Hudson’s Bay Company Reports Second Quarter 2014 Financial Results

Hudson's Bay Company (“HBC” or the “Company”) (TSX:HBC) today announced its results for the 13-week period ended August 2, 2014 (the “second quarter”).

Second Quarter Highlights (13-week period ended August 2, 2014)

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

• Consolidated same store sales grew by 1.9% on a local currency basis.
  • Hudson's Bay and Lord & Taylor (together, “Department Store Group” or “DSG”) grew by 1.1%.
  • Saks Fifth Avenue grew by 2.2%.
  • Saks Fifth Avenue OFF 5TH (“OFF 5TH") grew by 14.9%.
• Digital sales were $162 million, including $116 million from Saks and growth of over 80% at DSG.
• Normalized EBITDA was $81 million, or 4.6% of sales, compared to $60 million, or 6.3% of sales, in the second quarter of Fiscal 2013.
• Four new OFF 5TH locations opened: Boston, Massachusetts; San Diego, California; Charlotte, North Carolina; and Louisville, Kentucky.

“HBC’s quarter was characterized by strong performance from the higher end of our businesses, demonstrating the sustained strength of affluent consumers, and softer performance from our more moderate businesses. OFF 5TH, buoyed by its new digital business, experienced outsized same store sales growth for the quarter,” stated Richard Baker, HBC’s Governor and Chief Executive Officer. “We continued to invest in HBC Digital, where we witnessed tremendous sales growth. Based upon our results for the first half of the year and our positioning for the back-to-school and holiday quarters, we are affirming our outlook for full-year Fiscal 2014.”

“We continue to execute on the five core strategies of our long-range plan to grow our sales and expand our EBITDA margin – driving digital sales across all our banners, growing Saks OFF 5TH, bringing Saks Fifth Avenue and OFF 5TH to Canada, driving outsized growth at our top doors and driving synergies and efficiencies across our business. In the second quarter, we made important progress on each of these strategies, including continued strength from digital sales.”

Strategic Update

During the second quarter, HBC began the integration of the Home Outfitters business with the Home business of the Hudson’s Bay banner. “Joining our two Home businesses not only allows us to create a more powerful Home destination, but also drives efficiency by combining our merchandising and marketing efforts and organizations,” stated Donald Watros, HBC’s President. HBC is currently in the process of assessing its Home Outfitters locations and previously announced the closing of locations in Mississauga, Ontario and Abbotsford, British Columbia in December 2014 and January 2015, respectively. Beginning with this year’s third quarter results, Home Outfitters will be included in HBC’s Department Store segment.

Locations

During the second quarter, the Company opened four new OFF 5TH stores located in Boston, Massachusetts; San Diego, California; Charlotte, North Carolina and Louisville, Kentucky. During the third quarter, HBC expects to open a Lord & Taylor store in Albany, New York, OFF 5TH stores in Eagan, Minnesota, Costa Mesa, California and Columbus, Ohio and a Hudson’s Bay Outlet in Mirabel, Quebec.

HBC also recently announced the planned opening of a Saks Fifth Avenue store in the fall of 2016 at Brickell City Centre in downtown Miami, Florida. Previously, the Company has announced plans for Saks Fifth Avenue stores in San Juan, Puerto Rico in the spring of next year and in Honolulu, Hawaii in the spring of 2016.

Financial Results

Throughout this press release, the term "Normalized EBITDA" refers 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 and Twenty-Six Weeks Ended August 2, 2014 (the “MD&A”). The term “Legacy HBC” refers to the Company as structured prior to the acquisition of Saks (i.e., excluding Saks).

Second Quarter Summary

All comparative figures below and in the "Highlights" section are for the 13-week period ended August 2, 2014 compared to the 13-week period ended August 3, 2013.

Retail sales were $1,769 million, an increase of $821 million or 86.6% from $948 million for the prior year. The increase is primarily attributable to the inclusion of Saks. On a local currency basis, consolidated same store sales increased by 1.9%, with increases of 1.1% at DSG, 2.2% at Saks Fifth Avenue and 14.9% at OFF 5TH. Digital commerce sales totaled $162 million, including $116 million from Saks and growth of 82.2% at DSG.

In terms of merchandise category performance, sales growth at DSG was driven by men’s apparel, home and cosmetics. Sales growth at Saks Fifth Avenue was led by menswear, gifts and accessories. Sales growth at OFF 5TH was strong across the majority of categories.

Gross profit was $700 million, an increase of $332 million from $368 million for the prior year. The increase is primarily attributable to the inclusion of Saks. Adjusted to exclude purchase price accounting charges related to the acquisition of Saks, gross profit as a percentage of retail sales was 39.7%, an increase of 90 basis points. The increase was driven by the inclusion of Saks, which contributed higher gross profit as a percentage of retail sales than Legacy HBC. Gross profit as a percentage of retail sales at Legacy HBC was flat.

SG&A was $652 million, an increase of $325 million from $327 million for the prior year. The increase is primarily attributable to the inclusion of Saks. Excluding normalization items of $31 million, SG&A as a percentage of retail sales was 35.1% compared to 32.5% for the prior year, an increase of 260 basis points. This increase was a result of strategic investments in our HBC digital business, higher occupancy costs associated with the Queen Street sale and leaseback transaction and expected deleverage of our store expenses, partially offset by synergies and the inclusion of Saks, which runs a lower SG&A rate than Legacy HBC. 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 $81 million, an increase of $21 million from $60 million for the prior year. These figures include positive impacts of $6 million and $2 million, respectively, due to the required implementation of IFRIC 21 (see below). Normalized EBITDA as a percentage of retail sales was 4.6%, compared to 6.3% for the prior year.

Finance costs were $29 million, a decrease of $48 million from $77 million for the prior year. The decrease is comprised primarily of the expiration of equity commitment forwards related to financing the Saks acquisition that resulted in $49 million for mark-to-market charges in the second quarter of Fiscal 2013 as well as a net decrease of $18 million in non-cash charges for mark-to-market of outstanding warrants. These cost reductions were partially offset by $24 million of incremental interest expense from debt financing for the acquisition of Saks.

26-Weeks Ended August 2, 2014 Summary

All comparative figures below are for the 26-week period ended August 2, 2014 compared to the 26-week period ended August 3, 2013.

Retail sales were $3,624 million, an increase of $1,792 million or 97.8% from $1,832 million for the prior year. The increase is primarily attributable to the inclusion of Saks. On a local currency basis, consolidated same store sales increased by 2.3%, with increases of 1.8% at DSG, 2.4% at Saks Fifth Avenue and 15.0% at OFF 5TH. Digital commerce sales totaled $369 million, including $278 million from Saks and growth of 95.9% at DSG.

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

Gross profit was $1,416 million, an increase of $692 million from $724 million for the prior year. The increase is primarily attributable to the inclusion of Saks. Adjusted to exclude purchase price accounting charges related to the acquisition of Saks, gross profit as a percentage of retail sales was 40.2%, an increase of 70 basis points. The increase was driven by the inclusion of Saks, which contributed higher gross profit as a percentage of retail sales than Legacy HBC, partially offset by a slight reduction in gross profit as a percentage of retail sales at Legacy HBC.

SG&A was $1,333 million, an increase of $662 million from $671 million for the prior year. The increase is primarily attributable to the inclusion of Saks. Excluding normalization items of $55 million, SG&A as a percentage of retail sales was 35.3% compared to 34.7% for the prior year, an increase of 60 basis points. This deleveraging was driven in part by strategic investments in our HBC digital business and higher occupancy costs associated with the Queen Street sale and leaseback transaction, partially offset by the inclusion of Saks, which runs a lower SG&A rate than Legacy HBC, and synergies.

Normalized EBITDA was $178 million, an increase of $89 million from $89 million for the prior year. These figures include adverse impacts of $2 million and nil, respectively, due to the required implementation of IFRIC 21 (see below). Normalized EBITDA as a percentage of retail sales was 4.9%, flat to the prior year.

Finance costs were $104 million, an increase of $15 million from $89 million for the prior year. The increase is comprised primarily of $51 million of incremental interest expense from debt financing for the acquisition of Saks and $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 and leaseback. These cost increases were partially offset by the expiration of equity commitment forwards related to financing the Saks acquisition that resulted in $49 million for mark-to-market charges in the 26 weeks ended August 3, 2013 as well as a net decrease of $14 million in non-cash charges for mark-to-market of outstanding warrants.

Outlook

Based upon HBC’s results for the first half of Fiscal 2014 as well as management’s views on the operating environment and our ongoing initiatives, management reaffirms Fiscal 2014 guidance as follows:

• 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 26-week period ended August 2, 2014, the exchange rate incorporated in the Company’s financial results was USD:CAD = 1:1.09.

Finance Organization

As previously announced, Paul Beesley joined the Company during the second quarter as Chief Financial Officer. Subsequent to the second quarter, John Caplice joined HBC as Senior Vice President, Treasury and Investor Relations on September 2. Mr. Caplice has extensive experience in financial management and strategic communications development, most recently serving as Senior Vice President, Treasurer & Investor Relations at Shoppers Drug Mart Corporation, Canada's largest retail drug store chain with annual sales in excess of $11 billion, from 2000 to 2014.

Real Estate Strategy

Management and our advisors have been diligently exploring various alternatives to potentially surface value from our real estate portfolio, which is comprised of two Fifth Avenue, New York City flagship stores, U.S. department stores and Canadian locations. We expect to be in a position to announce details of our real estate review not later than the release date of our fiscal 2014 annual financial statements.

IFRIC 21

As required, HBC has retrospectively implemented IFRIC 21 – Levies ("IFRIC 21"), an accounting interpretation issued by the International Accounting Standards Board that 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. Rateable 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 unaudited Interim Condensed Consolidated Financial Statements for the Thirteen and Twenty-Six Weeks Ended August 2, 2014.

Conference Call to Discuss Results

Richard Baker, HBC’s Governor and Chief Executive Officer, Donald Watros, HBC’s President, and Paul Beesley, HBC’s Chief Financial Officer, will discuss the quarter’s financial results and other matters during a conference call on September 12, 2014 at 8:30 am EDT.

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 and twenty-six weeks ended August 2, 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 has been prepared on a basis consistent with our audited consolidated financial statements for Fiscal 2013 except for the retrospective application of IFRIC 21 as described in Note 2 of the unaudited interim condensed consolidated financial statements. 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 these 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 and twenty-six weeks ended August 2, 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 and Twenty-Six Weeks Ended August 2, 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 and Twenty-Six Weeks Ended August 2, 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 and Twenty-Six Weeks Ended August 2, 2014.

Supplemental Information

The following table shows the reconciliation of Net (Loss) Earnings 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 and Twenty-Six Weeks Ended August 2, 2014.

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

(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 and Twenty-Six Weeks Ended August 2, 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 non-cash pension expense. 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; (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 (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 and (iv) net earnings (loss) related to discontinued 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 and (iv) expenses related to discontinued operations. We have included Normalized EBITDA, Normalized Net (Loss) Earnings and Normalized SG&A to provide investors with supplemental measures of our operating performance. We believe Normalized EBITDA, Normalized Net (Loss) Earnings and Normalized 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 and other interested parties frequently use EBITDA, Normalized 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 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, 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.

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 78 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 May 2, 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.