related to your competition?

Gerald Storch

That's a really great question. It's why we believe that the second half of this year holds so much promise. And capital tends to be cyclical. It's just the way it is, and retail tends to have cycles like that, too. So everyone came into the fourth quarter of last year too heavy and sales did not materialize for all the reasons that we've all been through.

So people exited the year with too much inventory. There is a lot of work going on right now to get rid of all that. There's no doubt there's an overhang across the board and people are worried and they're stressed.

Meanwhile if you follow any of the indices or metrics that you can get, like the Baltic Dry Index that talks about how much shipments are coming over from Asia to here, et cetera, you all see they are at all-time lows, implying that nobody's replenishing these stocks, right, because people are concerned, they don't want to make that same mistake again.

So the history will show, and I believe this is what's going to happen again, is that there's a tendency to overcompensate and not bring enough in as you get to the back half of this year. And so that's when we expect there will be a flip.

And everyone's - we're being cautious too. You'd be foolish not to be, right? So everybody's being really careful. It's like fool me once, okay, but second time, no way. And so we're all tightening up inventories, planning - retailers, smart retailers are always planning to current trend.

So plan things to stay challenging, and then if they get better you're going to have the reversal of what we had last year, which is, I would never say there's too little, but people are going say, hey, I don't need to discount to sell my inventory quite so heavily. So that's why we think you maybe setting up for a great back half of the year.

Oliver Chen

Okay. And just a…

Gerald Storch

No way, there's going to be an overhang. You've seen the guidance from other retailers, so many of them guiding to be flat or down for the year. That's based on the hangover from last year.

Oliver Chen

My last question is related to e-com. There's been a lot of great initiatives and synergies you been speaking to. Should the momentum be in the 20%s range still for next year? I just want to know how to interpret how these benefits may phase in over time and how we should model our thoughts on e-com growth for the next year.

Gerald Storch

We don't give guidance on that, but it does vary significantly by banner. And so in somewhere like Germany I think we can grow quite rapidly there, numbers that are almost sort of NMF or fantastic type of numbers there.

And you take a look at Canada, we believe Hudson Bay should be the e-commerce, you know, Amazon, if you will, of Canada, given our heritage there and our leadership position in that marketplace.

Saks Fifth Avenue is our largest website. It's incredibly profitable, and it's been growing pretty darn fast. But at some point you do reach the top of the curve and it's harder to keep copy at the same rate.

That 23% growth rate that we showed in the fourth quarter and for the year is approximately double the growth rate of sales on the Internet across the board, for the Internet as an entirety.

So that's pretty cool. I think at some point we will keep doubling the growth rate of the Internet, but we'll come - we'll asymptote to sort of the overall growth rate of the Internet, maybe do a little better with all that we're doing overall. But that would still be a double-digit growth rate on the Internet. And that would be the kind of thing that I would be thinking about, even though I had said we don't give specific guidance on that.

Oliver Chen

Thanks. Congrats on all the milestones. Richard, Jerry, Paul, thanks.

Gerald Storch

Appreciate it.

Operator

Our next question comes from Patricia Baker with Scotiabank.

Patricia Baker

Good morning, and thanks for taking my questions. I have three questions. First of all, Paul, could you give an update to the guidance and of revenues up $700 million, EBITDAR [Technical Difficulty] guidance remains flat.

Does that really reflect the dynamic around what you're going to be doing with Gilt and when you will get it to better scalability and better costing so that it will be contribute more on a EBITDAR basis?

Paul Beesley

Patricia, you are breaking up a little bit. I don't know if you're on a cell phone or what. Could you try again?

Patricia Baker

Okay. I'll try again. Actually I'm trying to call you from Europe on Skype. I apologize.

Gerald Storch

While shopping at our stores.

Patricia Baker

Basically I was just asking about the updated guidance and the fact that the revenue is increasing $700 million from the prior guidance. Did you hear that?

Paul Beesley

Yes.

Patricia Baker

And then does that reflect the dynamic around your expectations for Gilt and how long it will take to get back to better costing, et cetera, et cetera, and better scalability and be able to contribute [indiscernible] in some way to the EBITDAR/EBITDA?

Paul Beesley

Yes, you're exactly right. We did take the guidance for sales up by the $700 million. We left the EBITDAR and EBITDA guidance unchanged. The range is big enough to accommodate what we believe will come from Gilt. And certainly this being the first year, we would expect much more significant growth in fiscal '17 compared to '16.

Patricia Baker

Exactly, okay. And my second question is, it's probably early but I am curious. The OFF 5th locations in Canada are quite interesting. Did you notice any difference in how the Canadian system was responding to OFF 5th when you have those openings versus openings that you might have in the US?

And also relative to other offsite vehicles that we've seen in Canada, you've got an amazing presence in footwear, and is that a category where initially you're seeing a lot of traffic within the store?

Richard Baker

So it's Richard speaking. It is early days for Saks OFF 5th in Canada but our early indication is on the very strong side. We have long believed that Canada is under-penetrated in the off-price marketplace and that there is a great opportunity for us off-price in Canada.

We're very excited and feel good about our roll-out plans. Also very efficient for us to open up stores, Saks OFF 5th stores in Canada, because of our existing infrastructure. Low risks, high opportunity for reward. And relatively efficient cost to get those stores open.

Additionally Saks Fifth Avenue stores that we've opened in Canada, as we've talked about, we're very happy with the results that are going there. And the Queen Street store might turn out to be one of the great Saks Fifth Avenue stores in the entire chain. Both of these launches into Canada bode very well for our desires to grow Saks OFF 5th into Germany and other countries, as well as the opportunity to continue to grow Saks Fifth Avenue globally. All good on that front.

Patricia Baker

Okay. Thank you…

Gerald Storch

The other thing. I'm sorry. The other point that I believe this illustrates is that our success with Saks Fifth Avenue and Saks OFF 5th in Canada underscore the value from our business model, which is geographically diversified as well diversified across context.

So although we pointed out many times that there is a challenge in the US due to the strong US dollar, and that's been affecting our Saks Fifth Avenue stores. I'd point out, and we said this a few times but I want to highlight, it also affects our Saks OFF 5th stores as the Canadian traveler is one of our biggest consumers at the Saks OFF 5th stores, particularly in the Northeast and down in Florida.

So meanwhile as we open at Saks Fifth Avenue and Saks OFF 5th in Canada and we see all the Canadians coming to shop because with the high exchange rate for the US dollar they're essentially trapped in Canada for their shopping, but they want to shop at Saks, they are familiar with Saks.

They want to shop at Saks OFF 5th, they know what it is. And we see sales that frankly have surprised us on the high side as we've gotten started here, although as Richard points out, it's early to make a call on that.

Patricia Baker

No, absolutely. Again, apologies for the connection. But I'll ask my third question. The robotics that you're putting in, Perfect Pick, you said that it's not common, not used by very many players.

Can you point to anybody who's using this technology in another part of retail or a consumer-related business?

Richard Baker

Let me start with one piece of the question, and I will let Jerry finish it. What's really exciting for us is that we acquired a bunch of -- a variety of different businesses that were behind. We've done a lot of work to upgrade and improve those businesses.

Now as we are able to greater focus our expenses and CapEx dollars in our Internet infrastructure, we're able to launch into best-in-class facilities and best-in-class technology.

Nordstrom and Macy's and other major retailers around the world made these investments five years ago or seven years ago. We're going to get to leapfrog everybody and end up with technology in our fulfillment centers better than what's in the Amazon fulfillment centers. That's a very exciting opportunity for us going forward.

Gerald Storch

And other people do have this up and running, although it's a small number of sites. We've visited several of them. We know what they are. I don't know for disclosure purposes what we can comment on, what we can't, frankly, Patricia.

But just to say, it's not unproven technology. It's up and running. And we visited specific centers where it is running and we can see what it provides. And we're confident that it's going to work.

Richard Baker

Also Patricia our team has the cutting edge capabilities. It was the Saks team that first installed kiva before Amazon bought it, and was on the first users of kiva. And that was a great success for Saks. Now we're going to be, not be first user but in the first wave of users in a newer - a more efficient technology.

Patricia Baker

Thank you very much. And thanks for your patience.

Gerald Storch

Thanks, Patricia.

Operator

Our next question comes from Wayne Hood with BMO Capital.

Wayne Hood

A couple of questions. One, if you look at the US business, Saks and Lord and Taylor, their peer groups from a gross margin standpoint were down about 200 basis points in the fourth quarter. Would it be fair for us to assume anyway, you don't like making assumptions, but that those segments would have been down 200 basis points as well?

And if that is the case, just thinking about the weighting of that, if they were to recoup that in the fourth quarter of this year, would imply at least an 80 basis points improvement in gross margin. Am I think about that the right way, and did the dynamics unfold the way that the peer group did in the US?

Gerald Storch

We don't release information at that level of microscopic copy. I would say that certainly we were very excited about how well we did in Canada, and the US was a tougher market. We do believe that there's an opportunity for an improvement in the United States in the back half of the year where we kind of crunch those numbers.

I do not believe that whether you isolate just the US or whether you, I believe, correctly include our entire company including Canada and Europe, I do not believe that we declined as much as some of our competitors did.

Wayne Hood

Okay. Paul, just for you. You mentioned the sale of non-core assets as part of a way to fund the CapEx. Can you be more specific around -- or maybe provide a range, both on a gross and net basis, what that might represent in terms of sale?

And then where you think your inventory levels will be on a reported basis in Canadian dollars at the end of the year? I say that only in a sense it impacts cash flow. And I think all of us on the phone get questions about your cash flow and where your leverage will land, and that will help us maybe better understand how you fund that.

Paul Beesley

For starters on selling non-core assets, what we mean by that is we have a historically, year after year there have been leases that we've been able to sell the leases and bring in a great deal of capital in cash, and take out a store that's maybe not performing that well.

That happens because perhaps more of a developer wants to redevelop a mall or put in a different type of use. That's something that has historically occurred, and we expect it to continue occurring as we go forward.

Wayne Hood

On the inventory side, Paul?

Paul Beesley

We don't provide projections on inventory. Just to reiterate what Jerry said previously, the biggest impact clearly is the acquisition of HBC Europe followed by the impact of foreign currency. Then there was a significant impact from non-comp stores, and finally some growth on a comp basis within North America.

Looking at that again, clearly in the luxury segment we are higher than anticipated, although we would expect that the combination of continued inventory and the efforts currently in progress that this is not a significant issue for the company. I can't provide a forecast on where we expect to be at the end of fiscal '16.

Wayne Hood

Okay.

Gerald Storch

I would say we're very focused on cash flow, that we believe there are significant opportunities to improve our working capital terms. And we're more focused on that from what I can tell than this company has ever been. Paul and his team have led that charge. It is something that we talk about quite frequently, and we're determined to make progress on that.

Wayne Hood

My final question comes to Kaufhof. How should we think about how that business in light of the economic backdrop there as well as political environment as we go into 2016? You mentioned that collectively that you expect comp store sales of low single digit, but is that realistic for them, that maybe they might be flat or down? How should we think about them in the context of everything that's going on?

Gerald Storch

We look at GALERIA Kaufhof through a lens of what happened in Canada. So when we bought the Hudson Bay Company, people told us department stores don't work in Canada, Canadians are moderate, not a lot of opportunity for growth. We did a lot of analysis. And what we determined in Canada was that badly run department stores don't work well in Canada.

We went ahead aggressively making a lot of changes to Hudson Bay where we tested different formats and different ways of doing things. After the tests were successful, we rolled them out. If you look at the available data on the Hudson Bay company from 2008.

What you are going to see is a lot of growth totally unrelated to the economics of what was going on in that country at that time because it was so unproductive when we started and the changes we were making were having a beyond macroeconomic effect on the business.

We believe in Germany as we get our test going and as we figure out the game plan for what's going to work in Germany, we think we have an opportunity to move the needle and create results in Germany that will be more material than the negative or positive impacts of the economy in Germany.

Wayne Hood

All right. Thank you, guys…

Gerald Storch

And I don't know if your question related to the impact of the terrorist incidents and what's going on in Europe there. This is now the second time we have been through with them. The first time is after the Paris attacks in November and then now with the Brussels one.

First of all we're mostly concerned in that environment about our people and about the people in those countries. We turn there first and pay [most] attention to that.

Belgium has been particularly tough in this regard. But keep in mind it's a very small part of the overall company. For example, we have four stores in Brussels. They were closed in the wake of the Paris attacks for a couple of days. The same four stores in Brussels were closed for a day after the more recent attacks.

Those stores, put it in context, they're less than 1% of our Company because we have over 460 stores at Hudson Bay. It certainly impacts the tenor and the mood over there, but those are short-term factors. The business, like it did last time tends to come back relatively rapidly as you get distance from the situation.

Over the long term what Richard said comes into play. The force of everything that we're working on will simply swamp the competition, who is not - frankly, doesn't appear to be making any change or improvement in their business. And it gives us an opportunity to really leapfrog into the current century and be a fantastic retailer of the likes they have not seen in Europe in the past.

Wayne Hood

Thank you.

Operator

Our next question comes from Derek Dley with Canaccord Genuity.

Derek Dley

Thanks. Can you guys just talk to some of the consumer response from some of your promotions? Are you seeing a lot more consumers waiting for promotions before making that purchasing decision?

Gerald Storch

I don't know if it's possible to quantify that or say that. It has been a highly promotional environment, and consumers are smart. I think when it's a promotional environment consumers buy on promotion. Now, whether they're waiting or what it is, I don't know. Again, we think we're in a period that's unusual, and as we get to the back half of this year we're quite optimistic we'll be in a period that's unusual for a different reason.

We'll be up against easy comparisons in an environment where everyone's playing it cautious as opposed to the environment we had last fall where people were too aggressive and then ended up with too much inventory and had to do anything they could to get rid of it.

Derek Dley

Okay. That's helpful. In the past, I think it's prior to Kaufhof, you guys provided a three-year target balance sheet leverage. Do you guys have an update to that?

Richard Baker

No. Not at this point.

Derek Dley

Okay.

Richard Baker

I would say that were very focused on, as Jerry mentioned, very focused on cash flow management. And so you'll continue to see, I believe, the benefits of that effort. But we haven't provided a forecast.

Derek Dley

Okay. Thank you very much.

Operator

The next question comes from David Hartley with Credit Suisse.

David Hartley

Thanks. Good morning. Just want to ask first on the range of guidance you provided for sales and profitability. Can you talk maybe to what the biggest driver is to going from the high end of the range to the low end of the range, or vice-a-versa?

Gerald Storch

Yes. I really think it's going to be what happens in the back half of the year. I guess far from saying that we're being redundant, I want to repeat the theme from this call, which is that this year is going to be all about the back half of the year. I've seen a couple other retailers point about it, point it out. We all get out a lot and get talk to others. I think we're all focus on that in retail right now, given how things transpired last year.

The reason for the wide range, and for the range that we provide, is simply that we really don't know. We want to see how things play out as we get later into the year. We know we're doing a lot of great things and that they're going to bear fruit, and the question is when.

We're very excited about how we're positioned. We're very excited about our strategy. We think the fact that by and large, if you look at our numbers compared to competitors, we did better in Q4, I believe certainly, in sales and in retaining our profitability than our competitors did.

We think our strategy is right and we're making the right investments for the future in systems, in Internet, in stores. And I think the biggest mistake someone could make in this environment is to cut back on the investment in the business, and then you find out the next year that you made a serious error.

David Hartley

Okay. You mentioned three factors for -- in terms of financing the business, I guess: sale of non-core assets, working capital, and a small increase in the ABL. Is that the order of importance here? I know you've addressed the non-core assets. Could you maybe speak to that a bit?

Paul Beesley

Yes. That is the order. We do expect a very modest increase in the ABL.

David Hartley

Okay. So when I look at the free cash flow that we saw this year, negative free cash flow in 2015, are you expecting kind of a similar level of cash flow in 2017 -- or 2016, is that implied in your guidance?

Paul Beesley

I think this year cash flow was impacted in terms of receivables and higher inventory. I would think it's reasonable to expect cash flow from operations in '16 to be better than in '15.

Gerald Storch

Of course we're a much bigger Company for most of this year. We only closed on the Kaufhof acquisition at the end of September last year. And Gilt, we just closed on February 1.

David Hartley

Right. So you see that as a positive, having it for the whole year then?

Gerald Storch

Absolutely.

David Hartley

Okay. Just on acquisitions. Can you speak a little bit about what the future holds there and what you're thinking is in terms of acquisitions going forward?

Gerald Storch

We don't normally comment on acquisitions. But we are very excited about all the wonderful businesses that we have in place and all the opportunity that presently exists. And I think we should be very focused on organic growth and the opportunities we can squeeze out of our existing business.

David Hartley

Okay. I would agree with that. And just last question on inventory. I think there is a revaluation -- basis of revaluation change there. Could you talk a little bit about that? It's just to kind of agree with what your comps are doing, or was there another driver of that?

Gerald Storch

Sorry. Do you want to just repeat the question, David?

David Hartley

I think you changed the basis for inventory evaluation in the quarter?

Paul Beesley

Okay. We change the basis of evaluation from retail to cost. It's just similar to the change we did previously with the acquisition of other companies. And it's associated with Saks. Again, not a significant impact on the financials.

David Hartley

Okay…

Gerald Storch

Consistent with the rest the company. That's all.

David Hartley

Okay. So it was just the Kaufhof piece is that you're revaluating?

Paul Beesley

No, no, no. This is exclusively Saks.

David Hartley

Specifically Saks.

Paul Beesley

Yes.

David Hartley

Okay. All right. Thanks a lot.

Operator

The next question comes from Steven Salz with M Partners.

Steven Salz

Yes. Just one question here. Can you provide any additional detail on the JV mandate? I know in the MD&A you mentioned that has a mandate to acquire assets and diversify. I guess can you - I know you don't talk about acquisitions, but maybe just the criteria for acquisition specific to the JV? Thanks.

Richard Baker

Hi, Steven. We are actively focused on acquiring additional real estate assets in order to grow our portfolio and diversify our credit. But we like to make money and the real estate is very highly valued in today's marketplace. So I'd say we're being very disciplined in order to find something that's a value-add.

Steven Salz

All right. Thanks.

Richard Baker

Thank you.

Operator

And I'm not showing any further questions at this time. I'd like to turn the call back over to our host.

Gerald Storch

Thank you all. Have a good day. Appreciate it.

Operator

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.

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