Hudson's Bay Company Reports Third Quarter 2015 Financial Results
Hudson's Bay Company ("HBC" or the "Company") (TSX:HBC) today announced its third quarter financial results for the 13 and 39 weeks ended October 31, 2015. The Company also announced today that its Board of Directors has approved a quarterly dividend to be paid on January 15, 2016, to shareholders of record at the close of business on December 31, 2015. Unless otherwise indicated, all amounts are expressed in Canadian dollars.
Third Quarter Year-Over-Year Highlights
- Consolidated sales growth of 34.1% to approximately $2.6 billion
- Consolidated same store sales growth of 12.9%
On a constant currency basis, consolidated same store sales
increase of 2.0%
- Department Store Group ("DSG") same store sales increase of 5.1%
- Saks Fifth Avenue same store sales decrease of 3.6%
- Saks Fifth Avenue OFF 5TH ("OFF 5TH") same store sales increase of 2.8%
- HBC Europe (GALERIA Kaufhof, Galeria INNO and Sportarena) same store sales increase of 6.6% for the one month of ownership
- Digital sales increase of 36.3%, up 23.9% on a constant currency basis
- SG&A rate on a comparable basis improved by 40 basis points to 34.7%
- Adjusted EBITDAR of $272 million compared to $182 million
- Adjusted EBITDA of $160 million compared to $116 million
- Net Earnings of $1 million compared to a Net Loss of $13 Million
"This was an important quarter for our retail business as we continued to execute our strategy of delivering operational improvements while growing and diversifying our retail offerings through targeted acquisitions. With the addition of HBC Europe during the quarter, we now generate the majority of our sales outside the U.S., and have a significant European retail platform from which we can explore additional growth opportunities." stated Richard Baker, HBC's Governor and Executive Chairman. "We closed the GALERIA acquisition, with HBS Global Properties purchasing 41 of the properties, and subsequently sold a portion of our equity in HBS Global Properties during the fourth quarter, using the proceeds to de-leverage HBC's balance sheet. Our strategy of utilizing real estate to help finance targeted acquisitions should enable us to continue to drive profitable growth in our retail operations."
Added Jerry Storch, HBC's Chief Executive Officer, "We are pleased with our third quarter results in a difficult operating environment. We grew sales in both our stores and on the internet, and our results reflect the benefits of our focus on SG&A and the diversity of our retail business in both geography as well as consumer segment. In particular, our Department Store Group performed extremely well given overall market conditions. HBC Europe and OFF 5TH segments also saw solid growth, while the luxury business at Saks Fifth Avenue continues to face headwinds. We made good progress on our initiatives in the quarter as we continue to drive profitability while investing in the long term vision of HBC. We also remain focused on strengthening our digital capabilities, expanding OFF 5TH, bringing Saks Fifth Avenue and OFF 5TH to Canada and leveraging our scale to capture synergies and promote efficiencies across our businesses."
Throughout this press release, the terms "Normalized SG&A", "Legacy SG&A" "Adjusted EBITDAR", "Adjusted EBITDA", and "Normalized Net (Loss) Earnings" refer to financial results that have been adjusted to, among other things, exclude certain non-recurring items and charges and, in the case of Adjusted EBITDA and Adjusted EBITDAR, certain adjustments related to our Joint Venture entities. In addition, certain references are made to financial results on a constant currency basis. For a full explanation of the Company's use of non-IFRS measures, including the relevant definitions and reconciliations to reported 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 13 and 39 Weeks Ended October 31, 2015 (the "MD&A"). DSG refers to the Company as structured prior to the acquisition of Saks Incorporated ("Saks") in 2013 (i.e., excluding Saks Fifth Avenue and OFF 5TH). HBC Europe refers to GALERIA Kaufhof, Galeria INNO and Sportarena. Legacy HBC refers to the Company as structured prior to the acquisition of HBC Europe.
Third Quarter Summary
All comparative figures below are for the 13-week period ended October 31, 2015 compared to the 13-week period ended November 1, 2014.
Retail sales, which include digital sales from all banners, were $2,566 million, an increase of $653 million or 34.1% from $1,913 million in the prior year. Same store sales growth was 12.9%. On a constant currency basis, consolidated same store sales increased by 2.0%. Same store sales on a constant currency basis increased by 5.1% at DSG, by 2.8% at OFF 5TH and by 6.6% at HBC Europe for the one month of ownership, and decreased by 3.6% at Saks Fifth Avenue. Digital sales increased by 23.9% on a constant currency basis compared to the prior year, reflecting the Company's continued strategic focus on growing this channel.
There was variability of performance among merchandise categories, with many categories performing well while a few categories saw some pressure. At DSG there was sales growth in home products, menswear and cosmetics. At OFF 5TH, growth was driven by women's shoes, handbags and menswear while at Saks Fifth Avenue, strength in outerwear and women's advanced contemporary was more than offset by weakness in men's luxury collections and women's and men's ready to wear collections.
Gross profit as reported was $1,074 million compared to $787 million for the prior year, a year-over-year improvement of $287 million. The inclusion of HBC Europe for the month of October, as well as sales growth at our existing banners, combined with a favourable currency conversion on U.S. dollar denominated sales, drove the increase in gross profit dollars.
Going forward, the inclusion of HBC Europe is expected to impact HBC's reported gross profit and expense margins. The cost structure in Europe is such that gross profit margins are generally higher than those experienced in North America. This is in turn offset by higher SG&A expense, driven in part by increased labor costs. As a result, gross profit and SG&A rates reported by HBC going forward will not be directly comparable to historical results.
SG&A expenses were $1,012 million compared to $690 million for the prior year. Excluding normalization items described below of $107 million ($19 million in the prior year), Normalized SG&A expenses were $905 million compared to $671 million, an increase of $234 million. In addition to these normalization items, SG&A expenses were negatively impacted in the quarter by, among other things, the inclusion of HBC Europe, as well as the weakening of the Canadian dollar as U.S. dollar denominated expenses are converted into Canadian dollars.
Expense reduction is an area of focus for HBC. Recently, HBC announced an initiative to reduce SG&A expenses through its North American operations realignment program. The Company is pleased to report that these efforts have already had a meaningful impact on our SG&A rate. In order to highlight this impact, additional information is being included in the table below, which provides a reconciliation of SG&A as reported to Legacy SG&A:
|Thirteen week period ended||Thirty-nine week period ended|
|(millions of Canadian dollars)||October 31, 2015||November 1, 2014||October 31, 2015||November 1, 2014|
|SG&A as reported||1,012||690||2,567||2,023|
|Non-cash pension expense||(7)||(6)||(20)||(20)|
|Share based compensation||(6)||(5)||(17)||(11)|
|Saks Acquisition and integration related expenses||(7)||(14)||(22)||(49)|
|Kaufhof Acquisition costs||(70)||—||(79)||—|
|Joint ventures transaction costs||(3)||—||(35)||—|
|Foreign exchange adjustment||21||—||47||—|
|Restructuring and other||(10)||6||(9)||6|
|North American realignment initiative||(25)||—||(25)||—|
|Total normalizing adjustments||(107)||(19)||(160)||(74)|
|HBC Europe related SG&A||(148)||—||(148)||—|
|Net rent expense to joint ventures||(3)||—||(4)||—|
Legacy SG&A constant currency basis
|Legacy Retail Sales constant currency basis excluding HBC Europe||1,942||1,913||5,703||5,537|
Legacy SG&A as a percentage of Legacy Retail Sales
On a comparable basis, excluding the impacts of HBC Europe, the joint ventures, and foreign exchange, the Legacy SG&A rate improved 40 basis points compared to the prior year.
As previously disclosed, the Company is investing a total of approximately $50 million in strategic initiatives during Fiscal 2015. These initiatives include strategic investments in our digital business, pre-opening costs associated with the introduction of Saks Fifth Avenue and OFF 5TH to Canada and accelerated OFF 5TH openings in the U.S.
These increases in SG&A are partially offset by total operating synergies of $16 million realized in the third quarter, $8 million of which resulted from the Company's North American realignment initiative. As previously announced, HBC expects this initiative to generate a total of $75 million in annual savings, the full benefit of which we expect to realize during Fiscal 2016.
Adjusted EBITDAR for the third quarter was $272 million compared to $182 million in the prior period. After taking into account third party rent expense of $94 million and net cash rents to the joint ventures of $18 million, Adjusted EBITDA was $160 million compared to $116 million for the prior year.
Finance costs were $29 million in the quarter, compared to $47 million for the third quarter of Fiscal 2014. The decrease is primarily related to non-cash finance income generated by mark-to-market adjustments associated with the valuation of the common share purchase warrants outstanding.
Net Earnings were $1 million in the quarter, compared to a Net Loss of $13 million in the third quarter a year ago. Normalized Net Loss was $7 million in the quarter, compared to Normalized Net Earnings of $3 million in the third quarter a year ago. Normalized items include the net-of-tax gain recognized on the dilution of ownership in HBS Global Properties of $91 million in the third quarter of Fiscal 2015.
Inventory at the end of the third quarter increased by $1,360 million compared to the third quarter of Fiscal 2014. The primary driver of the increase was the inclusion of HBC Europe. Inventory levels were also impacted by, among other things, the weakening of the Canadian dollar, and overall sales growth at the Company, including the addition of 11 new OFF 5TH stores.
All comparative figures below are for the 39-week period ended October 31, 2015 compared to the 39-week period ended November 1, 2014.
Retail sales, which include digital sales from all banners, were $6,676 million, an increase of $1,139 million or 20.6% from $5,537 million in the prior period. Same store sales growth was 12.9%. On a constant currency basis, consolidated same store sales increased by 2.9%. Same store sales on a constant currency basis increased by 5.0% at DSG, by 8.3% at OFF 5TH and by 6.6% at HBC Europe for the one month of ownership, and decreased by 0.9% at Saks Fifth Avenue. Digital sales increased by 25.5% on a constant currency basis when compared to the prior year, reflecting the Company's continued strategic focus on growing this channel.
In terms of merchandise category performance, sales growth at DSG was driven by menswear, ladies apparel, home products and cosmetics. The decline in sales at Saks Fifth Avenue was driven by ladies apparel partially offset by growth in cosmetics, while at OFF 5TH, sales growth was driven by women's shoes, women's handbags and menswear.
Gross profit as reported was $2,738 million compared to $2,203 million for the prior year. Adjusting for the negative impact associated with the amortization of inventory related purchase accounting adjustments of $6 million in the current year and $40 million in Fiscal 2014, comparable gross profit increased by $501 million. Improved performance at DSG and Saks, the inclusion of HBC Europe gross profit for the month of October, combined with a favourable currency conversion benefit on U.S. dollar denominated sales, drove the increase in gross profit dollars.
Adjusting for the amortization of inventory related purchase accounting, gross profit rate was 41.1% of retail sales, a 60 basis point improvement over the comparable gross profit rate of 40.5% during the same period of the prior period. The majority of the improvement is the result of the inclusion of HBC Europe for the month of October.
SG&A expenses were $2,567 million compared to $2,023 million for the prior year. Excluding normalization items of $160 million ($74 million in the prior year), Normalized SG&A expenses were $2,407 million compared to $1,949 million, an increase of $458 million. In addition to these normalization items, SG&A expenses were negatively impacted by, among other things, the inclusion of HBC Europe, as well as the weakening of the Canadian dollar as U.S. dollar denominated expenses are converted into Canadian dollars.
The current year SG&A expenses included the impact of incremental strategic investments in our digital business, pre-opening costs associated with the introduction of Saks Fifth Avenue and OFF 5TH to Canada and accelerated OFF 5TH openings in the U.S., and the negative impact associated with the conforming change in the classification of advertising credits between SG&A and gross profit as they relate to the Saks business adopted in the fourth quarter of Fiscal 2014. These increases are partially offset by total operating synergies of $43 million realized in the first three quarters of Fiscal 2015.
Through the third quarter, the Company has realized $91 million of the previously announced $100 million synergy target related to the Saks acquisition. Separately, on September 29, 2015, the Company announced actions to increase efficiencies across North America by implementing best practices as well as leveraging the increased scale of the operations. This realignment resulted in $8 million of savings during the third quarter, and is expected to achieve a total of $75 million in annual savings during Fiscal 2016. In the third quarter, the Company incurred a non-recurring expense of $25 million related to these actions.
Adjusted EBITDAR was $577 million compared to $485 million in the first three quarters of Fiscal 2014. After taking into account third party rent expense of $236 million and the net cash rents to the real estate joint ventures of $19 million, Adjusted EBITDA was $322 million compared to $294 million for the same period.
Finance costs were $128 million, compared to $151 million for the prior year. The decrease is primarily related to penalties of $12 million in connection with early repayment of debt in the prior year, as well as non-cash finance income generated in the current year by mark-to-market adjustments associated with the valuation of common share purchase warrants outstanding.
Net Earnings were $14 million in the period, compared to $127 million in the prior year. Normalized Net Loss was $93 million, compared to $52 million in the prior year.
During the third quarter, the Company opened six new OFF 5TH stores located in Vacaville, California; Cerritos, California; Santa Barbara, California; Newark, Delaware; Lutz, Florida and Chicago, Illinois. The Company closed three Home Outfitters stores located in Calgary, Alberta; Guelph, Ontario and Newmarket, Ontario.
|STORE INFORMATION AS AT October 31, 2015|
|Lord & Taylor||50||6,898|
|Saks Fifth Avenue||38||4,741|
(1) HBC operates two Hudson's Bay outlets, two Zellers stores and four Lord & Taylor outlets that are excluded from store count and gross leasable area.
The Company also announced today that its Board of Directors has approved a quarterly dividend to be paid on January 15, 2016, to shareholders of record at the close of business on December 31, 2015. The dividend is in the amount of $0.05 per Common Share and is designated as an "eligible dividend" for Canadian tax purposes.
Fiscal 2015 and 2016 Outlook
Based upon current trends in the overall retail industry environment,
the impact of terrorism incidents on HBC's businesses in Belgium and
Germany (including store closures), and management's views on, among
other things, the current and anticipated operating environment and our
ongoing initiatives, management has updated its Fiscal 2015 and 2016
outlook, which is fully qualified by the "Forward-Looking Statements"
section of this press release.
|(Canadian dollars)||Fiscal 2015||Fiscal 2016|
|Sales||$10.7 to $11.2 billion||$14.2 to $15.2 billion|
|Adjusted EBITDAR||$1,165 to $1,235 million||$1,560 to $1,710 million|
|Adjusted EBITDA||$730 to $800 million||$800 to $950 million|
The updated outlook represents significant growth in the Company's Adjusted EBITDAR and Adjusted EBITDA when compared to HBC's Fiscal 2014 results of $869 million and $612 million, respectively. This reflects HBC's ongoing focus on strategic growth initiatives, including the addition of HBC Europe, accelerated pace of new store openings at OFF 5TH, strengthening digital and all-channel presence and capabilities, and the 2016 expansion of Saks Fifth Avenue and OFF 5TH into Canada.
The previous Fiscal 2015 capital expenditure guidance of $350 million to $400 million, net of landlord incentives, was only related to Legacy HBC. Based upon current trends, the Company is lowering its capital expenditure guidance for Fiscal 2015, in respect of Legacy HBC and HBC Europe, to between $300 million and $350 million, net of landlord incentives. This activity includes the addition of one Saks Fifth Avenue store and 15 OFF 5TH stores.
This outlook implies low single digit same store sales growth, calculated on a constant currency basis and reflects exchange rate assumptions of USD:CAD = 1:1.30 and EUR:CAD = 1:1.50 for Fiscal 2015 and USD:CAD = 1:1.32 & EUR:CAD = 1:1.50 for Fiscal 2016. Any variation in these foreign exchange rate assumptions could impact the guidance. The actual average foreign exchange rates incorporated in the Company's reported sales results for the third quarter of Fiscal 2015 were USD:CAD = 1:1.32 and EUR:CAD = 1:1.47.
Conference Call to Discuss Results
Richard Baker, HBC's Governor and Executive Chairman, Jerry Storch, HBC's Chief Executive Officer and Paul Beesley, HBC's Chief Financial Officer, will discuss the third quarter financial results and other matters during a conference call on December 11, 2015 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 13 and 39 weeks ended October 31, 2015 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 tables set out summary unaudited consolidated financial information and supplemental information for the periods indicated. The summary financial information set out below has been derived from unaudited interim condensed consolidated financial statements, prepared in accordance with International Accounting Standard 34, Interim Financial Reporting, for the 13 and 39 weeks ended October 31, 2015. The unaudited financial information presented has been prepared on a basis consistent with our audited consolidated financial statements for Fiscal 2014. 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 13 and 39 weeks ended October 31, 2015.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(millions of Canadian dollars, except per share amounts)
|Thirteen weeks ended||Thirty-nine weeks ended|
|Oct 31, 2015||Nov 1, 2014||Oct 31, 2015||Nov 1, 2014|
|Cost of sales||(1,492)||(1,126)||(3,938)||(3,334)|
|Selling, general and administrative expenses||(1,012)||(690)||(2,567)||(2,023)|
|Depreciation and amortization||(110)||(84)||(311)||(247)|
|Gain on contribution of assets to joint ventures||—||—||133||—|
|Gain on sale and leaseback transaction||—||—||—||308|
|Operating (loss) income||(48)||13||(7)||241|
|Finance costs, net||(29)||(47)||(128)||(151)|
|Share of net loss in joint ventures||(64)||—||(71)||—|
|Dilution gain from investment in the HBS Joint Venture||148||—||148||—|
|Earnings (loss) before income tax||7||(34)||(58)||90|
|Income tax (expense) benefit||(6)||21||72||37|
|Net earnings (loss) for the period||1||(13)||14||127|
|Net earnings (loss) per common share|
The following table shows additional summary supplemental information for the periods indicated.
|Thirteen week period ended||Thirty-nine week period ended|
|(millions of Canadian dollars except per share amounts)||
Oct 31, 2015
Nov 1, 2014
Oct 31, 2015
Nov 1, 2014
|Normalized Net (Loss) Earnings for the period (1)||(7)||3||(93)||(52)|
|Normalized Net (Loss) Earnings per Common Share – basic (1)||(0.04)||0.02||(0.51)||(0.29)|
|Normalized Net (Loss) Earnings per Common Share – diluted (1)||(0.04)||0.02||(0.50)||(0.29)|
|Declared dividend per Common Share||0.05||0.05||0.15||0.15|
(1) See tables in third quarter MD&A for a reconciliation of Net Earnings (Loss) to Normalized Net Loss
CONDENSED CONSOLIDATED BALANCE SHEETS
(millions of Canadian dollars)
|Oct 31, 2015||Nov 1, 2014(1)||Jan 31, 2015|
|Trade and other receivables||370||128||212|
|Income taxes recoverable||7||52||7|
|Other current assets||154||115||69|
|Total current assets||4,773||2,926||2,829|
|Property, plant and equipment||4,797||4,111||4,606|
|Pensions and employee benefits||58||58||69|
|Deferred tax assets||263||244||240|
|Investments in joint ventures||600||—||—|
|Loans and borrowings||582||672||246|
|Other payables and accrued liabilities||964||595||603|
|Income taxes payable||4||7||8|
|Total current liabilities||3,608||2,579||2,144|
|Loans and borrowings||3,314||2,365||2,723|
|Pensions and employee benefits||575||99||109|
|Deferred tax liabilities||694||634||668|
|Investment in joint venture||47||—||—|
|Accumulated other comprehensive income||324||109||319|
|Total shareholders' equity||2,504||2,175||2,492|
|Total liabilities and shareholders' equity||12,297||8,541||9,072|
(1) During Fiscal 2014, the Company identified measurement period adjustments based on new information relating to deferred taxes. The impacts of the adjustments to previously reported amounts are provided in more detail in Note 4 of the Company's unaudited Interim Condensed Consolidated Financial Statements for the 13 and 39 Weeks Ended October 31, 2015.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions of Canadian dollars)
|Oct 31, 2015||Nov 1, 2014|
|Net earnings for the period||14||127|
|Deduct: Income tax benefit||(72)||(37)|
|Deduct: Dilution gain from investment in the HBS Joint Venture||(148)||—|
|Add: Share of net loss in joint ventures||71||—|
|Add: Finance costs, net||128||151|
|Operating (loss) income||(7)||241|
|Net cash income taxes received||1||4|
|Interest paid in cash||(107)||(102)|
|Distributions of earnings from joint ventures||59||—|
|Items not affecting cash flows:|
|Depreciation and amortization||311||247|
|Net defined benefit pension and employee benefits expense||20||20|
|Other operating activities||(48)||(5)|
|Share of rent expense to joint ventures||(89)||—|
|Gain on contribution of assets to joint ventures||(133)||—|
|Gain on sale and leaseback transaction||—||(308)|
|Share based compensation||23||12|
|Settlement of share based compensation grants||(3)||—|
|Changes in operating working capital:|
|Increase in trade and other receivables||(89)||(19)|
|Increase in inventories||(813)||(512)|
|Increase in other assets||(54)||(47)|
|Increase in trade and other payables, accrued liabilities and provisions||263||343|
|Increase in other liabilities||28||6|
|Net cash outflow for operating activities||(638)||(120)|
|Proceeds from landlord incentives||118||74|
|Proceeds from lease terminations and other non-capital landlord incentives||22||51|
|Proceeds from sale of assets||—||35|
|Proceeds from sale and leaseback transaction||—||650|
|Proceeds from contribution of assets to joint ventures||1,134||—|
|Acquisition of Kaufhof Operating Business, net of cash acquired||(745)||—|
|Investment in joint ventures||(186)||—|
|Net cash (outflow for) inflow from investing activities||(35)||519|
|Long-term loans and borrowings:|
|Short-term loans and borrowings:|
|Net borrowings from asset-based credit facilities||306||176|
|Net decrease in other short-term borrowings||(1)||(1)|
|Payments on finance leases||(19)||(15)|
|Net cash inflow from (outflow for) financing activities||810||(377)|
|Foreign exchange (loss) gain on cash||(13)||1|
|Increase in cash||124||23|
|Cash at beginning of period||168||21|
|Cash at end of period||292||44|
The following table shows the reconciliation of Net Earnings (Loss) to EBITDA, Adjusted EBITDAR as well as Adjusted EBITDA.
|Thirteen week period ended||Thirty-nine week period ended|
|(millions of Canadian dollars)||October 31, 2015||November 1, 2014||October 31, 2015||November 1, 2014|
|Net Earnings (Loss)||1||(13)||14||127|
|Finance costs, net||29||47||128||151|
|Income tax expense (benefit)||6||(21)||(72)||(37)|
|Share of net loss in joint ventures||64||—||71||—|
|Gain on contribution of assets to joint ventures||—||—||(133)||—|
|Gain on Queen Street Sale (1)||—||—||—||(308)|
|Dilution gain from investment in the HBS Joint Venture (2)||(148)||—||(148)||—|
|Non-cash pension expense||7||6||20||20|
|Depreciation and amortization||110||84||311||247|
|Share based compensation||6||5||17||11|
|Normalization and rent adjustments|
|Saks Acquisition and integration related expenses||7||14||22||49|
|Kaufhof Acquisition costs||70||—||79||—|
|Joint ventures transaction costs||3||—||35||—|
|Amortization of inventory purchase price accounting adjustments (3)||
|Foreign exchange adjustment (4)||(21)||—||(47)||—|
|Restructuring and other||10||(6)||9||(6)|
|North American realignment initiative (5)||25||—||25||—|
|Net rent expense to joint ventures (6)||3||—||4||—|
|Third party rent expense||94||66||236||191|
|Total normalizing and rent adjustments||197||74||369||274|
|Third party rent expense||(94)||(66)||(236)||(191)|
|Cash rent to joint ventures||(70)||—||(78)||—|
|Cash distributions from joint ventures||52||—||59||—|
(1) Realigned from normalization adjustments in prior year presentation
to EBITDA in the current year.
(2) Represents the gain realized as a result of change in ownership related to the Company's investment in HBS Joint Venture.
(3) Relating to the Saks Acquisition in the prior year and the GALERIA Acquisition in the current year.
(4) Represents the impact of gains losses related to the translation of U.S. dollar denominated asset and liability balances.
(5) Represents costs associated with the implementation of the Company's North American operations realignment program announced on September 29, 2015.
(6) Rent expense to the joint ventures net of reclassification of rental income related to the Company's ownership interest in the joint ventures (see note 10 to the unaudited interim condensed consolidated financial statement for the thirteen and thirty-nine weeks ended October 31, 2015).
EBITDA is a non-IFRS measure that we use to assess our operating performance. EBITDA is defined as Net Earnings (Loss) before finance costs, income tax expenses (benefit), share of net loss in joint ventures, the gain on contribution of assets to real estate joint ventures, gain on contribution of assets to real estate joint ventures, the gain on Queen Street Sale, dilution gain from investments in joint ventures, and non-cash pension expense, depreciation and amortization expense, and non-cash share based compensation expense. EBITDAR is defined as EBITDA before rent expense to third parties and net rent expense to joint ventures.
Adjusted EBITDAR is defined as EBITDAR 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. Adjusted EBITDA is defined as Adjusted EBITDAR less rent to third parties, less cash rent to the real estate joint ventures plus cash distributions from the real estate joint ventures. Normalized Net (Loss) Earnings is defined as Net Earnings (Loss) 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. Normalized SG&A is defined as SG&A adjusted to exclude: (i) business and organization restructuring/realignment charges; (ii) merger/acquisition costs and expenses; (iii) normalizing adjustments, if any, related to transactions that are not associated with day-to-day operations. In addition, for comparative purposes, we are introducing Legacy SG&A which is defined as Normalized SG&A less HBC Europe related SG&A and net rent expense to joint ventures.
We have included EBITDA, Adjusted EBITDAR, Adjusted EBITDA, Normalized Net (Loss) Earnings, Normalized SG&A and Legacy SG&A to provide investors and others with supplemental measures of our operating performance. We believe EBITDA, Adjusted EBITDAR, Adjusted EBITDA, Normalized Net (Loss) Earnings, Normalized SG&A and Legacy SG&A 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, rating agencies and other interested parties frequently use EBITDA, Adjusted EBITDAR, Adjusted EBITDA, Normalized Net (Loss) Earnings, and Normalized SG&A in the evaluation of issuers, many of which present similar metrics when reporting their results. Our management also uses Adjusted 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, Adjusted EBITDAR, Adjusted EBITDA, Normalized Net (Loss) Earnings or Normalized SG&A differently than we do, these metrics are not comparable to similarly titled measures reported by other companies. This press release makes reference to certain financial results expressed on a constant currency basis. In calculating the same store sales change on a constant currency basis, prior year foreign exchange rates are applied to both current year and prior year same store sales. This enhances the ability to compare underlying sales trends by excluding the impact of foreign currency exchange rate fluctuations. Definitions and calculations of same store sales differ among companies in the retail industry.
About Hudson's Bay Company
Hudson's Bay Company is one of the fastest-growing department store retailers in the world, based on its successful formula of driving the performance of high quality stores and their all-channel offerings, unlocking the value of real estate holdings and growing through acquisitions. Founded in 1670, HBC is the oldest company in North America. With the recent completion of its acquisition of GALERIA Kaufhof Group, HBC's portfolio today includes nine banners, in formats ranging from luxury to better department stores to off price, with more than 460 stores and 65,000 employees around the world.
In North America, HBC's leading banners include Hudson's Bay, Lord & Taylor, Saks Fifth Avenue and Saks OFF 5TH, along with Find @ Lord & Taylor and Home Outfitters. In Europe, its banners include GALERIA Kaufhof, the largest department store group in Germany, Belgium's only department store group Galeria INNO, as well as Sportarena.
HBC has significant investments in real estate joint ventures. It has partnered with Simon Property Group Inc. in the HBS Global Properties Joint Venture, which owns properties in the United States and Germany. In Canada, it has partnered with RioCan Real Estate Investment Trust in the RioCan-HBC Joint Venture.
Certain statements made in this news release, including, but not limited to, the benefits that are expected to result from the acquisition of HBC Europe, the impact on the Company's reported gross profit and expense margins as a result of the acquisition of HBC Europe, the benefits that are expected to result from the North American operations realignment initiative, the Company's prospects for future growth opportunities, including targeting acquisitions, the impact on sales as a result of current trends in the retail industry, the Company's growth strategies of improving retail operations, unlocking the value of real estate, and earnings guidance in respect of Sales, Adjusted EBITDAR and Adjusted EBITDA for each of Fiscal 2015 and 2016, and other statements that are not historical facts, are forward-looking. Often but not always, forward-looking statements can be identified by the use of forward-looking terminology such as "may", "will", "expect", "believe", "estimate", "plan", "could", "should", "would", "outlook", "forecast", "anticipate", "foresee", "continue" or the negative of these terms or variations of them or similar terminology.
Implicit in forward-looking statements in respect of Sales, Adjusted EBITDAR and Adjusted EBITDA for Fiscal 2015 and 2016, are certain current assumptions, including, among others, the Company achieving low single digit same store sales growth on a constant currency basis in each of Fiscal 2015 and 2016, the Company realizing annualized cost savings and synergies during Fiscal 2016 totaling $75 million from the recently announced North American operations realignment program, the Company achieving $100 million in synergies from the continued integration of Saks, the Company opening new stores in North America, the Company maintaining a significant ownership interest in HBS Global Properties and the RioCan-HBC Joint Venture, and assumptions regarding currency exchange rates for each of Fiscal 2015 and 2016. Specifically, we have assumed the following exchange rates: €1 = C$1.50 and US$1 = C$1.30 for Fiscal 2015, and €1 = C$1.50; US$1 = C$1.32 for Fiscal 2016. These current assumptions, although considered reasonable by the Company at the time of preparation, may prove to be incorrect. Readers are cautioned that actual future operating results and economic performance of the Company, including with respect to our anticipated Sales, Adjusted EBITDAR and Adjusted EBITDA for each of Fiscal 2015 and 2016, are subject to a number of risks and uncertainties, including, among others described below, general economic, market and business conditions, changes in foreign currency rates from those assumed, the risk that the Company may not achieve same store sales growth on a constant currency basis and the risk that the Company many not achieve the contemplated cost savings and synergies as described above, and could differ materially from what is currently expected as set out above.
Although HBC believes that the forward-looking statements in this news release are based on information and assumptions that are current, reasonable and complete, these statements are by their nature subject to a number of factors that could cause actual results to differ materially from management's expectations and plans as set forth in such forward-looking statements for a variety of reasons. Some of the factors - many of which are beyond HBC's control and the effects of which can be difficult to predict – include, among others: ability to execute retailing growth strategies, ability to continue same store sales growth, changing consumer preferences, ability to realize synergies and growth from strategic acquisitions, ability to make successful acquisitions and investments, successful inventory management, ability to upgrade and maintain our information systems to support the organization and protect against cyber-security threats, privacy breach, loss of key personnel, ability to retain key personnel of HBC Europe, ability to attract and retain qualified employees, exposure to changes in the real estate market, successful operation of the joint ventures to allow the Company to realize the anticipated benefits, loss of flexibility with respect to properties in the joint ventures, exposure to environmental liabilities, changes in demand for current real estate assets, increased competition, change in spending of consumers including the impact of unfavourable or unstable political conditions, fluctuations in the U.S. dollar, Canadian dollar, Euro and other foreign currencies, increase in raw material costs, extreme weather conditions or natural disasters, ability to manage indebtedness and cash flow, risks related with increasing indebtedness, restrictions of existing credit facilities reducing flexibility, ability to maintain adequate financial processes and controls, ability to maintain dividends, developments in the credit card and financial services industries, and other risks inherent to the Company's business and/or factors beyond the Company's control which could have a material adverse effect on the Company.
HBC cautions that the foregoing list of important factors and assumptions is not exhaustive and other factors could also adversely affect its results. For more information on the risks, uncertainties and assumptions that could cause HBC's actual results to differ from current expectations, please refer to the "Risk Factors" section of HBC's third quarter Management Discussion & Analysis dated December 10, 2015, as well as HBC's other public filings, available at www.sedar.com and at www.hbc.com.
The forward-looking statements contained in this news release describe HBC's expectations at the date of this news release and, accordingly, are subject to change after such date. Except as may be required by applicable Canadian securities laws, HBC does not undertake any obligation to update or revise any forward-looking statements contained in this news release, whether as a result of new information, future events or otherwise. Readers are cautioned not to place undue reliance on these forward-looking statements.