Hudson's Bay swung to fiscal Q1 earnings of C$176M from loss of C$82M a year ago as sales more than doubled to C$1.86B, mainly attributable to inclusion of Saks; consolidated same-store sales grew 2.8% on a local currency basis

Cindy Allen

TORONTO and NEW YORK , June 3, 2014 (press release) – Hudson's Bay Company (“HBC” or the “Company”) (TSX: HBC) reported today its results for the 13-week period ended May 3, 2014 (the “first quarter”). First Quarter Highlights (13-week period ended May 3, 2014)

HBC's financial results for the first quarter of 2014 include Saks Incorporated ("Saks")

• Consolidated same store sales grew 2.8% on a local currency basis.
  • Hudson's Bay and Lord & Taylor (together, “Department Store Group” or “DSG”) grew 2.5%.
  • Saks Fifth Avenue grew 2.6%.
  • Saks Fifth Avenue OFF 5TH (“OFF 5TH") grew 15.1%.
• Digital sales were $207 million, reflecting both the inclusion of Saks and DSG more than doubling.
• Normalized EBITDA was $97 million, or 5.2% of sales, compared to $29 million, or 3.3% of sales. These figures include adverse impacts of $8 million and $2 million, respectively, due to the required implementation of IFRIC 21 (see below). The adoption of IFRIC 21 will have no impact on Fiscal 2014 annual EBITDA.
• Two OFF 5TH stores opened in Palm Beach, Florida and Milwaukee, Wisconsin; two Saks Fifth Avenue locations closed in Orlando, Florida and Stamford, Connecticut.
• HBC completed the sale and leaseback of its Queen Street flagship store and Simpson Tower office complex in Toronto for a purchase price of $650 million (the “Queen Street Sale”). Substantially all of the net proceeds of the sale were utilized to reduce debt, including the retirement of the U.S.$300 Second Lien Term Loan, the permanent reduction of the First Lien Term Loan by U.S.$150 million and a reduction of the outstanding balance on the Company's Canadian revolving credit facility.

“Overall first quarter performance was in the range of our expectations,” stated Richard Baker, HBC’s Governor and Chief Executive Officer. “We are encouraged by the business trends witnessed through the quarter, which bode well for the balance of this year. Furthermore, we are pleased by the progress of our integration of Saks, which is on-track to achieve approximately $50 million in HBC synergies targeted for this year. As a result, we are reaffirming our outlook for Fiscal 2014 as provided in April.

Our confidence in HBC’s future is based upon our core sales growth strategies – driving digital sales across all our banners, growing OFF 5TH through a modified and more productive format as well as new stores in the U.S. and Canada, bringing Saks Fifth Avenue to Canada and driving outsized growth at the top doors of each of our banners. In addition, we are focused on achieving EBITDA margin expansion over time by driving synergies and efficiencies across our business. Evidenced by robust digital sales growth, including DSG more than doubling, as well as strong same store sales growth at OFF 5TH, our key strategies demonstrated solid momentum in the quarter and are on track with our goals. I look forward to sharing our progress over the balance of the year ahead.”

Financial Results

Throughout this press release, the terms "Normalized EBITDA" and “Normalized Net Earnings” are used to refer to financial results that have been adjusted to exclude certain non-recurring items and charges. For a full explanation of the Company's use of non-IFRS measures, please refer to the “Supplemental Information” section of this press release. For further discussion of the Company's financial and operating results, please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations for the Thirteen Weeks Ended May 3, 2014 (the “MD&A”). The term “Legacy HBC” refers to the Company as structured prior to the acquisition of Saks (i.e., excluding Saks).

First Quarter Summary

All comparative figures below and in the "Highlights" section are for the 13-week period ended May 3, 2014 compared to the 13-week period ended May 4, 2013.

Retail sales were $1,855 million, an increase of $971 million from $884 million for the prior year. This increase was primarily attributable to the inclusion of Saks. On a local currency basis, consolidated same store sales increased by 2.8%, with increases of 2.5% at DSG, 2.6% at Saks Fifth Avenue and 15.1% at OFF 5TH. Digital commerce sales totaled $207 million, reflecting both the inclusion of Saks and DSG more than doubling from its smaller base.

In terms of merchandise category performance, sales growth at DSG was driven by menswear and beauty. Sales growth at Saks Fifth Avenue was driven by menswear and accessories. Sales growth at OFF 5TH was strong across all categories.

Gross profit was $716 million, an increase of $360 million from $356 million for the prior year. This increase was primarily attributable to the inclusion of Saks. Adjusted to exclude $38 million of purchase price accounting charges related to the acquisition of Saks, gross profit as a percentage of retail sales was 40.6%, compared to 40.3% for the prior year, an increase of 30 basis points. This increase was driven by the inclusion of Saks, which contributed higher gross profit as a percentage of retail sales, partially offset by a modest decline in gross profit as a percentage of retail sales within Legacy HBC.

SG&A was $681 million, an increase of $337 million from $344 million for the prior year. This increase was primarily attributable to the inclusion of Saks. As adjusted to exclude Saks acquisition and integration related expenses and other normalization adjustments, SG&A as a percentage of retail sales was 35.4%, compared to 37.0% for the prior year, an improvement of 160 basis points. This improvement was driven by the inclusion of Saks, an entity with lower SG&A as a percentage of retail sales, partially offset by an increase in SG&A as a percentage of retail sales within Legacy HBC, which was attributed to increased rental expense related to the Queen Street Sale as previously disclosed and incremental investments in HBC Digital. Management believes that HBC remains on track to realize approximately $50 million in synergy savings in Fiscal 2014, which will be principally reflected in SG&A.

Normalized EBITDA was $97 million, an increase of $68 million from $29 million for the prior year. Normalized EBITDA as a percentage of retail sales was 5.2%, compared to 3.3% for the prior year, an increase of 190 basis points.

Finance costs were $75 million in the first quarter, compared to $12 million for the prior year. This increase of $63 million was comprised of $27 million of interest expense from net debt financing for the acquisition of Saks, $30 million for the non-cash write-off of deferred financing costs and early payment penalties for the retirement of debt utilizing proceeds from the Queen Street Sale (as previously disclosed) and $4 million for the mark-to-market of outstanding warrants.

Queen Street Sale

On February 25, 2014, HBC completed the sale of its downtown Toronto flagship store and adjacent Simpson's Tower office complex to an affiliate of The Cadillac Fairview Corporation Limited for a purchase price of $650 million at an implied capitalization rate of approximately 4.75%. The Company has leased the entire retail and office complex for a base term of twenty-five years with renewal options of up to approximately twenty-five additional years. The property will serve as the site of one of Canada's first Saks Fifth Avenue locations. The Company also agreed to lease space in Toronto's Sherway Gardens for another Saks Fifth Avenue store in Canada. A portion of the proceeds was used to retire in entirety the Company’s U.S.$300 million Second Lien Term Loan and permanently reduce U.S.$150 million of its U.S.$2,000 million First Lien Term Loan. The balance of the net proceeds was used to reduce the outstanding balance of the Company’s Canadian revolving credit facility. Over time, a portion of the proceeds will provide ample liquidity to fund the Company’s strategic investments including the expansion of Saks Fifth Avenue into Canada and our HBC Digital and OFF 5TH businesses.

As previously disclosed, the sale and leaseback results in an initial reduction to annualized finance costs of approximately $42 million, partially offset by an increase to annualized rent expense (SG&A) of approximately $30 million. Additionally, $30 million of non-recurring finance costs primarily due to the early extinguishment of debt, of which $18 million are non-cash, were reflected in the first quarter results.

Outlook

Our Fiscal 2014 guidance incorporates management’s views on the current and expected operating environment and expected investments in sales growth and margin enhancement initiatives – especially HBC Digital, which increases SG&A expenses – as well as approximately $50 million of synergies savings from the integration of Saks into HBC. The following guidance is fully qualified by the Forward-Looking Statements section below:

• Total sales of $7.8 billion to $8.1 billion. This implies low-to-mid single-digit consolidated same store sales growth calculated on a local currency basis, driven in part by strong digital sales growth.
• Normalized EBITDA of $580 million to $620 million.
• Capital investments of $380 million to $420 million, net of landlord incentives.

This guidance reflects a U.S. dollar exchange rate assumption of USD:CAD = 1:1.09 for Fiscal 2014. Significant variation in this exchange rate assumption would impact the guidance. In the first quarter, the exchange rate incorporated in the Company’s financial results was USD:CAD = 1:1.10.

Appointment of Chief Financial Officer

As previously announced, Paul Beesley is joining the Company as Chief Financial Officer on June 9. Mr. Beesley has extensive experience in financial management and strategic development across a range of leading Canadian-based companies, most recently serving in a number of executive roles with Empire Company Limited, a corporation with annual sales in excess of $19 billion and operations in retailing and related real estate, from 2000 to 2014, including as Chief Corporate Development Officer of its Sobeys unit and as Chief Financial Officer of Empire. While at Empire, Mr. Beesley developed strategies resulting in the acquisitions of Canada Safeway and the remaining stake in Sobeys, led the creation of an Empire-related REIT and facilitated numerous financing transactions.

IFRIC 21

As required, HBC has implemented IFRS accounting standard IFRIC 21– Levies (“IFRIC 21”) retrospectively, which provides guidance on the accounting for levies imposed by governments. Prior to the adoption of IFRIC 21, the Company recorded all property taxes rateably over the relevant tax year. Ratable recognition of property taxes in Canada continues to be appropriate under IFRIC 21. However, in the majority of the U.S. municipalities in which the Company operates, point-in-time recognition of property taxes is required where the obligating event for taxes is ownership of the property on the day of the year, frequently the assessment date, for which the tax is imposed. For further discussion of IFRIC 21, please refer to the “New Accounting Policies – Levies” section of the MD&A and Note 2 of the Company’s Interim Condensed Consolidated Financial Statements for the Thirteen Weeks Ended May 3, 2014.

Conference Call to Discuss Results

Richard Baker, Governor and Chief Executive Officer, and Donald Watros, President and acting Chief Financial Officer, will discuss the quarter’s financial results and other matters during a conference call on June 3, 2014 at 8:30 am EST.

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

Consolidated Financial Statements and Management's Discussion and Analysis

The Company's unaudited interim condensed consolidated financial statements for the thirteen weeks ended May 3, 2014 and Management's Discussion and Analysis thereon are available under the Company's profile on SEDAR at www.sedar.com.

Selected Consolidated Financial Information

The following summary unaudited consolidated financial information for the quarters ended May 3, 2014 and May 4, 2013 has been prepared on a basis consistent with our audited consolidated financial statements for Fiscal 2013. In the opinion of our management, such unaudited financial data reflects all adjustments, consisting of normal and recurring adjustments, necessary for a fair presentation of the results for those periods. The results of operations for interim periods are not necessarily indicative of the results to be expected for a full year or any future period. The information presented herein does not contain disclosures required by IFRS and should be read in conjunction with the Company’s unaudited interim condensed consolidated financial statements for the thirteen weeks ended May 3, 2014.

(1) Certain previously reported figures have been restated due to the implementation of IFRIC 21. For more information, please refer to the “New Accounting Policies – Levies” section of the MD&A and Note 2 of the Company’s unaudited Interim Condensed Consolidated Financial Statements for the Thirteen Weeks Ended May 3, 2014.

(1) Certain previously reported figures have been restated due to the implementation of IFRIC 21. For more information, please refer to the “New Accounting Policies – Levies” section of the MD&A and Note 2 of the Company’s unaudited Interim Condensed Consolidated Financial Statements for the Thirteen Weeks Ended May 3, 2014.

(1) Certain previously reported figures have been restated due to the implementation of IFRIC 21. For more information, please refer to the “New Accounting Policies – Levies” section of the MD&A and Note 2 of the Company’s unaudited Interim Condensed Consolidated Financial Statements for the Thirteen Weeks Ended May 3, 2014.

Supplemental Information

The following table shows the reconciliation of Net Earnings (Loss) to EBITDA as well as Normalized EBITDA.

(1) Certain previously reported figures have been restated due to the implementation of IFRIC 21. For more information, please refer to the “New Accounting Policies – Levies” section of the MD&A and Note 2 of the Company’s unaudited Interim Condensed Consolidated Financial Statements for the Thirteen Weeks Ended May 3, 2014.

The following table shows the reconciliation of Net Earnings (Loss) to Normalized Net Loss.

(1) Includes write-off of deferred financing costs and losses and penalties on early extinguishment of debt.

(2) Certain previously reported figures have been restated due to the implementation of IFRIC 21. For more information, please refer to the “New Accounting Policies – Levies” section of the MD&A and Note 2 of the Company’s unaudited Interim Condensed Consolidated Financial Statements for the Thirteen Weeks Ended May 3, 2014.

EBITDA is a non-IFRS measure that we use to assess our operating performance. EBITDA is defined as net earnings before interest expense, income tax, non-cash share based compensation expense, depreciation and amortization expense, impairment and other non-cash expenses and pension expense (non-cash). The Company’s Canadian defined benefit pension plan is currently over-funded, and as a result pension expense is adjusted as management does not expect to make any payments in the foreseeable future.

Normalized EBITDA is defined as EBITDA adjusted to exclude: (i) business and organization restructuring/realignment charges; (ii) merger/acquisition costs and expenses; and (iii) normalizing adjustments, if any, related to transactions that are not associated with day-to-day operations and (iv) EBITDA related to discontinued operations. Normalized Net Earnings (Loss) is defined as net earnings (losses) adjusted to exclude: (i) business and organization restructuring/realignment charges; (ii) merger/acquisition costs and expenses; (iii) normalizing adjustments, including those related to purchase accounting, if any, related to transactions that are not associated with day-to-day operations and (iv) net earnings (loss) related to discontinued operations. We have included Normalized EBITDA and Normalized Net Earnings (Loss) to provide investors with supplemental measures of our operating performance. We believe Normalized EBITDA and Normalized Net Earnings (Loss) are important supplemental measures of operating performance because they eliminate items that have less bearing on our operating performance and thus highlight trends in our core business that may not otherwise be apparent when relying solely on IFRS financial measures. We also believe that securities analysts, investors and other interested parties frequently use EBITDA, Normalized EBITDA and Normalized Net Earnings (Loss) in the evaluation of issuers, many of which present similar metrics when reporting their results. Our management also uses Normalized EBITDA in order to facilitate operating performance comparisons from period to period, prepare annual operating budgets and assess our ability to meet our future debt service, capital expenditure and working capital requirements and our ability to pay dividends on our shares. As other companies may calculate EBITDA, Normalized EBITDA or Normalized Net Earnings (Loss) differently than we do, these metrics are not comparable to similarly titled measures reported by other companies.

About Hudson’s Bay Company

Hudson's Bay Company, founded in 1670, is North America's longest continually operated company. Today, HBC offers customers a range of retailing categories and shopping experiences primarily in the United States and Canada. Our leading banners – Hudson's Bay, Lord & Taylor, Saks Fifth Avenue and Saks Fifth Avenue OFF 5TH – offer a compelling assortment of apparel, accessories, shoes, beauty and home merchandise. Hudson’s Bay is Canada's most prominent department store with 90 full-line locations, one outlet store and thebay.com. Lord & Taylor operates 49 full-line locations primarily in the northeastern and mid-Atlantic U.S., four Lord & Taylor outlet locations and lordandtaylor.com. Saks Fifth Avenue, one of the world's pre-eminent luxury specialty retailers, comprises 39 U.S. stores, five international licensed stores and saks.com. OFF 5TH offers value-oriented merchandise through 75 U.S. stores and saksoff5th.com. Home Outfitters is Canada's largest kitchen, bed and bath specialty superstore with 69 locations. Hudson’s Bay Company trades on the Toronto Stock Exchange under the symbol “HBC”.

Forward-Looking Statements

Information in this press release that is not current or historical factual information may constitute forward-looking information, including future-oriented financial information and financial outlooks, within the meaning of securities laws. This information is based on certain assumptions regarding expected growth, results of operations, performance, and business prospects and opportunities. While the Company considers these assumptions to be reasonable, based on information currently available, they may prove to be incorrect. Forward-looking information is subject to a number of risks, uncertainties and other factors that could cause actual results to differ materially from what the Company currently expects. These risks, uncertainties and other factors include, but are not limited to: credit, market, currency, operational, liquidity and funding risks, including changes in economic conditions, interest rates or tax rates, the timing and market acceptance of future products, competition in the Company’s markets, the growth of certain business categories and market segments and the willingness of customers to shop at the Company’s stores, the Company’s margins and sales and those of the Company’s competitors, the Company’s reliance on customers, risks and uncertainties relating to information management, technology, supply chain, product safety, changes in law, regulations, competition, seasonality, commodity price and business disruption, the Company’s relationships with suppliers and manufacturers, changes to existing accounting pronouncements, the ability of the Company to successfully implement its strategic initiatives, changes in consumer spending, managing our portfolio of brands and our merchandising mix, seasonal weather patterns, economic, social, and political instability in jurisdictions where suppliers are located, increased shipping costs, potential transportation delays and interruptions, the risk of damage to the reputation of brands promoted by the Company and the cost of store network expansion and retrofits, compliance costs associated with environmental laws and regulations, fluctuations in currency and exchange rates, commodity prices, the Company’s ability to maintain good relations with its employees, changes in the law or regulations regarding the environment or other environmental liabilities, the Company’s capital structure, funding strategy, cost management programs and share price, the Company’s ability to integrate acquisitions and the Company’s ability to protect its intellectual property.

For more information on these risks, uncertainties and other factors the reader should refer to the Company’s filings with the securities regulatory authorities, including the Company’s annual information form dated April 30, 2014, which is available on SEDAR at www.sedar.com. To the extent any forward-looking information in this press release constitutes future-oriented financial information or financial outlooks, within the meaning of securities laws, such information is being provided to demonstrate the potential of the Company and readers are cautioned that this information may not be appropriate for any other purpose. Future-oriented financial information and financial outlooks, as with forward-looking information generally, are based on assumptions and subject to risks, uncertainties and other factors. Actual results may differ materially from what the Company currently expects. Other than as required under securities laws, the Company does not undertake to update any forward-looking information at any particular time. The reader should not place undue importance on forward-looking information and should not rely upon this information as of any other date. All forward-looking information contained in this press release is expressly qualified in its entirety by this cautionary statement.

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