Hudson's Bay: Reduced Cash Burn Amidst Uneven Sales Performance

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About: Hudson's Bay Company (HBAYF)
by: Elephant Analytics
Summary

Hudson's Bay's sales performance has been uneven, with Saks Fifth Avenue continuing to perform well, but Lord & Taylor and the Canadian operations dragging results down.

Hudson's Bay believes the Canadian issues are fixable, but Lord & Taylor has had ongoing challenges.

Hudson's Bay has made encouraging progress with reducing cash burn and looks set to make additional progress in 2019.

Reducing cash burn is important to preserve Hudson's Bay's large amount of real estate value.

Hudson's Bay (OTCPK:HBAYF) has made some progress in terms of reducing its cash burn, which is important to help preserve its large amount of real estate value. It is rationalising unprofitable locations and has also paid down a fair amount of its debt (with its Saks mortgage representing the majority of its remaining debt). However, it still has some challenges with its Canadian operations running into some issues and its Lord & Taylor banner continuing to producing negative comps.

Hudson's Bay trades as HBC on the Toronto Stock Exchange. It reports in Canadian dollars and I have used a $1.33 CAD to $1.00 USD exchange rate where appropriate.

Uneven Sales Results

After a solid Q3 2018, Hudson's Bay's comparable store sales performance was more uneven in Q4 2018 with total comparable store sales at -1.4%. Saks Fifth Avenue remained quite strong, delivering +3.9% comps (and +7.0% two-year stacked comps) in its seventh consecutive quarter of positive comps. The rate of comparable store sales growth was several percent lower than recent quarters, although Hudson's Bay explained that sales at Saks Fifth Avenue's Manhattan flagship store were affected by the main floor construction activity. The redeveloped main floor was unveiled in February.

The DSG segment had significantly negative comps at -5.2% during Q4 2018. This segment has been struggling as the Hudson's Bay banner in Canada has turned negative as well (after a lengthy period of positive comps). The explanation for the weak performance at Hudson's Bay in Canada is that it went too far to attract former Sears Canada customers with lower priced goods and ended up with the average basket price being down noticeably.

Comparable Store Sales Q1 2018 Q2 2018 Q3 2018 Q4 2018
Saks Fifth Avenue 6.0% 6.7% 7.3% 3.9%
DSG -0.6% -3.8% 0.9% (-2.4%*) -5.2%
Saks OFF 5TH -3.5% -7.6% -2.3% -2.1%

* Hudson's Bay reported +0.9% comps for its DSG segment in Q3 2018, but also noted that was helped by a promotional shift. After adjusting for that promotional shift, comps would have been -2.4% in Q3 2018.

The outlook for Saks Fifth Avenue looks good, with the redeveloped main floor (and the end of construction activity on that floor) expected to provide some benefit going forward. Hudson's Bay also believes that the issues with its Hudson's Bay banner in Canada are fixable with changes expected to have an impact in the second half of 2019.

Reducing Cash Burn

Although Hudson's Bay's top-line results were uneven in Q4 2018, it did manage to make progress during 2018 in terms of adjusted EBITDA and cash flow. It announced that its adjusted EBITDA from continuing operating reached $338 million ($254 million USD) in 2018, an increase of 30% compared to 2017. As well, Hudson's Bay reported operating cash flow of positive $57 million CAD ($43 million USD) in 2018 from continuing operations, which was a noticeable improvement versus 2017, albeit helped by working capital changes.

Hudson's Bay anticipates capital expenditures to come in around $300 million to $325 million CAD ($226 million to $244 million USD) net of landlord incentives in 2019. This may allow it to keep its cash burn (before asset sales) fairly restrained in 2019.

With the proceeds from its Lord & Taylor flagship sale, Hudson's Bay has managed to reduce its outstanding debt from around $3.074 billion CAD (approximately $2.346 billion USD) to $2.312 billion CAD (approximately $1.761 billion USD).

Source: Hudson's Bay

Conclusion

Hudson's Bay has a lot of work to do still, as its Canadian operations have hit some rough patches and Lord & Taylor continues to face a challenging situation with persistently negative comps. On the positive side, Saks Fifth Avenue remains quite strong and Saks OFF 5TH has seen its declines moderate amidst digital sales strength.

Hudson's Bay's value largely remains in its real estate, and the proceeds from its Lord & Taylor flagship sale (and to a lesser extent its Oakridge Mall deal) reinforces the high value of prime real estate. To be able to properly unlock that value (and avoid having the asset value frittered away in funding operational losses like Sears), Hudson's Bay needs to stop its cash burn. It has made encouraging progress there in 2018 and seems likely to make some more progress in 2019 (as it rationalises unprofitable locations and attempts a rebound at its Hudson's Bay banner). This is an ongoing process that may take multiple years though.

Disclosure: I am/we are long HBAYF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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