Hudson's Bay's (HBAYF) CEO Gerry Storch on Q2 2017 Results - Earnings Call Transcript

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About: Hudson's Bay Co (HBAYF)
by: SA Transcripts

Hudson’s Bay Company (OTCPK:HBAYF) Q2 2017 Results Earnings Conference Call September 6, 2017 8:30 AM ET

Executives

Elliot Grundmanis - IR

Richard Baker - Governor and Executive Chairman

Gerry Storch - CEO

Ed Record - CFO

Analysts

Oliver Chen - Cowen and Company

Sabahat Khan - RBC Capital Markets

Brian Morrison - TD Securities

Patricia Baker - Scotia Capital

Derek Dley - Canaccord Genuity

John Zamparo - CIBC

Operator

Good day, ladies and gentlemen, and welcome to the Hudson’s Bay Company presents Q2 2017 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 be given at that time. [Operator Instructions]

I’d now like to turn the call over to Mr. Elliot Grundmanis. Sir, you may begin.

Elliot Grundmanis

Good morning, everyone, and thank you for joining us today. On behalf of Hudson’s Bay Company, I’d like to welcome all of you to our second quarter conference call. With me on the call today are Richard Baker, Governor and Executive Chairman; Gerry Storch, Chief Executive Officer; Ed Record, Chief Financial Officer; Ian Putnam, Chief Corporate Development Officer; Todd Zator, Chief Accounting Officer; and Jonathan Levy, SVP of Financial Planning and Analysis.

Yesterday, we issued a news release on our second quarter results. We also posted complete financial statements to our website and filed them on SEDAR. In a moment, I’ll pass the call over to Richard and Gerry to make a few comments on our results, let Ed introduce himself 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 savings estimates and benefits from HBC’s previously announced Transformation Plan and capital investment outlook for fiscal 2017 and other statements that are not historical facts, 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 in the 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 annual information form dated April 28, 2017, including the recent MD&A 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’d now like to pass the call over to Richard.

Richard Baker

Thank you, Elliot, and good morning, everyone.

Heading into the fall season, we are optimistic about the remainder of the year. The current retail environment provides both challenges and opportunities. And while it was a tough second quarter as expected, we continue to take the actions necessary to succeed in this rapidly evolving landscape.

Total sales in the second quarter increased by 1.2% compared to the prior year, driven by new store openings and a lower Canadian dollar, both Saks Fifth Avenue and Hudson’s Bay delivered positive comparable sales while digital sales at our department store banners grew almost 20%. These areas of strength combined with what we are seeing so far in the third quarter, give us reason to be optimistic about the remainder of the year.

Our recently announced Transformation Plan is proceeding as expected and the initiatives associated with this plan should have a significant impact in the second half of the year. Through streamlining operations, increasing efficiencies and leveraging scale, we’ll be realizing more than $350 million in annual savings when the plan is fully implemented by the end of fiscal 2018, including the anticipated $75 million in annual savings previously announced in February. We expect to realize approximately a $170 in savings during fiscal 2017 with most of these savings occurring in the second half of the year. I believe that we remain well-positioned to succeed in the long term.

The Company operates diverse retail offerings across multiple segments and geographies, all of which are supported by solid capital structure, backed by the Company’s real estate assets. The current environment provides both challenges and opportunities. And we’re constantly evaluating the best use of both our retail and real estate assets to create value for our shareholders. We have a long, successful history of accretive transactions with our real estate assets. And we’re actively exploring further opportunities to build on that track record. While stores are critical part of HBC’s long-term all-channel strategy, we continue to evaluate all opportunities to generate value from HBC’s extensive real estate portfolio. This includes increasing the productivity of HBC’s real estate; streamlining our store portfolio; and diversifying the assets of the HBC’s real estate joint ventures. We have a lot of hard work in front of us but have confidence that our model of combining world class real estate assets which are less impacted by short-term trend with our diverse retail businesses provides value for the Company and our shareholders.

I’d now like to pass the call to Gerry, who will talk more about our second quarter results and what we’re doing in the business.

Gerry Storch

Thank you, Richard, and good morning, everyone.

We are growing our business globally, digitally and physically. Yesterday, after more than 16 months of work, we unveiled our first Hudson’s Bay store in the Netherlands and we also re-launched our Gilt website, inaugurating the New Gilt. On Friday, we will be officially opening the renovated designer floor of our Saks Fifth Avenue flagship in New York, completing yet another major phase of this important project for the Company. During the second quarter, our diversified banners demonstrated areas of strength. Hudson Bay continued its trend of delivering comparable sales growth. While comparable sales at Saks Fifth Avenue grew the most in more than two years, digital sales grew double digits at our department store banners, reflecting the ongoing execution of our long-term all-channel retail strategy.

We’re also excited about the recent introduction of Saks OFF 5TH in Germany and the improvements we’re making at Galeria Kaufhof, which are important examples of our strong and ongoing commitment to our businesses in Europe. Additionally, we expect that the Transformation Plan will have a much larger impact on our second half results. These factors combined with what we’re saying so far in the third quarter, give us reason to be optimistic about the remainder of the year.

Completing these efforts are the ongoing changes being made to adapt to evolving consumer preferences. These include, emphasizing digital sales by investing further improving our digital platforms and online capabilities.

During the quarter, Lord & Taylor move onto the same online platform in Saks Fifth Avenue and Saks OFF 5TH, while Hudson’s Bay is expected to migrate over in early 2018. Using a combined platform across North America allows us to leverage the same infrastructure across all of our banners, improving our ability to test and implement new features. We’re also extending Gilt to an intent based offering while leveraging the Saks OFF 5TH banner. The New Gilt, including a redesigned website, was launched yesterday to better reflect the buying habits of Gilt’s member base. finally, Saks OFF 5TH inventory is expected to be offered on Gilt in time for the holiday season, further integrating our luxury off price banners.

Leveraging technology to reduce fulfillment time for digital sales. Following successful installation of the case shuttle system at our Canadian distribution center in 2016, we remain on track with the installation of robotic technology at our Pottsville, Pennsylvania distribution center, serving Saks OFF 5TH and Lord & Taylor. The first phase of this installation is expected to be completed in the coming months.

Creating exciting in-store experiences and unique offerings. We continue to explore ways to differentiate the in-store experiences at all of our banners by offering pop-up shops, food areas and wellness activations. Recent highlights include the launch of the justBobbi Concept Shop at Lord & Taylor in New York and the opening of Topshop and Sephora store-within-store concepts at multiple Galeria Kaufhof stores in Germany.

Growing our presence in the luxury market. Significant progress has been made on the transformational renovation of our Saks Fifth Avenue New York City flagship, including the opening of its fifth floor, featuring new concepts in women’s contemporary and advanced designer ready-to-wear. As a part of the renovation, Saks debuted an innovative wellness-oriented concept called the Saks Wellery and is preparing to officially launch the newly renovated third floor this Friday, a one-of-a-kind destination for extraordinary designer fashion from around the world. We also continued to advance our efforts to integrate the in-store and online experiences at Saks with the introduction of first-to-market shareability and styling functionality on the mobile app as well as further development of our ability to connect Saks store associates with Saks.com customers.

These initiatives complement the Transformation Plan that we previously announced, and combined we expect they will lead to improvements in our overall results.

Since Richard has already mentioned our top-line results, I’ll begin by highlighting gross profit, which was $1,324 million in the quarter, a $27 million decrease over the prior year’s amount. Gross profit as a percentage of retail sales declined by 130 basis points compared. This decline in gross profit rates was largely driven by the highly promotional environment experienced during the quarter.

Adjusted SG&A for the quarter were $1,287 million, an increase of $38 million compared to the prior year. As a percentage of sales, adjusted SG&A expenses were 39.1% compared to 38.4% last year. This increase in SG&A dollars was driven by a negative $25 million impact from foreign exchange rate movements, additional investment in digital resources combined with an increase in fulfillment expenses related to the sales growth in our digital channel, and additional SG&A related to new stores opened during the last 12 months and other small items. These factors, combined with lower comparable sales on a constant currency basis resulted in an adjusted SG&A expense rate that increased.

We remain focused on reducing our overall expense rate and we are making good progress. The Transformation Plan we announced during the second quarter has started. These initiatives are part of this plan and they expect to have a much larger impact in the second half for the year due both to the timing of the initial actions and additional progress that’s been made over the last few months.

Adjusted EBITDAR for the second quarter was $207 million, compared to $263 million in the prior year period. Total rent expense during the second quarter, including net cash rent associated with Company’s joint venture, was higher compared to the prior year. Accordingly, Adjusted EBITDA was $16 million, a decrease of $65 million compared to the prior year and higher than the decline in Adjusted EBITDAR. While rent expenses are spread evenly over the course of the year, HBC’s pre-rent earnings are typically highly seasonal, with the majority of earnings generated in the back half of the fiscal year. The formation of the two real estate joint ventures and the establishment of additional rents payable to these entities significantly increased rental expense as a percentage of the seasonably low pre-rent earnings generated during the first two quarters of the fiscal year.

Finance costs were $53 million compared to $56 million in the prior year, which included a write-off of deferred financing costs of $3 million. Interest paid in cash was $49 million compared to $37 million in the prior year. This increase in cash expense was primarily a result of timing differences on the payment of the Saks Fifth Avenue flagship mortgage, as well as the increased size of the Lord & Taylor flagship mortgage and increased outstanding borrowings on the Company’s Global ABL facility.

Finally, net loss was $207 million compared to $142 million in second quarter of fiscal 2016. The higher net loss is primarily due to lower gross margin dollars combined with a higher SG&A and depreciation and amortization expenses. These negative impacts were partially offset by higher net earnings in joint ventures and a larger income benefit. Normalized net losses were $164 million compared to $122 million in the prior year. This increased loss is primarily a result of lower gross profit dollars and higher adjusted SG&A, as described earlier, as well as increased depreciation and amortization expenses.

During the current quarter, capital investments, net of landlord incentives totaled $189 million. We opened seven Saks OFF 5TH stores, five of those in Germany, and made significant progress on the build out of our first 10 Hudson’s Bay stores in the Netherlands. The landlord incentives for these projects are due to be received upon the opening of the stores, which is expected to reduce the run rate of net capital expenditures in the second half of the year. Additionally, we are continuing work on our major renovation at the Saks Fifth Avenue flagship store on 5th Avenue in New York, as well as smaller renovations at various Hudson’s Bay, Lord & Taylor and Saks stores.

In Europe, we remain committed to our sizeable renovation program at Galeria Kaufhof, which includes the introduction of new store-within-store concepts as well as other improvements.

We are dedicated to prudent capital management and currently expect total capital investments in fiscal 2017, net of landlord incentives, to be approximately $550 million compared to $657 million in fiscal 2016.

As we work our way to the third quarter, we are seeing an improvement in trends from the second quarter. The recent introduction of Saks OFF 5TH in Germany went well. And yesterday, I was in Amsterdam where we had crowds lined up for the opening up of our first Hudson’s Bay stores there.

Across our banners, we are focused on driving the business during the critical fall and holiday seasons, which generate a vast majority of HBC’s earnings. Creating shareholder value remains our top priority and we continue to assess the best use of our retail and real estate portfolio for making the right strategic and tactical decisions to improve performance in our retail businesses going forward.

So, that concludes my overview of the quarter. I would now like to officially welcome Ed Record to the HBC family. I will pass the call over to him to give a brief introduction.

Ed’s deep retail experience will support our Company’s mission to get ahead and stay ahead of the rapidly changing retail environment. He will play a key role as we continue to drive performance, increase free cash flow and make the right strategic decisions to improve our retail business while also evaluating the best use of our real estate assets. We’re extremely excited to have such an experienced retailer and leader joining us as our new CFO. Ed?

Ed Record

Thanks, Gerry and hello everyone. I am thrilled to be joining HBC. HBC’s management and Board of Directors have been incredibly creative in finding ways to do transactions that leverage the Company’s real estate and unlock shareholder value. This has created a company with a diverse portfolio of leading banners, all of which have significant potential to succeed in this environment. I look forward to helping HBC capitalize on this potential and to unlock additional shareholder value.

HBC’s leadership team and finance organization are world class, and I am excited to be working with them to execute the Company’s strategic plan and position HBC for continued success.

I will now pass the call back to Richard.

Richard Baker

Thank you, Ed. We are really excited to have you here and know that you will be an excellent addition to our management team. I would like to also take this moment to thank all of our associates for all their hard work and dedication.

Operator, we are now ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Oliver Chen with Cowen and Company. Your line is open.

Oliver Chen

Hi. Thank you. And welcome Ed, good to be working with you again. Our question is related to the gross margin and how you’re balancing freshness to the inventory and promotions and gross margin in the context of what’s been a tough physical traffic environment. Also, if you could just articulate or elaborate on your optimism for third quarter so far? Retail has been highly volatile and the competition from Amazon and others has been steep. So, I would love your thoughts on both. Thank you.

Gerry Storch

Sure. Our inventories in general are in pretty good condition, and we’ve worked very hard to manage that inventory tightly. And so, you may notice that our working generation from the retail business was pretty good in the second quarter. And so, some of that margin degradation year-over-year that you saw was associated with making sure we kept that inventory clean and in great position, because obviously sales have been a little tougher than we expected, going back for several quarters. So, we will make sure we’re in a good position going into the fall and we believe that we are, and that will bear fruit as we look to the future.

In terms of what we’re seeing in the third quarter so far, I want to be careful not to go too far, but except to say that compared to the second quarter for sure, we’re seeing better performance in many of our banners and we’re optimistic that will continue for the remainder of the year. And the Transformation Plan that we have outlined to you, will have a much larger impact during the second half of the year as we really didn’t execute it until well into the second quarter and some of the actions are continuing. And so, given the timing of those actions, it really has an impact in the back half of the year.

And I may get a question on SG&A rate, so let me just anticipate that as it’s related to that. You may notice that even though, the SG&A rate was down or was up if you will, so deteriorated year-over-year during the second quarter, the gap year-over-year much, much less than it was in the second quarter. So you can start to see traction taking hold from that Transformation Plan, if the rate was 39.7 in the second quarter, it was 42.4 in the first quarter as we started the Transformation Plan. As we look to the future, we expect the Transformation Plan to have a lot of more impact on the business.

As far as Amazon and the retail business, there is no doubt that we’re going through a period of much more rapid change than any of us have witnessed in retail before. And that’s why we’re so focused on the digital side of the business. And why we highlighted the 20% growth in our digital business in our department stores and why we’ve made the investments in the New Gilt in order to get that business move in the right direction as well, and also the investments we’re making in fulfillment in everything else. There is no reason, why we can’t keep up or even exceed the best in class when it’s comes to digital performance, and I think we’re doing that.

As you see that 20% growth, as you know is much faster than the online market in general and on a par roughly with where Amazon is quarter-to-quarter, but roughly exactly where they are in fact. So, we think, we’ll continue doing that. So, we’re very heavily focused on that plus everything else that I outlined. We’re making large investments. We’ve made some big bets. Finally, as we get to the second quarter for the year, we start to see those mature, things happening like 10 stores in the Netherlands opening whereas we had zero and just lots of start-up expense and no openings until now. This is the time, we expect to open. So, we have 10 stores open in Netherlands in September alone, which is unprecedented and stores are beautiful and great. And then, Saks Fifth Avenue is our biggest single capital investment, is the work on that building and the phases are starting to happen. So, now that designer floor opens on Friday and that’s a big deal and that will be the world’s finest designer floor by far. And I encourage you to come over and see that because I know you’re in New York.

So, we’re making the moves that we think we need to make in order to be forward-looking and provide great customer experiences online and in store, which is the answer to the online only threat. Thank you.

Operator

And our next question comes from the line of Sabahat Khan with RBC Capital Markets. Your line is open.

Sabahat Khan

So, just on the gross margin, just a follow-up there. Can you maybe talk about which banners you probably -- you have to do maybe more promotional activity at and have those banners maybe picked up into Q3 in terms of the margin performance?

Gerry Storch

I think it’s pretty much across the board where -- and you know I think since you follow the market that this promotional activity has intensified in the retail market in general. And again that coupled with our strong desire to keep the inventory in a good position going into fall is what led to that. It’s probably little less when I take a look at it, I would highlight Saks Fifth Avenue where we intend to sell a lot more of that product at regular cost. And we’re seeing some interesting trends in the sale of new products there, which also are quite promising at full price.

Sabahat Khan

Thanks. And then, in the press release, you provided some color on some of the REIT -- or you are being in real estate to certain extent. Can you maybe talk about the degree to which you’re kind of pursuing the monetization or surfacing some of those values? Is it if things come up, you’ll pursue it or are you actively looking to look at some asset sales or things on that front?

Richard Baker

Well, at this time, we’re not in a position to announce anything specifically. But in general, we’re looking for opportunities to ensure we’re making the best use of our space and then we’re creating the most value for our shareholders.

Gerry Storch

And I just want to add, we are always looking for opportunities. This Company is -- one of the hallmarks of the Company is the aggressive real estate activity. And you can see that in our history and we highlighted some of that in our press release. So, we certainly never stopped and we continue it every day.

And we don’t always highlight it but we really -- we’re at the forefront of refocusing floor space and department stores for other usage. So, you can visit our stores in Canada and visit Pusateri food halls inside of two of our Saks stores. You can go in Canada and now in Germany and visit full blown Topshops inside of our Hudson’s Bay department stores. In Germany, we started launching our exclusive rights to Sephora inside of our German department stores. Right here in New York on Fifth Avenue, you can visit on the second floor something that we call the Wellery, which is an exciting pop-up venue inside of our Saks Avenue building. You can go in Toronto and visit Kleinfeld where we have the exclusive rights to Kleinfeld, the world’s largest bridal store with exclusive rights in Canada. So, whether it’s a Gilt popup store inside of a Saks OFF 5TH, we’re very focused on making our stores more efficient by squeezing the square footage in order to put other productive uses inside of them.

Operator

Thank you. Our next question comes from the line of Brian Morrison with TD Securities. Your line is open.

Brian Morrison

Good morning, Gerry. I just want to follow up on your reasoning for optimism in the second half. Those comments were appreciated, but what is our definition of optimism? Should I interpret that to mean improving adjusted EBITDAR or EBITDA in the second half of the year relative to last year?

Gerry Storch

Again, I don’t want to get into a forecasting situation here. So, all I will say is that even if you look at second quarter, as disappointing as it is compared to first quarter that where we saw in the second quarter we saw improvement in comp store trends, we saw improvement in year-over-year comparisons pretty widely, while performance is still very disappointing. And I wouldn’t paint it in any other way in the second quarter. As we look to the future, I think we see continued improvement.

Brian Morrison

And then, just following up on your comment on real estate opportunities. Does that include the potential for additional retail acquisitions as well?

Richard Baker

At the present time, we are not focused on any retail acquisitions or frankly any large acquisition. So, again, that’s something that’s part of our DNA and that we are always taking opportunistic approach and we’re dealing throughout the landscape.

Brian Morrison

Okay. And then just lastly, can you just remind us where we stand in terms of the $250 million capital investment plan in the Saks flagship, what remains outstanding? And then, can you remind us what the future capital investment forecast for European retail operations are over the next several years?

Elliot Grundmanis

Hey, Brian. It’s Elliot. So, as with Saks Fifth Avenue flagship, we are proceeding along as expected. We see this renovation proceeding into 2018 and potentially 2019 as well depending on the environment. We are trying to flexible and watch our cash obviously. As far as Europe goes, a big part of our investment in Europe for this year at least is the opening of the stores in the Netherlands but we are getting a lot of that funded through our landlords. Then in Germany, we continue to invest in the stores there. A lot of that involves bringing in Topshops, Sephora and we are doing in some of our larger flagship stores.

Gerry Storch

So, at the flagship we’ve already opened a new fourth floor and fifth floor and now the third floor will open in just two days. We still have to come for next year the big projects on the main floor and the second floor. So that -- and there is still more after that but those are the big pieces.

Brian Morrison

What’s the dollar capital investment?

Elliot Grundmanis

So, the 250 is still the number we’ve put out and we are still confident about that number. When we end up spending that full amount, we will be flexible with and it depends on environment and speeding the process of renovation there.

Operator

Thank you. And our next question comes from the line of Patricia Baker with Scotia Capital. Your line is open.

Patricia Baker

Thank you very much and good morning everyone. Just a quick follow up I think Gerry on your comments that the Q3 is -- trends are improving and presumably you are really talking about sales and traffic trends. Can you discuss with us what you think what is driving the better trends versus Q2? And let’s hope that they continue throughout the quarter.

Gerry Storch

There are two primary factors obviously. And I do believe there is some improvement in the overall environment but I’ll leave that to you to analyze better than I, because you have a lot of companies that you follow as well as the macro numbers. So, I think we are seeing a little bit better environment overall.

Secondly, we have to believe that we are making investments; we are making improvements in our business. We have been investing a lot of money. We haven’t done that mindlessly. We have real strong objectives for how we’ll improve the business, as you know and return standards for achieving those, and those are starting to work. They are starting to take hold.

We spent, I think I said in my remarks over 16 months since we announced Hudson’s Bay Netherlands. We studied it for some time before that as well. So that’s been almost two years in the making and finally we are opening the stores. So, as we open the stores, then we get the fruit of all that labor and expense and work that we’ve done, capital and management time and attention on accomplishing that test; in Germany as we’ve opened three Sephora shops within our stores so far but we have a lot more to come. And as those open up inside the stores, every time we have a Sephora shop open inside one of our Kaufhof department stores, there is a line out the door and down block to come in for that opening of the shop-within-shop. As we open more of those, we expect to see more excitement sharing those as well. Topshop in Alexanderplatz, that’s doing well as we open more of those. That continues to -- I believe certainly, as we look to the future that our capital program will deliver the results that’s designed to deliver.

And online, we brought Gilt. Now, its’ been year and a half, two years. And finally, we’re making some of the improvements that we always intended on making, but systems can be that way that it takes some time to get the engineering work done. And just yesterday, we launched the New Gilt website. And as we go throughout fall, we’re going to be adding a very significant number of SKUs to that website as we integrate to Saks OFF 5TH inventory into the Gilt website. And as you can tell from our numbers in the off price segment and our previous comments, Gilt has tended to pull down the numbers from Saks OFF 5TH, our Saks OFF 5TH website. So, we haven’t mentioned that, but it’s actually flying. We redid that website last year; and this year, we’re getting the benefits from all the work that we did there and that website is one of our solid performers. Our website for Hudson’s Bay in Canada is performing very well, well above our 20% average, if you will. So, we are very pleased with what we’re seeing there in terms of investments. And you’ve toured the case shuttle which was significant investment that fulfills those orders from the Hudson’s Bay website and we have case shuttle coming online for Saks OFF 5TH, which as I mentioned one of our most directly growing website, and Lord & Taylor in the fall here. So, we’ve made significant investments as you know very well and they’re starting to be completed and are completed, we get the benefits from those investments.

Patricia Baker

So, basically, if were just to summarize that, significant initiatives that you’ve undertaken to really differentiate stores are gaining traction and as a result of that that’s where your optimism is coming from?

Gerry Storch

Absolutely, I think there is -- this is a dialogue that the internet is killing department stores, is a pretty bold dialogue out there right now. And we all hear and read it. And we know that there is truth to the fact that there is a threat from the internet in general. But the answer that can’t be, to disinvest in the business; the answer is to invest to make the department store experience better. And I have said many times that people don’t dislike department stores, they dislike that department stores and they like good ones. And I’ll stand by that, if you look at again our continued good performance with Hudson’s Bay in Canada, where we made the investments over many years and so, we’re farther along on that lifecycle there than we are elsewhere as our competitors go out of business.

Patricia Baker

If I can have a follow-up and I didn’t hear the beginning of the call, I apologize. But we expected the rollout of having Sephora in the general department stores. Is there potential that we could see you doing deals with Sephora perhaps in the Netherlands at some point or elsewhere?

Richard Baker

So, obviously, we can’t comment in those kinds of deals. But I think the takeaway is that we’re in the deal business, we’re making deals with all kinds of exciting retailers around the world for them to have brick and mortar exposure within our world class locations. And as Gerry said, this retail environment that we’re in, we’re still in it. But, the good news was, we brought a bunch of weak and department store chains that had great opportunities. As we put money against them, as we put new uses and test new concepts, we’re getting optimistic and very good results.

Now, we have to continue to roll that out in a responsible way using our CapEx dollars very efficiently and letting our partners put in as much their money as possible. And we continue to have world class locations, world class department store banners. And as we layer in partnerships and deals with all these great, exciting retailers around the world, we think we have reason to be optimistic.

Operator

Thank you. Our next question comes from the line of Derek Dley with Canaccord Genuity. Your line is open.

Derek Dley

Yes. Hi there. Could you just provide us an update on where you are at in terms of your different banners and online penetration?

Gerry Storch

I’ll give you a subjective tone on that because I don’t -- we don’t release specific numbers overall for that. Obviously, Gilt is our highest online penetration, that being numerous but it’s 100% online. And I bring it up because it was a deteriorating business when we bought it. We have been very pleased I emphasize that by the technology and by the team that came with deal. And our Saks approximately for example, which was developed and sponsored with the Gilt has gone come light years from what I thought was little bit behind as an app to one of the leading apps in the retail industry today and the penetration of sales that are done on that app are approaching double digits which are rarely seen in department store. So, I think we’ve gotten a lot of Gilt from the technology side that we kept -- that we bought the company for and we wanted.

The regional side of the business has been slow and has been holding back our off price comp as we’ve said several times since we purchased it. And we’re making the changes that are going to improve that business as we look forward. But anyway that’s a 100% online of course.

Then for the Company as a whole, we’re in kind of 20% of range if you think about it. It’s approximately the total online penetration of our business and that continues to grow. The highest, all channel business with Saks Fifth Avenue which has a very mature website and very profitable website, I would also add given the average unit retail on that website, and that continues to grow and it’s above the 20% average for the Company as a whole. Rapidly growing websites that identify, as kind of Rising Stars that are more and more significant, they’re substantial websites, are really growing at the kind of rates I’ve only seen in the past with sort of startups -- that are not startups are the Saks OFF 5TH website and Hudson’s Bay in Canada website, the bay.com up there. And that’s growing at a very rapid rate as well. So, those are growing above the company average. They penetrate -- they are starting to penetrate there also. Then that leaves Lord & Taylor, which is and Kaufhof which are below the average and have some room to grow.

Derek Dley

Okay. And at what level of penetration or put another way, what kind of the growth you guys need -- or the e-commerce program to sort of fully offset the incremental SG&A that’s being put towards developing and expanding your e-commence platform?

Gerry Storch

So, that’s a great question and the answer is more complex than we might want it to be. And that’s because -- it’s one thing I would say it takes to bring everyone to positive comps and that’s relatively easy to say. If you can get the stores relatively flat and then you start -- and the websites are growing at that 20%, you got a pretty good profit formula overall, as you can tell by doing the math on what that would bring. Why it’s more complicated is because the relative flow throughs vary by banner significantly. So, by that I mean at Saks Fifth Avenue, given the very high average ticket and the negative arbitrage and shipping abroad to someone’s home versus having come to store and pick it up is relatively insignificant. And so there’s not negative if they buy it online instead of in the store, the lower the average ticket, then the more you have to sell online to make up for a loss of an in store sale. And there are many companies, not ours but there are many companies that are in business that’s different from ours where the average ticket is so low that they can’t even make any money online given the fulfillment cost. So, it’s totally proportional to the average ticket online and therefore how much the fulfillment penalty is overall.

The other thing that makes it difficult to be precise is that increasingly we are investing in all channel models. And those for example, we have launched buy online pick up in store at Saks 5TH Avenue in this quarter and we are launching it for Lord & Taylor and Hudson’s Bay over the next few months. And so this is one of the most important of the all channel models where they buy on the website but pick it up at the store. So, that’s very different set of economics from when we ship it to them at their home. We have been doing it for many years where they buy online, they ship it from the store. That has a negative economics because the store fulfillment is most expensive fulfillment compared to the distribution center fulfillment. So, it’s actually a pretty complex model that we are getting our arms around. And I think every day we understand it better.

The answer I give the team all the time is that in order to win it’s not simply a matter of getting better online and getting more efficient, we have to be better in stores too and that was one of the core principles of our Transformation Plan was that it doesn’t matter where we save money, we need to save money. The most efficient providers in the future are going to be the ones that prevail. So, we focus very heavily on reducing the cost of doing the business in the store base model but we also are focused very heavily on the cost of doing business and the digital model. The digital model is less mature and so there are many more opportunities to automate for example with robotic technology or to process design with other technology in the online world. So, I think we have to do both and be very heavily focused on both.

One of the things I am most excited about and the organization by the ways as we move the digital operations out of the digital group and into the logistics team and they started to find Six Sigma technology to the digital operations and there are some of the most interesting things I go to, may sound like they wouldn’t be, when I see how the logistics team is getting hold to that digital operations and fulfillment and redesigning work flows and processes in order to be more efficient. So, we have a long way to go but we are in the nuts and bolts of what makes the all chattery thought of the future and that’s where we are headed.

Operator

Thank you. Our next question comes from the line of John Zamparo with CIBC. Your line is open.

John Zamparo

Thanks. Good morning. Gerry, you said in the past that you don’t have whole lot of stores that don’t have the profitability you are looking for and you’re not looking to close stores. But is there an area where you feel you might be over stored, either in terms of geography or particular store banner or store size?

Gerry Storch

So, one point to be clear, I would always like to have more profitability in every store. So that’s great. I think what I’ve said is our online stores where they are EBITDA negative and we are closing them will be accretive to the company. That doesn’t mean we wouldn’t sell them. For example, there’s a great opportunity and the math works and works well with the retail concept as well, we’re obviously mindful about the overall market, we will be very economic. So, look at our history, we’re -- for example, we exited the Short Hills store for Saks Fifth Avenue, because the economics of the opportunity were so good. It isn’t so much that there was something wrong with the Saks Fifth Avenue store there. It was that the economic value and alternative use was that much higher. And so, we’ve shown that we’ll do that and that I think is a much more fruitful area of inquiry across our portfolio than the question of poor performing stores and closing those, because there simply aren’t a lot of those that would make any sense. I notice as a little bit of side or dicta here, many of the stores when I hear about competitors closing stores, they’re closing stores that don’t have a lot of value one way or the other. And some of you mentioned that they’re not sure that’s EBITDA positive, that they are closing them except some longer term view.

So, the tail is where the opportunity is. They can take a look at what might happen with real estate overall, the opportunity is better with the stores that we have across the board and then we’re always open for real estate opportunities with the entire portfolio.

John Zamparo

And I want to move back to real estate just for a second, diversifying the joint ventures. Is there an updated timeline on when expect these two to go public? And is there -- can you remind us, is there a minimum level of ownership that you’d like to have when it comes to HBC’s stake in these joint ventures?

Richard Baker

So, there is no minimum stake that we’ve discussed. We do feel it’s important to own a substantial piece of the joint ventures. We continue to analyze the industry and the marketplace and the timing around doing an IPO and we can’t comment beyond that on IPO.

John Zamparo

And just one last quick one for me on the Saks Fifth Avenue comp, you highlighted the positive number. Is some of that from return of tourism and weaker U.S. dollar and have you seen that show up in Q3 so far?

Gerry Storch

Yes. We don’t see a lot of that; it’s still a negative on the international sales. But I think it’s getting better. And the other point there is that the only information that we really have on that when it comes down to it, is we have the data from credit cards that are issues of people outside the U.S. What we don’t know, what we never know, we do some market research and other things but you can’t be precise enough to go with a percent or two here and there of comp. We don’t know with how many Americans and of curse Saks Fifth Avenue customers very wealthy, make their purchases abroad when they’re on recreational trips or business trips or whatever, because it’s less expensive to buy the same product in France or England or wherever based upon exchanges. So, really don’t know exactly but it’s still based on the way we always measure it, which is the credit card utilization, how many are foreign versus domestic. We still see that it’s a slight negative for us. But it’s not -- maybe not as bad as it’s been in the past.

Operator

[Operator Instructions] And our next question comes from the line of Oliver Chen with Cowen and Company. Your line is open.

Oliver Chen

Thank you. Ed, welcome as well. I just wanted to ask you your thoughts on key priorities. And it’s been really early days, but how would you contrast it against your prior experience with famous American retailer as well? And then Gerry, as you some up digital, what would you prioritize as the most important innovations ahead and what consumers want versus your capabilities, just for us to understand what will be the biggest needle movers? And I know there is a lot of really cutting edge innovation happening on the Saks on digital as well? Thanks.

Ed Record

Hey, Oliver. Thanks. I would tell you, there is not a lot of similarity between HBC and J.C. Penney. So, I’m not sure my priorities are in line with J.C. Penney. Although, I do think it’s a difficult environment out there and we continue to improve every day. And the thing I like about HBC is it’s truly an international organization and just a world class team here that I’m excited to be a part of. And as you said, it’s early days; we’re going to continue to figure out what the priorities are as we move forward, but I’m excited to be here.

Gerry Storch

And we’re glad to have Ed here as well. In terms of the digital experience, I’ll highlight a few things. It’s vast, is part of the answer, but let me give you few things. So I think one of the most important strategically is recognizing that we do have stores. And so, the internet is also a tool to help us to grow and that stores are competitive advantage. So, therefore, that’s internet functionality that takes advantage of our competitive advantage is unusually important. And along with having stores come the sales people, and so we have service and personal relationships with our customers. So, the tools that enable us to deepen those personal relationships and the relationships between the customer and the store are those that are uniquely valuable for us from a competitive standpoint, because internet only competitors can have those. So that’s a big area of our focus overall as you know and you seen from some of the functionalities that we’ve drilled out in Saks Fifth Avenue and elsewhere. So that’s really important.

When I talk to internet only people, they are jealous of our service, they’re jealous of our fitting room, they’re jealous of things that you can only have because you’re bricks and mortar retailer. So that’s naturally you want to think that head of the arrow of our competitive advantage and drive that deeper as much in the future. Secondly, and always on the internet is broader assortments. And so, we’re looking to do that at all of our websites. The most important one in the short term is clearly expanding the assortment on Gilt. And because people -- everyone I talk to loves Gilt. It’s one of these very interesting things where wherever I go in the world, if I say go to a list of banners that I own, people always know the one in their country, of course. In the U.S., they know Saks Fifth Avenue but Gilt everybody knows and they giggle for a while. You have Gilt, that’s amazing, like that. And that’s been a little bit in contrast the performance of the business. And the key part of that is providing a modern experience there which we’ve done as of yesterday, the re-launch of the New Gilt in a more intent based site and expanding the assortment so there is more that you can get there.

So, expanding assortments in general in all of our banners and I wouldn’t highlights anyone else but all of them is really important and Gilt is certainly very important. And then finally, just functionality, just having them work well and to be state-of-the-art. And that’s why we’re pleased as we continue that banners to our common platform because it’s just a much better experience than what we’ve had in the past. And as part of that, I would highlight the mobile experience on our common platform is so much better than what we’ve had on our other the platforms in the past. And the growth in mobile is important, as you know, it’s the -- that by huge amount is most rapidly growing sector or source traffic that’s important to have a great mobile site. And so, we’re just trying to get that in all of our banners as we go forward.

Oliver Chen

And Gerry, I know you’ve been a visionary with technology. I just wanted to get your take on voice-enabled commerce and if that will be material as you look out on a longer term basis. And the second topic that’s coming up in retail is this whole manifestation of speed; speed, as it has to do with your relationship with vendors. And you’ve done a great job with the speed with your robotics but I was questioning, speed as you -- we respond to fashion trend so quickly and thinking about lead times from buying to putting stuff on floor or some of your proprietary product as well.

Gerry Storch

Well, those are some great questions and let me give you some quick answers to them. I would be happy to talk to you anytime offline and going to more depth anything that you’d like to talk about.

On the voice enabled technology, I think it’s lot like the internet itself where when it first starts, people think that it’s the exclusive domain of the people who do it first. And I don’t believe that’s true. I think voice enabled technology will be important just like it is -- just like voice recognition technology’s grown in general in commerce, but something everyone uses. Again, just like the internet itself, the analogy might be the internal combustion engine where when it first came out, well, that’s only for car companies or something that you should invest in, but I think that’s been the best investment of late in car companies as opposed to the realization everybody uses, motors and engines and what they do. Electricity is the same way; it comes, at first you want to own Edison Electric or whatever it is but then those become common place, those utilities and electricity is used by everyone what they do. The internet is like that. In early days, I think there’s some confusion between sort of internet company and the fact that everyone must integrate the internet tightly in their business the way that we’re doing with the personal selling at Saks Fifth Avenue, the example that I used earlier. I would say the same thing with voice enabled shopping that initially that be effective particularly for replenishment items or more commoditized items; it’s going to be very difficult to buy fashion that way, if we can’t see it and get some sense as to what the fabric is like and all the complexities in fashion online in general and magnified if we’re just doing it through the voice. But over time the voice will be very important as an element of net just the mobile has come up in the comparing point. But it will be for everyone not just for the companies that start out that way. And there will be competitors, there will be Amazon, there will be Google and there will be Apple, everyone will have one. And then I think we’re pretty pleased with our performance for example with our app on Apple Store and we keep winning there for all the innovations with the Saks app on Apple. And so, if voice recognition becomes -- the voice enabled shopping is important and it starts with commodity and it spreads elsewhere. But when it does, we will be there and just will be there with partners as we go forward.

As for speed, speed is -- we have slogan at target, speed is life. So, speed is everything in retail and it always has been; it’s not new that it’s important. And so, we are working across the board to increase the speed of our actions. We very much need to do that. If I look for example at Kaufhof, I think we have absolutely the totally dead right, total 100% right direction. We just need to go faster. So on everything we do, we need to go faster.

We are seeing vendors improve their lead time. We’ve had a big project that’s starting to bear fruit going forward on reducing our own lead times for our private label merchandise. And so, I believe speed will be increasingly important. I would highlight as an example how that’s integrating the business. When you get a chance to visit our new department stores in the Netherlands, people ask what have you done there? We’ve taken all the learnings from all department stores we’ve had and we have a unique opportunity to design a department store of the future from scratch. And we sat around and Richard challenged us and we said okay, we will write word, what’s the department store of the future, what does it look like, what would it be, what was now, we know everything, the internet exists. What would you do as opposed to being sort of burdened with the structure or the approach of past, what would you do? One of the things that we knew from the very beginning is wanted a much more open floor plan, with outlets, sort of hard shops and things that are coded into the business. So, as you could react very rapidly as brand preference changes and something that was hot yesterday isn’t hot anymore, so that we could move faster as we look to the future. So, you’re absolutely right, speed is very important and will become more so. And you’ve already touched on speed delivery and we’re all over that one issue. We also said, we think the robotic technology is not just important for reducing costs; those goods can leave the DC very shortly after order is received when we have the robotic technology.

Operator

Thank you. And I’m showing no further questions at this time. Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.