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Edited Transcript of HBC.TO earnings conference call or presentation 12-Sep-19 12:30pm GMT

Q2 2019 Hudson's Bay Co Earnings Call

Toronto Sep 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Hudson's Bay Co earnings conference call or presentation Thursday, September 12, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Helena B. Foulkes

Hudson's Bay Company - CEO & Director

* Jennifer Bewley

Hudson's Bay Company - Head of IR

* Rebecca A. Roof

Hudson's Bay Company - Interim CFO

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Conference Call Participants

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* Brian Lombardi

* Oliver Chen

Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst

* Patricia A. Baker

Scotiabank Global Banking and Markets, Research Division - Analyst

* Sabahat Khan

RBC Capital Markets, LLC, Research Division - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Hudson's Bay Company Presents Q2 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference, Ms. Jennifer Bewley, Vice President of Investor Relations at HBC. Ma'am, you may begin.

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Jennifer Bewley, Hudson's Bay Company - Head of IR [2]

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Thank you, and good morning, everyone. We appreciate you joining us today. This morning we issued our second quarter results, which have been posted to SEDAR. In a moment, I'll pass the call over to Helena Foulkes, HBC's CEO; and Becky Roof, our Interim CFO, 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 the 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 activity, performance goals or achievements or any other future events or developments 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 assurances that such estimates and assumptions will prove to be correct. Many factors could cause HBC's results to differ materially from those expressed or implied by 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 May 3, 2019, 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 any undue reliance on forward-looking statements made on this call.

Before we discuss our results, I'd like to briefly comment on the process that we announced in early June. Our Board of Directors has formed a special committee of independent directors to review and evaluate a nonbinding proposal of a take-private transaction received from a majority shareholder group. Although the special committee and its financial and legal advisers have completed significant work since June, we remain unable to comment while the special committee and the Board conduct their review, and there can be no assurances that any definitive agreement in respect of the take-private proposal will be approved or that a transaction will be consummated.

With that, I'll turn the call over to Helena to discuss our second quarter results.

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Helena B. Foulkes, Hudson's Bay Company - CEO & Director [3]

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Thank you, Jennifer and hello, everyone. The aim of our retail operations is to deliver amazing customer experiences, which in turn enables us to drive growth and, ultimately, financial performance. With Saks Fifth Avenue and Hudson's Bay as the cornerstones of our company, we have simplified HBC's retail portfolio to brands that have meaning to customers and that benefit from scale and unique positions within growing markets.

To that end, we're pleased to have concluded our extensive review of strategic alternatives for Lord & Taylor with an agreement for Le Tote to acquire the business. Bringing together Le Tote's fashion rental subscription service, with Lord & Taylor's traditional retail business will create a new model and the first of its kind experience for the mid-tier retail segment. While the structure is somewhat unconventional, there are several clear advantages to the deal.

We believe Le Tote's leadership and innovative approach is the best path forward for Lord & Taylor, its customers and associates. HBC receives approximately $100 million of cash at closing, a $33 million promissory note and 25% equity stake in the new venture. For Le Tote, we are providing approximately $284 million worth of inventory and $77 million of net rent per year for 3 years. Importantly, we maintain ownership of the Lord & Taylor real estate with nearly the same day 1 flexibility to unlock value that we would have had on our last day of operations.

While the potential for larger redevelopment begins late in 2021 when HBC and Le Tote have options to reassess the Lord & Taylor store network, HBC has hired a team of seasoned professionals to lead the planning and execution of any possible redevelopment, which is inherently complex, capital-intensive and a long-term undertaking.

And finally, we look forward to the transaction closing before the holiday season, pending Le Tote's ability to acquire financing.

As I look back over the last 1.5 years, it's remarkable how much we've accomplished, while firmly understanding that we are in the early stages of what we can become.

There are distinct opportunities for our 2 businesses. At Saks Fifth Avenue, we feel strongly about our position amid an increasingly competitive environment, and remain committed to driving further upside for this business. For Hudson's Bay, we are continuing to fix the fundamentals within our merchandise strategy and service model, and there is more to be done as we work to reinvigorate our presence in the market to appeal to customers.

The second quarter delivered many positives, a step change in our digital growth, the ninth consecutive quarter of comp growth at Saks Fifth Avenue and another quarter of growth for Saks OFF 5TH. We continue to concentrate on controlling the controllables, investing in our future, improving our cost structure and continuing our disciplined management of inventory as a component of strengthening operations and improving free cash flow.

Our Q2 challenge was our gross margin performance. Approximately 2/3 of the margin decline was due to transitions in our store footprint, vendor relationships and merchandise, the impact of which is expected to lessen during the remainder of the fiscal year. The balance can be attributed to the intense promotional activity in North American luxury and to the promotional environment in Canada, which reduced our opportunity for greater full price selling.

While it was clear that Saks had breakaway sales performance in the first quarter, it was unclear that the market would turn to aggressive discounts in an attempt to catch us. Despite the change in the competitive environment, what did Saks deliver in the second quarter? We expanded the number of top customers, bucked the industry trend to achieve a 7.3% 2-year stacked comp and accelerated our digital growth. By elevating our service model, digital experience and merchandise assortment, Saks's strategy continues to resonate with luxury consumers.

At our New York City flagship, construction related to the grand renovation continued. During the quarter, we opened a new men's shoe experience, which is the first step in Saks's strategy to double down on men's, which remains one of our strongest categories and an example of how we're making strategic investments to capture even greater market share. Just this month, we opened the Vault, a high fine jewelry experience, housed in a reclaimed space on the lower level of the flagship. Jewelry and watches account for 38% of the worldwide personal luxury market, yet for Saks it's only 6% of our sales, creating a true greenfield opportunity for a 95-year-old brand.

So far this year, 6 of our 10 floors have had some renovation disruptions. We're thrilled to arrive at this holiday season with a true physical representation of the new luxury strategy for visitors and residents of New York City. The Saks flagship will be filled with exclusive services and merchandise and high-touch customer service, all of which will drive the kind of excitement and experiences befitting this luxury landmark during the holiday season.

At Hudson's Bay, as we expected, comparable sales decreased in the second quarter, down 3.4%, which still was a sequential improvement for -- from the first quarter and a continuation of our progress as we dealt with the consequences of a late wet spring. In Q2, the better performance was driven by sharp improvements in our digital channel, supported by more effective marketing and our recently launched app. Even so, on a 2-year stacked basis, Hudson's Bay comp declined 4%, a clear signal that we have more work to do.

We are adjusting our merchandising strategy to deliver a sharper and more exciting assortment that appeals to both existing and prospective customers, in-store and online. Our first step was correcting previous merchandise missteps. And to date, our team has exited more than 300 unproductive brands, while adding 100 new and emerging brands to help reset and elevate the fall assortment.

This season, we will have unique initiatives and experiences featuring new product exclusives and partnership with brands like Anthropologie Home, L.L.Bean and Mango. We're also introducing a range of international premium womenswear designers, including a focused initiative to introduce Scandinavian style to our customers, featuring fashion forward brands STAND STUDIO and ROTATE by Birger Christensen, among others.

In addition, we will introduce ethically and sustainably minded Maggie Marilyn from New Zealand and Harris Wharf London's reimagined wardrobe staples. This fall also brings exclusive signature stripe collaborations with Color Me Courtney, Nobis and Hunter.

Looking ahead, as we further refine the Bay's merchandise strategy, we will seek out opportunities to rightsize and drive productivity for more traditional brands, while we continue to introduce new styles to our customers. These changes will be gradual and may take time to resonate in the market, as we better position Hudson's Bay to recapture market share.

For Saks OFF 5TH, new customer acquisition continued to drive topline performance, posting a 3.4% comp sales increase in the second quarter. Once again, we grew the right way, using new marketing tactics that better target our recommendations to potential customers. The effectiveness and increasing sophistication of our digital marketing programs amplify all touch points, with Saks OFF 5TH customer accounts growing in-store, online and for those customers using all of our channels.

We implemented a new strategy in 2018 focused on fixing the fundamentals and providing fashionable on-trend items at a great value, which meant shifts in our buying, marketing and service model.

From a financial perspective, we knew our improved performance at Saks OFF 5TH would be more apparent this year, and we're just about right where we expect it to be with additional strategic improvements continuing to roll out.

Digital sales were a standout for HBC this quarter, increasing sharply, up 19% year-over-year, improving upon our 10% growth rate a year ago and 14% in the first quarter. For the first time in HBC history, our combined mobile and app revenue surpassed our desktop revenue. We've tightened integration with marketing, which made our new data-driven strategies more effective, and our smart investments are starting to pay off, including the addition of new leadership, launching an app for Hudson's Bay, driving continued customer adoption of the Saks app and testing new personalization tactics.

In addition, we've invested in fixing the fundamentals. The team has been working on ensuring that we're holding inventory in the most advantageous locations for our customers, resulting in fewer out-of-stocks and improvement in canceled orders through online channels, providing another boost to our digital performance.

Over the last 1.5 years, we've made bold moves to reposition HBC for long-term success. We've divested Gilt, agreed to sell our European retail and real estate, entered into an agreement for Lord & Taylor, closed Home Outfitters and are currently optimizing the Saks OFF 5TH footprint.

Our go-forward portfolio includes 3 distinct segments with nearly half of our sales in luxury, more than 1/3 in Canadian retail and about 15% in Off Price. While we're still in the early stages of what HBC can become, our top priorities remain: one, making focused investments to drive growth at Saks and Hudson's Bay; two, enhancing the customer experience across all channels; three, reducing operating cost and complexity, while continuing to fix the fundamentals; and four, capitalizing on the value of our real estate. All of these actions are crucial in ensuring we can operate from a position of strength as we work to improve performance. We've charted our course, and our promise is to do everything within our power to deliver on the extraordinary heritage and potential of HBC.

For more details on our financial performance, I'll turn the call over to Becky.

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Rebecca A. Roof, Hudson's Bay Company - Interim CFO [4]

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Thank you, Helena, and good morning, everyone.

First, I would like to make you aware that following the company's agreement to sell Lord & Taylor to Le Tote, Lord & Taylor has been classified as discontinued operations, and its financial results are not included in my remarks, including any impacts related to Lord & Taylor comp inventory or lease obligations.

As Helena mentioned, gross profit was a challenge during the quarter, and I'd like to expand on what we believe caused this result. Second quarter gross profit declined year-over-year by $101 million, and gross profit margin was down 530 basis points to 34%. The year-over-year decline contained strategic, transitional and market-driven impacts.

First, the strategic. We are actively streamlining our retail portfolio, and approximately $20 million or 110 basis points of the year-over-year decline can be attributed to our store closings. While those closings negatively impacted our gross profit, these decisions also have provided SG&A benefits. In the second quarter, the SG&A savings which resulted from store closures completely offsets the $20 million decline in gross profit.

Home Outfitters closed on schedule at the end of the second quarter. For Saks OFF 5TH, we announced 15 closures. One location closed in the second quarter, 13 have or will close in the third quarter and 1 will close in the fourth quarter. Once these are completed, we will have 245 locations across 3 distinct businesses in North America and a store footprint with a significant concentration in top markets that are characterized by population density and higher-than-average household incomes.

Changes in our vendor relationships accounted for approximately $21 million for another 110 basis points of the year-over-year gross profit margin decline. In the fall season, we expect this impact to gross profit will lessen. In the long term, we believe the change will contribute positively to our gross profit, as we've created a win-win model where it makes economic sense for HBC and our vendors.

As you know, we have targeted inventory efficiency as a key component of strengthening operations and improving free cash flow. At the end of the second quarter, comparable inventory declined by 5% year-over-year, slightly ahead of our full year target for a low single-digit decline.

In the second quarter, we made strategic moves to use our store closings to clear aged inventory from Hudson's Bay and Saks OFF 5TH. At the end of the quarter, HBC's aged inventory was down 10% year-over-year, and we are entering the fall season with a much cleaner and fresher inventory position compared to last year. In the second quarter, $21 million or about 110 basis points of the gross profit decline can be attributed to inventory. Saks OFF 5TH and Hudson's Bay are holding less inventory, and Saks Fifth Avenue's inventory was essentially flat.

And finally, the last 180 basis points is largely due to the change in market dynamics Helena described. There was clearly an industry-wide apparel inventory overhang, which digital and traditional retailers aggressively addressed earlier in the second quarter than last year.

Moving on to SG&A. In the second quarter, SG&A expenses declined $34 million year-over-year, resulting in an SG&A margin of 36.7%, an improvement of 170 basis points. SG&A expense reductions were widespread, with corporate, store operations and closed stores contributing to the year-over-year improvement.

As it relates to the Lord & Taylor sale, if completed, HBC will have some stranded corporate costs that can be reduced, but not on day 1.

As was said on our last call, we expected adjusted EBITDA to be lower in the first half of the year compared to last year. We expect adjusted EBITDA to improve through the balance of the year, as the expected benefits from our previously described strategic initiatives fully take effect in the fall season. Even so, the second quarter's North American retail financial performance was a setback, with an adjusted EBITDA loss of $5 million. We expect full year adjusted EBITDA from North American retail operations to top last year, excluding Lord & Taylor discontinued operations. However, our expectation for improvement carries more risk than we anticipated at the end of the first quarter.

In terms of controlling the controllables, we are working as quickly as possible to further align in-store scheduling with customer demand, advance our digital operations and further improve our marketing mix.

On the real estate side, adjusted EBITDA totaled $57 million from joint ventures in the second quarter. Our pending European real estate and retail transaction recently received regulatory approval. If completed as expected in the fall, we anticipate real estate adjusted EBITDA will be diminished by approximately $40 million in 2019.

In Q2, our net loss from continuing operations totaled $462 million, including a noncash $150 million impairment of Canadian deferred tax assets; $89 million of transaction and restructuring costs; and a $17 million impairment related to the Saks OFF 5TH store closures. On a normalized basis, we posted a net loss of $171 million.

Moving on to our balance sheet. On a year-over-year basis, we've lowered our debt balance by nearly $800 million through proceeds from our earlier real estate transactions. At today's exchange rates, we have permanently reduced our U.S. term loan by $221 million, we have eliminated the $509 million Lord & Taylor mortgage and we ended the quarter with $107 million in lower outstanding borrowings on our ABL. With the pending sale of our European real estate and retail operations for $1.5 billion, we anticipate eliminating the balance of our $429 million outstanding on our term loan at the close.

Capital investments were $138 million during the second quarter of 2019, a decline from $188 million from the same quarter a year ago. While work is still being completed this year on Saks's grand renovation, the spending last year was substantially higher than this year. In addition to the work at Saks and strategic improvements at Hudson's Bay stores, we continue to modernize and cloud-enable our technology platform and fix the fundamentals of our digital operations, including improving site speed, order processing and checkout, order fulfillment and delivery speed.

Our CapEx expectations for the year are unchanged at $300 million to $325 million net of landlord incentives, as compared to $346 million in 2018 on a like-for-like basis.

That concludes my remarks. Operator, we will now open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Patricia Baker from Scotiabank.

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Patricia A. Baker, Scotiabank Global Banking and Markets, Research Division - Analyst [2]

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I have 3 questions. Okay. First of all, going back to the gross margin, and thank you for delineating the impact of all of the factors in the quarter. It's very helpful. So you mentioned that the transitions in vendor relationship -- relationships account for 110 basis points and that we -- that was lessened in the back half. And over the long term, I get that, that will positively impact gross margin. Do you believe, Helena, that you are where you need to be with respect to vendor relationships and you've completely done a thorough review? Or are you likely to make some further tweaks and changes going forward?

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Helena B. Foulkes, Hudson's Bay Company - CEO & Director [3]

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Sure. Do you want me to answer that one? You said you had a couple others. Yes.

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Patricia A. Baker, Scotiabank Global Banking and Markets, Research Division - Analyst [4]

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Yes, yes.

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Helena B. Foulkes, Hudson's Bay Company - CEO & Director [5]

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Sure. Thanks, Patricia. I think the team did a nice job delineating, as you say, where this was coming from. We feel very clear that we've quantified the impact of the vendor transitions. And as you can imagine, we spent a lot of time thinking about this. So the -- in some cases, we're moving away from the traditional wholesale model. And as you know, there is, over time, an inventory benefit of that move and a gross margin rate improvement, but we are going through that transition now. And as we said, that will lessen over time. So we're very clear about that. And then on other vendor relationships, I think we have a good handle on as well. We are transitioning inventory, as you know, but I think we've got that piece pretty well quantified.

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Patricia A. Baker, Scotiabank Global Banking and Markets, Research Division - Analyst [6]

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Okay. And then secondly, a lot of detail and color on just what you're changing at the Bay and revamping the merchandising strategy there, adding a lot of new interesting brands. And you said that it would take some time to roll that out. So are you phasing those in? And when do you think we'll see the Bay having that full offer and completely remerchandised?

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Helena B. Foulkes, Hudson's Bay Company - CEO & Director [7]

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Sure. I definitely expect improvement in the second half, but it will also take time. We're modernizing the mix, and I'm trying to give you a sense, in some of those brands, of that modernization. I'm really encouraged by the fact that as brands -- emerging brands and traditional brands even, want to come to the Canadian market, they're seeing Hudson's Bay as a place to come. And you can see that from Anthropologie Home and L.L.Bean and Mango as well as the other brands that I mentioned. But this is an overall mix move that we're making in terms of modernizing and returning, I would call it, to more slightly upscale. As you know, we went a little too downscale as we chased the Sears customer. And so I'm very pleased, and I can see in the early results of fall where those moves are having an impact. But I will also say that in some of the more traditional classic brands, we have work to do to reposition those. And so we are really working on how do we transition those classic brands at the right pace and how do we find all of these new emerging brands to replace some of that volume. And as I said, I think it's a real strength for us that brands want to be at Hudson's Bay. We are everywhere the Canadian consumer is. And we're known for being stylish and quality-driven, and so these things don't happen overnight, but I can see the progress.

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Patricia A. Baker, Scotiabank Global Banking and Markets, Research Division - Analyst [8]

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And just to follow up on that, Helena, when you named a number of those brands in your opening remarks, a lot of those will be new to the Canadian market, and I would assume that you'd be, in many respects, have exclusives?

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Helena B. Foulkes, Hudson's Bay Company - CEO & Director [9]

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Yes, exactly. And I think one of the things that we've been talking about as a team is we tend to be a little modest. We need to be bolder in terms of taking credit for that exclusivity. So Patricia, I know you are good at shopping our stores. When you're over at Queen Street, you'll notice lots more signage, for example, that highlights the fact that these are brands that are now exclusive to us in Canada.

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Patricia A. Baker, Scotiabank Global Banking and Markets, Research Division - Analyst [10]

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Okay. Exactly. And then thirdly, and just the financial discussion. And I was interested in the phrase that was used, that you have an outlook for the rest of the year, but there's more risk attached to that kind of forecast. Can you just talk about what specifically you see as those incremental risks?

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Rebecca A. Roof, Hudson's Bay Company - Interim CFO [11]

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I think -- Patricia, it's Becky, and thank you for joining us this morning. I think that as we mentioned, we are disappointed in our second quarter performance and it left us with just a little bit lower starting point for the rest of the year, and that's what's really driving those remarks.

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Operator [12]

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Our next question comes from Oliver Chen from Cowen.

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Oliver Chen, Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst [13]

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Regarding the promotional environment, what do you see going forward in terms of what's happening? And also, which parts of the portfolio was most impacted? And are you pleased with the inventory cleanliness at this point in the evolution of what you're seeing in the marketplace? Also Le Tote and thinking more broadly about e-commerce, which includes subscription as well as circular and players such as RealReal, [Castle], Poshmark and others, what -- how will you think that will manifest throughout your other banners? And how might you synergize that relationship strategically and financially?

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Helena B. Foulkes, Hudson's Bay Company - CEO & Director [14]

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Right. Okay. Thanks, Oliver. Yes, so the promotional intensity was most felt at Saks, and this was a result. And I think, in many ways, look, we were -- we've been leading the market from a top line perspective. And as I said, I think we were surprised to see, really, starting in June, online and store players breaking their clearance sales early and deeper. And it's pretty simple. We had to respond to that, and we did, and that had the impact that we're describing to you.

I think that, that's less of an issue in the third quarter just given the cycle of the luxury market. You traditionally, obviously, don't have markdowns in the third quarter, as you're still in the fall selling season. And as we look to the fourth quarter, last year, it really started. So I think we have less of a comp issue as we go into the second half as we think about promotional intensity. We're not expecting necessarily that it declines. We're just saying we started to see some of this last year.

As it relates to inventory, we're really pleased with our inventory position. I have to tell you, our aged inventory has never been in such a good spot. Our overall inventory is down. And I think it shows up for the customer. When I'm visiting stores, and I'll use the Bay as an example, the edit is much more clear. I mean, if you're there right now, you are just not seeing the level of clearance goods we had last year. It's more clear on the style point of view that we have. And we've also positioned inventory in both businesses to be ready for dramatically stronger e-commerce sales. So I feel really good about our inventory position.

As it relates to Le Tote, look, we were very, very pleased to be able to announce that deal. First, I would just want to thank all of our colleagues in the Lord & Taylor team. They've been tremendous through all of this strategic review. And they were thrilled because they now are part of a team that is very forward-looking. It's a new model, as you said, and I know you understand it really well, Oliver. We think that the opportunity for a customer to be able to walk inside a store and think about either renting or buying is really innovative. And we're certainly looking at that not just for Lord & Taylor, but thinking hard about the customers we serve in our other banners and the opportunity for us to bring them new services, whether it's rental or resale or subscription. And the idea of being a brand that brings you what's relevant for you is what's on our mind. So we have nothing to announce. There's nothing imminent, but we continue to look very hard at those emerging places within retail because we think that's what the customer wants.

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Oliver Chen, Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst [15]

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Okay. And our last question is about the e-commerce growth, which was impressive. Was it traffic or conversion-led? It looks like you made some great progress in [bopol], and as e-commerce evolves, how are you thinking about doing your best to maximize margins and minimize split shipments and other items as well as speed? Speed is so important given the reality of inventory as well as the customer demand, so would love your thoughts on the hurdles ahead in e-commerce.

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Helena B. Foulkes, Hudson's Bay Company - CEO & Director [16]

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Sure. Yes, again, I'm really proud of the team. They've made a lot of real progress. You recall last year, we made leadership changes in tech, in digital specifically, in marketing, and you can start to see the results coming together. I think that a lot of this is back to fixing the fundamentals. So the team has a daily standup call looking at Net Promoter Score, customer feedback and where we're falling down and fixing it realtime. And that's been things like site speed, checkout experience. We've had a real focus on delivery times. To your point, that's a place where, a year ago, we were falling down and it was taking too long to get product. And in a world where the customers' expectations are going up dramatically, we need to deliver on those expectations. So we've spent a lot of time fixing delivery as well as through our marketing, finding new customers. So it's been both traffic and conversion. As you know, as the world moves to mobile, conversion is lower on mobile. But overall, across all of our channels within digital, conversion is going up, and so our Net Promoter Score is going up. So look, what -- we're very, very happy with it, but we also know we have plenty of opportunity. And so we're quite confident that we are going to continue to grow.

The other thing I would highlight that I'm really pleased with is the integration of digital with our stores. And I think that's really where the magic can happen for an omnichannel retailer. So at the Bay, I would point out that 97% of our turn from e-commerce come to our stores. That's a terrific opportunity for us to give her what she is looking for when she comes back to stores, and it speaks to how much those customers find the convenience of the Hudson's Bay shopping experience.

And at Saks, we are rolling out digital tools every single week to our stylists who are using them to serve their customers in stores. I'm very impressed with how that team has embraced the digital tools and is really using it to understand what their customers are looking for and to bring new to their customers. So it's not a standalone digital e-commerce activity only. It's a real integration with our stores which is fueling some of this.

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Operator [17]

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Our next question comes from Sabahat Khan from RBC Capital Markets.

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Sabahat Khan, RBC Capital Markets, LLC, Research Division - Analyst [18]

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Just a little follow-up on the commentary on the men's category that you mentioned. Is this going to entail maybe more square footage? Are you changing brands? And then I guess in terms of competition, are you finding a lot of your competitors are also undertaking that strategy? Just want to understand the opportunity there and how you're investing behind it.

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Helena B. Foulkes, Hudson's Bay Company - CEO & Director [19]

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Sure. Well, look, the men's category is our fastest-growing category. And I think the team has done a great job, really.

I'll focus on Saks, the flagship store in particular, since we mentioned it, and I would love for all of you to go see it because it really looks spectacular. I think what they did really nicely was they brought the shoe business, which had been split across 2 floors, together. And in the center of the floor, with lots new -- lots of new brands and exclusive product. It also opens up the sight line to invite you into the rest of the product. And so we're off to a very strong start, as I mentioned. And we're very pleased with where we're going. The categories that -- and the brands that are growing are sort of traditional brands, I'll call them, high-end designer brands, but also new and emerging brands. And so you really see a nice mix of customers on that floor.

And it's not just in the Fifth Avenue store in New York City, but across the chain. Really nice progress the team has made. And when I talk to the supplier community, what they're really talking about is Saks for them is now starting to stand out to have a point of view on fashion for men, which they see as unique in the marketplace, and I think that's why we're winning.

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Sabahat Khan, RBC Capital Markets, LLC, Research Division - Analyst [20]

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All right. Great. And then just one on the Hudson's Bay. You mentioned some store rationalization across some of your other banners. I guess how are you feeling about the current Hudson's Bay footprint in Canada given some of the growth that you are seeing on the online side? Do you feel all the stores are complementary or necessary? How are you thinking about that over the next while?

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Helena B. Foulkes, Hudson's Bay Company - CEO & Director [21]

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Yes. We did a thorough review of the fleet when we made our choices that we announced a couple quarters ago to reduce store count. And all of our Hudson's Bay stores are 4-wall profitable, and so there are no plans to change anything with the fleet. What I will say is I think the real estate team has done a very nice job helping us think about new uses of space within the store. And the WeWork partnership, particularly in Queen Street, is very exciting to me. It allows us to take 1.5 floors on that store and really convert it over into workspace. That's interesting to us in other places. So we're not so much looking at the number of stores as maybe thinking about space within our stores. I talked before about how brands are coming to Canada and thinking about using Hudson's Bay, how do we use some of our retail square footage to invite them in, and we're open to lots of different things. So we're overall pleased with the portfolio. We're -- for 50% of Canadians we live -- they live within 16 kilometers of our store, and I think that speaks to just the overall brands that we have in the country.

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Operator [22]

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(Operator Instructions) And our next question comes from [Marjin Willing] from AMP.

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Unidentified Analyst, [23]

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This is [Marjin Willing] from AMP in Amsterdam. I've got some questions with regard to The Netherlands. Dutch media reported about the company leaving the country by the end of the year, retail stores. There are some leaked documents about the collective labor layoff. Can you elaborate some more on that? Are there plans to leave The Netherlands? And what are -- and what's the status of that plan?

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Jennifer Bewley, Hudson's Bay Company - Head of IR [24]

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Thank you so much for the questions. This is Jennifer. I think we've been pretty clear that our strategy is focused on North America, but The Netherlands business is going under a strategic review, and we don't have any update to offer at this time. It has been an underperforming business, and there's a possibility that we close some stores, even before we regain 100% ownership of that business. The biggest liability for us with The Netherlands is actually on our leases. So we have 10-year lease guarantees, and we're in year 2 of those guarantees. It's about $75 million in total rent per year in The Netherlands. And so we definitely suggest that people think through that liability and the probability of what that liability could potentially mean. But there's no -- there's been no firm decisions made on The Netherlands at this point, and so we just don't have an update.

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Unidentified Analyst, [25]

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Okay. One follow-up question about The Netherlands. Your second quarter loss in Europe was 69 -- sorry, CAD 96 million. What part of that is coming from The Netherlands?

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Jennifer Bewley, Hudson's Bay Company - Head of IR [26]

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We don't break that out.

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Operator [27]

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And our next question comes from Hannah Meehan from TIG.

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Brian Lombardi, [28]

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This is Brian Lombardi with TIG. Just got a question on the Special Committee process, and apologies if I missed the update on this. I think when the announcement was made about the special committee, the timing guidance was September and the sense was in conjunction with -- or ahead of earnings. Maybe I misunderstood. Could you please update us on that?

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Jennifer Bewley, Hudson's Bay Company - Head of IR [29]

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Sure. Brian, it's Jennifer. So the Special Committee has announced that we would be receiving an independent valuation work from TD Securities in September, but they have not announced anything beyond that. So you know as much as we do with that announcement, there was never a connection between earnings and the Special Committee. And so as you can appreciate, since the process is ongoing, we don't have anything to share. So that is where we are.

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Operator [30]

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And I am showing no additional questions from our phone lines. I'd now like to turn the conference back over to Jennifer Bewley for any closing remarks.

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Jennifer Bewley, Hudson's Bay Company - Head of IR [31]

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Thank you so much for your time today and your interest in Hudson's Bay. For further questions, please give me a call at Investor Relations to be added to our queue. Have a great day.

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Operator [32]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.