HBC investing in digital to help grow its business online and in stores

Photo: The Canadian Press. All rights reserved.

A women leaves the downtown Toronto flagship Hudson's Bay Co. store in Toronto on Monday, January 27, 2014. HBC says it earned $29.1 million in its latest quarter as its acquisition of U.S. luxury retailer Saks helped sales increase nearly 75 per cent. THE CANADIAN PRESS/Nathan Denette

TORONTO - Hudson's Bay Co. (TSX:HBC) is spending more on its online shopping capabilities to grow its business, which now includes Saks Fifth Avenue, chief executive Richard Baker says.

His comments Thursday came after the Toronto-based retailer reported a profit of $29.1 million in its latest quarter as its acquisition of U.S. luxury retailer Saks helped increase sales by nearly 75 per cent.

Baker says one of the reasons the HBC bought Saks last year was that its digital capabilities were more developed.

"A customer that shops with us both in-store and online spends three to four times as much as single-channel shopper and 70 per cent of retail transactions are influenced by the digital experience," Baker said on a conference call with analysts.

"So these efforts will not only drive digital expansion, but also create a positive impact on our brick-and-mortar businesses."

The company has set a goal of annual sales of $10 billion by its 2018 financial year.

The company reported Thursday its profit in the first quarter ended Feb. 1 amounted to six cents per diluted share on $2.41 billion in sales. That compared with a profit of $86.8 million or 75 cents per diluted share on $1.39 billion in sales a year earlier.

HBC says same-store sales at its Hudson's Bay stores were up 5.2 per cent, while Saks same-store sales grew 3.1 per cent on a U.S. dollar basis. Its Lord and Taylor stores saw same-store sales fall 1.3 per cent on a U.S. dollar basis.

Online sales totalled $252.3 million as sales related to Hudson's Bay and Lord and Taylor increased by roughly 59 per cent.

In its outlook, HBC says it expects total sales of between $7.8 billion and $8.1 billion for its 2014 financial year based on same-store sales rising by low to middle single digits.

Normalized earnings before interest, taxes, depreciation and amoritization for the coming year are expected to be between $580 million and $620 million.

RBC Capital Markets analyst Irene Nattel noted the company's guidance includes an increase of $40 million in spending on HBC's digital initiatives.

"HBC management did a good job on the conference call of framing 2014 guidance and of putting context around incremental spend, notably on digital, to accelerate revenue growth," Nattel wrote in a note to clients.

Nattel said digital is driving the bus at HBC.

"A small portion of existing marketing budgets is currently being diverted to digital, but over time investors could reasonably expect ongoing shift of marketing dollars from old world flyers into digital," she wrote.

Baker conceded the increased spending on its online operations will limit earnings growth in the short-term.

"However, we believe profitability will improve substantially as sales growth from the investment accelerates over a fixed-cost base," he said.

In addition to growing its online sales, Baker said the company will look to increase the number of its Off 5th stores, including up to 25 locations in Canada in addition to plans for seven full Saks stores.

In January, HBC signed a deal to sell its Queen Street store in downtown Toronto and an adjacent office tower to Cadillac Fairview, an arm of the Ontario Teachers Pension Plan that operates the Toronto Eaton Centre mall across the street from The Bay store.

HBC, which will continue to occupy the space under a long-term lease, said one of its Canadian Saks stores will share some of the Queen Street location that currently holds a Hudson's Bay store.

Baker said Thursday the company is continuing to look at the rest of its real estate portfolio and evaluate its options.

HBC shares fell 96 cents to close at $17.86 on the Toronto Stock Exchange.