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Edited Transcript of HBC.TO earnings conference call or presentation 10-Dec-19 1:30pm GMT

Q3 2019 Hudson's Bay Co Earnings Call Toronto Dec 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Hudson's Bay Co earnings conference call or presentation Tuesday, December 10, 2019 at 1:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * 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 ================================================================================ Conference Call Participants ================================================================================ * Jungwon Kim Cowen and Company, LLC, Research Division - Research Associate * Mark Robert Petrie CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst * Patricia A. Baker Scotiabank Global Banking and Markets, Research Division - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by, and welcome to the Hudson's Bay Company Presents Third Quarter 2019 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speaker today, Jennifer Bewley, Vice President, Investor Relations. Please go ahead, ma'am. -------------------------------------------------------------------------------- Jennifer Bewley, Hudson's Bay Company - Head of IR [2] -------------------------------------------------------------------------------- Good morning, everyone, and thank you for joining us today. This morning, we issued our third 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 a 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 the 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 and our own website, Listeners should not place any undue reliance on forward-looking statements made on this call. With that, I'll turn the call over to Helena to discuss our third quarter. -------------------------------------------------------------------------------- Helena B. Foulkes, Hudson's Bay Company - CEO & Director [3] -------------------------------------------------------------------------------- Thank you, Jennifer, and hello, everyone. Since last February, HBC has made strides, streamlining our business so that we can operate from a position of strength and drive financial performance. With the sale of Lord & Taylor to Le Tote in November, we now have the portfolio that enables us to focus and capitalize on our greatest opportunities: Saks Fifth Avenue and Hudson's Bay. There is no doubt that we wanted more from our third quarter performance as we were up against our most difficult comparison from a year ago. Strong digital sales, continued cost control and inventory management were not enough to overcome industry headwinds softening in the luxury category and the challenge of winning back market share in Canada. At Saks Fifth Avenue, we remain optimistic about our unique position in the luxury market and our ability to further solidify this business as a category leader. We've made strategic investments with the goal of defining Saks as the fashion authority with an elevated service model and digital experience. And now we're leaning into personalization across all channels to drive growth. At Hudson's Bay, we're capable of better results from what is a solid business. We're working to recapture share by serving customers with a sharper merchandise edit and improved service. While the early results of these efforts are promising, we are not yet at the scale needed to overcome unproductive assortments. In Canada, digital is a more emerging channel, and we've made significant progress in improving the Bay's e-commerce capabilities, helping to put us in a position to lead. At Saks OFF 5TH, we're creating our version of an off-price retailer. This business is in the early stages of its updated strategy to drive the thrill of the find by delivering luxury for less. We've begun to see early results after pivoting over a year ago and believe there is even more opportunity ahead. I am confident in our go-forward plans and believe that each of these businesses has the ability to deliver a best-in-class customer experience that will drive financial performance over time. The only true certainty is that retail will be radically different in 5 years than what we know today. I joined HBC not only to be here for the first stage of streamlining the portfolio but the next stage where we deliver on what HPC can become: a company focused on serving our customers, building our brands, making strategic investments in marketing and digital and connecting it all together for a unified shopping experience. This quarter, Saks is up against an extremely challenging comp, given the success we had in the third quarter of 2018. While there was a decline this year of 2.3%, comparable sales are up 5% on a 2-year stack. Industry data shows that luxury shoppers paused in the third quarter. For Saks, the pause was most notable in metropolitan cities, while there are pockets of growth in smaller markets. It appears though that the luxury pause is over as the fourth quarter has started on a stronger track. Dialing, service and client-telling continue to be core differentiators for Saks, as noted by another quarter of strong sales through the Fifth Avenue Club, the ultimate personalized experience that drives meaningful customer relationship. For most of this year, we've been testing and learning how to bring a more personalized experience to all Saks shoppers. While online personalization is table stakes, we've learned that connecting online data to our top selling associates can drive upside. As part of our efforts to lean into personalization, we plan to empower more associates with this capability and further tailor the Saks experience to individual shoppers. At our New York City flagship, we entered the holiday season with an elevated shopping experience, including high-touch services and exclusive merchandise. It's important to note that at this time last year, the majority of the flagship's main floor was impacted by our grand renovation. Today, we're thrilled that customers will find our flagship at full strength with little to no disruption from construction and truly exemplifying our new luxury strategy. For Hudson's Bay, comparable sales in the third quarter decreased 3.9% and increased 0.4% on a 2-year stack basis. As we've said before, the challenges facing Hudson's Bay are largely self-inflicted. Work is well underway to reimagine the customer experience with an emphasis on newness, exclusivity, better merchandise and service. Thus far, we've seen a positive response and growth within certain categories, including home, kids and beauty. While this incremental progress is encouraging, more work needs to be done and faster in men's and women's apparel for us to fully reposition ourselves in the market and return to growth. We are modernizing and delivering a more upscale edit by investing in brands that bring more fashionable design and style. For the upcoming season, Hudson's Bay will have expanded our relationship with 250 brands our customers currently love, introducing 75 new designers and exiting 600 brands. We're also placing an emphasis on service improvements at Hudson's Bay, and we've made progress improving NPS scores in stores. We've been attacking our top detractors, including associate availability, queues and wait times as well as the store environment. We've enhanced our zoning strategy, allowing our associates to be more nimble and introduce concepts like open-sell shoes when customers said they preferred speed and assistance. Recently, I visited one of our most improved stores in the third quarter, Fairview. Like many other stores, when they added a digital return desk, their NPS score jumped, and we're driving more efficiency through central cash desks and buy online, pick up in stores. Finally, we're fixing the fundamentals of the store environment, providing easier navigation, opening fitting rooms and cleaner facilities. Digital sales were a bright spot for Hudson's Bay, where we've upgraded our e-commerce presence, marketing and service. Most notably, digital sales grew by 17% in the third quarter, and NPS scores have nearly tripled since last year. Mobile orders tripled year-over-year, driven in part by the launch of our Hudson's Bay app in the first quarter. For Saks OFF 5TH, new customer acquisition continued to drive top line performance, including a 4.9% comp sales increase in the third quarter and a 2.6% increase on a 2-year stack basis. Accessories, women's apparel, kids and shoes were our top-performing categories. Growth in this business has been the result of a strategic shift that emphasized changes to our buying, marketing and service model, enabling the business to deliver an experience that provides fashionable, on-trend items at a great value. For holiday, we've invested in delivering key luxury items that provide shoppers with a sprinkle of Saks style. Moving on to digital. Sales across our businesses were strong this quarter, up 15%, driven in part by tighter marketing integration. Digital is an area we're fixing the fundamentals, such as site speed, a streamlined checkout process and a more accurate view of inventory have made a positive impact on performance. These improvements have also helped to establish the foundation we need to advance our businesses' digital experiences through greater personalization. Before I turn the call over to Becky, I want to hone in on our strategic priorities in light of recent news. Over the last month, many have asked if we expect our strategy to change. In short, the answer is no. Whether we are a public or private company, our strategy remains the same: making focused investments to drive growth in each of our businesses, enhancing the customer experience across all channels, reducing operating costs and complexity while continuing to fix the fundamentals and capitalizing on the value of our real estate. These actions are crucial in ensuring we can drive both top and bottom line performance over the long term. While this will take time, we're confident in our journey 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. -------------------------------------------------------------------------------- Rebecca A. Roof, Hudson's Bay Company - Interim CFO [4] -------------------------------------------------------------------------------- Thank you, Helena, and good morning, everyone. Our financial results are a bit noisy this quarter due to our ongoing strategic actions, including continuing store liquidations, the European transactions and our exit from the Netherlands as well as the updated real estate appraisals coming out of the special committee's work. Third quarter revenues totaled $1.8 billion, including a comparable sales decline of 1.7% as the company lapped a high-performing comparable sales in the third quarter of 2018. On a 2-year stacked basis, HBC's comparable sales grew 2.8%. Gross profit declined year-over-year by $38 million, and gross profit margin was down 120 basis points to 38.3%, a significant bounce from our second quarter performance with less of an impact from promotions and inventory. As you know, we are strategically streamlining our retail portfolio. In the third quarter, all of our Netherlands locations, 13 Saks OFF 5th stores and 2 Hudson's Bay clearance centers in Canada were in liquidation. While those locations contributed $55 million to sales, their gross profit contribution was de minimis. When you remove the liquidating locations from our third quarter financial results, our gross margin rate was flat year-over-year at 39.5%. Liquidations are continuing in the fourth quarter, albeit in fewer locations. Once completed, we will have 245 locations across 3 distinct businesses in North America and a strategically-positioned store network concentrated in top markets characterized by population density and higher-than-average household incomes. In addition, we continue to evolve our merchandise relationships where it makes economic sense for HBC and our partners. During the quarter, these changes accounted for approximately $19 million of the year-over-year gross profit decline as well as an unfavorable impact on retail sales. However, in the long term, we believe these changes will have a positive impact on gross profit as we work to create a win-win model with potential to benefit both HBC and our merchandise partners. Overall, gross profit margin, excluding liquidating sales, was higher year-over-year at Hudson's Bay and Saks OFF 5TH and slightly lower at Saks Fifth Avenue. Last quarter, we shared our belief that gross profit declines would moderate in the second half of the year as compared to our first half performance, and our Q3 performance confirms this. With the shorter holiday calendar, we can only say that the season has started with a normal level of promotions in luxury and in Canada. Moving on to SG&A. We are committed to running our businesses efficiently and exploring opportunities to further reduce expenses to better our overall financial operating performance, while still providing our customers with improved service levels. In the quarter, SG&A expenses declined $29 million year-over-year, resulting in an SG&A margin of 36.9%, an improvement of 70 basis points. We continue to benefit from previously closed stores as well as our strategic initiatives that we anticipated would kick in, in the second half of the year. Further optimization of in-store scheduling to best meet customer demand and improved back of house operations have contributed to year-over-year savings, which we have been reinvesting in marketing and our personalization efforts. Even so, adjusted EBITDA from our North American retail operations declined $24 million on an annual basis in the third quarter as lower sales and lower gross profit were not fully offset by improvements in SG&A... As you know, we expected adjusted EBITDA to be lower in the first half of this year in comparison to last year, as we anticipated that the benefits from our strategic initiatives would not fully take effect until the latter half of the fall season. After our second quarter results, we said that our expectation for improvement year-over-year carried risk. With the decline in the third quarter, we do not expect to top last year's performance even if the fourth quarter improves. The sale of our German retail and real estate assets during Q3 impacted our financials in several areas. First, we recorded $16 million less in adjusted EBITDA from our real estate equity investments during Q3. Second, we continue to experience noncash losses on our German retail investment of $80 million in the third quarter and $282 million for the full year up until the time we closed the sale transaction in early October. These losses will not be replicated next year. Third, we had a net gain on the sale of the retail and real estate transactions of $870 million that was partially offset by a $640 million charge, largely due to contractual lease accounting obligations that are required to be recorded as we assume the Netherlands' retail operations, which we are now closing. After the quarter ended, HBC Netherlands filed for protection from creditors under Dutch law, which will allow us to lower the operating lease liability to the guarantee amount in the fourth quarter. The net present value of our Netherlands lease guarantees were $379 million at November 2. Fourth, we were able to settle one of those leases after the quarter closed, which created a $36 million gain with similar negotiations continuing with other landlords. And finally, we had a $153 million noncash tax expense due to the company's utilization of carryforward tax losses against the full gain on sale of $870 million, which essentially draws down our deferred tax assets. For 2020, we anticipate real estate adjusted EBITDA will be diminished by approximately $100 million due to the divestiture of European real estate. At this time, our estimate of the ongoing cash expenditures related to the Netherlands lease guarantees is unchanged at approximately $300 million. Finally, there were 2 primary impacts from the special committee's commissioning of Cushman & Wakefield and CBRE at the request of certain of our minority shareholders to appraise HBC's real estate: first, the value of the Winnipeg building was written down, which triggered a $10 million impairment in the quarter; and second, an additional write-down of $37 million of deferred tax assets. We are very pleased to have improved on our gross margin performance from Q2, recognized our fourth consecutive quarter of SG&A savings and nearly exited Europe. Very shortly, we will have complete focus on North America. As many of you know, inventory efficiency has been another area of financial opportunity and is a key component of strengthening operations and improving free cash flow. Our merchants are leveraging new tools and processes to drive data-driven decisions and working to ensure that we are holding inventory in the most advantageous locations for our customers, which have continued to improve fulfillment in our digital operations. At the end of the third quarter, comparable inventory declined by 3% year-over-year in line with our full year target for a low single-digit decline. Saks OFF 5TH and Hudson's Bay are holding less inventory and Saks Fifth Avenue's inventory was up slightly. Our balance sheet and liquidity have improved substantially, with net debt of $1.7 billion at the end of the third quarter, representing $2.8 billion of outstanding debt and $1.1 billion of cash. Net debt has declined 56% or $2.2 billion year-over-year due to the repayment and retirement of our $656 million term loan, eliminating the $512 million Lord & Taylor mortgage and the balance of cash proceeds from our European transaction. Our liquidity is strong at more than $2.1 billion a combination of cash and availability on our ABL. Of that amount, over $970 million is attributable to availability on our ABL that is supporting by our -- supported by our borrowing base that's undrawn at the end of Q3. Capital investments were $85 million during the third quarter of 2019, a decline from $110 million from the same quarter a year ago. While much of the work has been completed this year on Saks' grand renovation, including the opening of The Vault during the quarter, the spending last year was substantially higher. In addition, the build-out of Saks' American Dream and improvements at Hudson's Bay stores is ongoing. On the technology side, we continue to fix the fundamentals in stores, digital and corporate to modernize and cloud-enable our technology platforms as well as spend to connect our online and offline shopping experiences. Our CapEx expectations for the year have narrowed to approximately $300 million net of landlord incentives or $350 million in total. Finally, we knew that we would not get to cash -- free cash flow positive this year, but we hope we would be closed. Given our results thus far in 2019, we reiterate that we will not be free cash flow neutral in 2019. That concludes my remarks. Operator, we will now open it up for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions). Our first question comes from Mark Petrie with CIBC. -------------------------------------------------------------------------------- Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [2] -------------------------------------------------------------------------------- Could you just walk through a little bit more detail on SG&A.? Obviously, there's lots of changes there. But could you give us a sense maybe of the organic change in spending? I don't know if it makes sense to do that by banner or just in total. And then the outlook for -- either for Q4 or into 2020? -------------------------------------------------------------------------------- Rebecca A. Roof, Hudson's Bay Company - Interim CFO [3] -------------------------------------------------------------------------------- Mark, thank you for your question. We have always had a lot of opportunity to reduce our SG&A costs and it's been a particular focus, and we'll continue to be so going forward. We're taking a rigorous review right now of all of our costs, both within the banners and corporate, and eliminating anything that we can. I'm not sure what you meant by organic. There are some items included in our SG&A that are not traditional SG&A-type expenses, but those are very, very small when you look at SG&A in the total. -------------------------------------------------------------------------------- Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [4] -------------------------------------------------------------------------------- Yes. I mean I guess, what I'm just getting at is net of, sort of, store closures or on a like-for-like basis, if you think that you can continue to reduce total SG&A spend, I guess, is really what I'm getting at. -------------------------------------------------------------------------------- Rebecca A. Roof, Hudson's Bay Company - Interim CFO [5] -------------------------------------------------------------------------------- We do. The company, as you're well aware, has grown by acquisition. And while we've done a good job in integrating some parts of SG&A and taking advantage of synergy, there are other areas that we still have a lot of opportunity, and that really pertains, of course, to our open stores. -------------------------------------------------------------------------------- Helena B. Foulkes, Hudson's Bay Company - CEO & Director [6] -------------------------------------------------------------------------------- Yes, I would reiterate that, Mark. I think that this quarter, what you see is efforts that we had begun really to make sure that we've got labor in the right places, labor front-facing with customers, but really looking at back of house labor and challenging whether we've got the right model. So we made nice improvements in the quarter on that. As we look forward, we definitely see more opportunity, I would say. One big area is really -- we've talked all year about moving more to the edge and essentially reducing our corporate overhead. So that continues to be a very big area of focus as well as looking at each of the business units and asking ourselves if we were starting over what kind of cost structure do we need. And so those are 2 areas where we're spending a lot of time, and you should expect the improvement in that. -------------------------------------------------------------------------------- Rebecca A. Roof, Hudson's Bay Company - Interim CFO [7] -------------------------------------------------------------------------------- And if I could add one more thing? We have implemented a new store labor planning model. We did that during this year and we're really seeing a lot of benefit from having our store labor scheduled when we know we're going to have our highest customer traffic. -------------------------------------------------------------------------------- Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [8] -------------------------------------------------------------------------------- Okay. Appreciate that. On the gross margin side and on the assortment, Helena, you've outlined some pretty material changes in terms of the vendor base. And then I think, Becky, you were calling out a $19 million impact related to that. But could you just sort of clarify? I don't know if I have that right. And then do you expect more in Q4? And when do you sort of expect the benefits to materialize from these shifts? -------------------------------------------------------------------------------- Helena B. Foulkes, Hudson's Bay Company - CEO & Director [9] -------------------------------------------------------------------------------- So thanks again, Mark. What we are talking about, we have 2 areas of change related to the way we work with our vendors. One is where there are a few -- a very few vendors who are moving from what we call an owned sale basis where we actually buy and take possession of their inventory to where that it's more of a lease sale basis where they actually occupy space in our stores. But they are responsible for the salespeople and the sales. During the transition on those very few vendors, there's a lot of noise in the numbers as we're converting from the owned to lease basis. And so we believe that, that are coupled with the change in the way we account for certain rebates and allowances that we get from vendors. We believe that, that had a negative impact in the quarter of $19 million. There will be, I believe, a smaller impact in the fourth quarter and then moving into next year, we should be completely out of that kind of noise. -------------------------------------------------------------------------------- Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [10] -------------------------------------------------------------------------------- And is that -- just sorry, is that at the Saks banner or at the Hudson's Bay banner or both? -------------------------------------------------------------------------------- Helena B. Foulkes, Hudson's Bay Company - CEO & Director [11] -------------------------------------------------------------------------------- Primarily, it's the Saks banner. -------------------------------------------------------------------------------- Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [12] -------------------------------------------------------------------------------- Okay. And then, Helena, just back to the sort of changes in the vendor relationships and the number of brands. Again, was that specifically Hudson's Bay? -------------------------------------------------------------------------------- Helena B. Foulkes, Hudson's Bay Company - CEO & Director [13] -------------------------------------------------------------------------------- Yes, it was. -------------------------------------------------------------------------------- Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [14] -------------------------------------------------------------------------------- Okay. And where are you at in terms of actually seeing that or rolling that through the stores? -------------------------------------------------------------------------------- Helena B. Foulkes, Hudson's Bay Company - CEO & Director [15] -------------------------------------------------------------------------------- Well, the numbers I was talking about is what you can expect to see in the spring. And I would say, more qualitatively, I feel very good about where we are in the home business where we have made a lot of changes from what I would call basics category offerings to more fashion-forward home, and we can really see it starting to take hold. I would say we are more in our infancy, however, in the women's and men's apparel categories, and where we have brought in newer, more exclusive fashion-forward brands, we're really happy with their performance. But we need more of them to offset the declines that we're seeing in some of the older, more conservative brands. So that is a shift that you will continue to see next year. It's not moving as fast as I would like it to be moving, quite frankly. So that's an area that we continue to work on. The other area that I would highlight that we're pleased with, on the other hand, is beauty where we've seen really nice performance in the second half. So as you think about the big chunks of the store, women's and men's apparel is still our biggest category. We've got more work to do. I'm confident that the team knows what they need to do, and they're going after it. And then in home and beauty, we're starting to see the turnaround that we expected. -------------------------------------------------------------------------------- Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [16] -------------------------------------------------------------------------------- All right. That's helpful. When you were describing it initially, I think you said something along the lines of upscaling the edit. Is that a fair characterization? And is that going to be consistent across the entire network or sort of more focused in your, sort of, urban stores? Or how should -- how are you approaching that? -------------------------------------------------------------------------------- Helena B. Foulkes, Hudson's Bay Company - CEO & Director [17] -------------------------------------------------------------------------------- Right. Yes, it's a very good characterization. We're definitely moving from good businesses to better and more fashion-forward, and I can see that in the numbers in terms of what's selling and also how we're buying for the spring. I do feel encouraged by that. And I would say our particular focus and where we see the most opportunity would be in our top 20 stores. However, as I visit more and more stores, I would say the opportunity is more global in nature. I think that our customers are telling us across the nation that they're looking for a slightly more upscale edit and where we're putting it in, it's working. So we are really looking across the company to bring in more of these brands. -------------------------------------------------------------------------------- Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [18] -------------------------------------------------------------------------------- Okay. And then just my last question is just on the digital. Obviously, you're getting some better traction there. Could you just talk a little bit more detail about what you've done differently? And then on a relative basis, how do those sales sort of differ in terms of P&L impact today versus stores? -------------------------------------------------------------------------------- Helena B. Foulkes, Hudson's Bay Company - CEO & Director [19] -------------------------------------------------------------------------------- Sure. I think the 2 big buckets that I would say have contributed to success across the board in digital have been our focus on fixing the fundamentals as well as the changes we've made from a marketing perspective. And first, I want to give a lot of credit to the teams across all of the areas that are working on this. But around fixing the fundamentals, it's really been basic things, as I said, around site speed, checkout process, very much connected to, for example, getting the right inventory in position. So while we historically had seen nice demand, we didn't have the inventory in position and what we were doing was disappointing customers. And so that is moving along really nicely. And you can see that, in particular, from the fact that, for example, at Hudson's Bay, we've tripled our Net Promoter Score on the digital experience. But across the board, we made very nice improvements in fixing the fundamentals. On the digital marketing side, we've just gotten a lot more savvy and aggressive around our use of data. And that is translating into very nice increases in traffic. So overall, I'm really pleased with the work, and we see still more opportunity ahead. As you look at our businesses, Saks is a business where, essentially, it's -- the profitability of a store sale and a digital sale are essentially the same. So we're really channel-agnostic as you think about sales of digital versus store sales at Saks. And that is unique, I would say, in retail. That exists because of sort of the labor model at Saks and just the very high price points that we have in the Saks business. At Hudson's Bay, I'd say it's more typical of what you see at other retailers, which is the overall profitability is lower from an online order. And so that is not unexpected but something that we consider as we think about the growth of this business. All-in, however, I think what we know is that the customer is looking for an omnichannel experience, and it's the integration of stores in digital that are really becoming the winning value proposition. One data point that I like to use in Canada that I think is so compelling is that 97% of all of our e-commerce returns come to our stores. And I think that reflects how omnipresent our stores are. And because the return process is so easy through our stores, it makes the online ordering process more compelling for our customers. -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- Our next question comes from Oliver Chen with Cowen and Company. -------------------------------------------------------------------------------- Jungwon Kim, Cowen and Company, LLC, Research Division - Research Associate [21] -------------------------------------------------------------------------------- This is Jonna on for Oliver. Could you just talk a little bit more on the potential reasons for why you think luxury shoppers took a pause in 3Q at Saks? And what do you see in terms of the competitive environment now? Do you think the market is relatively rational? And do you expect pressure in 4Q from competitive closures? -------------------------------------------------------------------------------- Helena B. Foulkes, Hudson's Bay Company - CEO & Director [22] -------------------------------------------------------------------------------- Sure. We're using external data when we look at this, and essentially, we're looking at credit card spending among high-end department store shoppers. And we did see a decline starting in August. So that was the piece that we noticed for the first time, quite frankly. We did have some positive impact of various initiatives we are working on, but not enough to offset the pause that we saw among overall spending. As we're now into the fourth quarter, what I would tell you is we feel a lot better about the business. Business has been quite strong for the last 8 weeks or so. And now, on the other hand, we're still seeing this pause in the external data. So I would say, we're still cautiously optimistic, but you should expect to see much better performance in the quarter from Saks. And in some ways, remember, we're also comping the fourth quarter last year where our flagship store had a lot of issues in terms of being closed, so it's a much easier quarter for us to be comping. But we do have some nice trends going. And so far, I would say it's been pretty rational from a promotional perspective. We're certainly watching closures in the marketplace and anticipating that, that could put some pressure on us. But so far, we've not seen that. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- (Operator Instructions) Our next question comes from Patricia Baker with Scotiabank. -------------------------------------------------------------------------------- Patricia A. Baker, Scotiabank Global Banking and Markets, Research Division - Analyst [24] -------------------------------------------------------------------------------- Helena, I just want to drill down a little more on the detail that you gave us about what you're doing to the assortment at Hudson's Bay. And I want to clarify, so when you were answering Mark initially, so did you say that by the spring of 2020 you would have the 75 new vendors in the Bay and the 600 -- the edit of 600 brands would be complete? -------------------------------------------------------------------------------- Helena B. Foulkes, Hudson's Bay Company - CEO & Director [25] -------------------------------------------------------------------------------- Yes. That phase would be done. I wouldn't say all of our work will be done. I was just giving the numbers you should expect to see for the spring. -------------------------------------------------------------------------------- Patricia A. Baker, Scotiabank Global Banking and Markets, Research Division - Analyst [26] -------------------------------------------------------------------------------- Okay. And then if we look at that edit, can you just provide some kind of direction. Would the bulk of these 600 brands that you're taking out of the Bay, would the bulk of those be in apparel? -------------------------------------------------------------------------------- Helena B. Foulkes, Hudson's Bay Company - CEO & Director [27] -------------------------------------------------------------------------------- Yes, it would be. And smaller businesses in apparel. -------------------------------------------------------------------------------- Patricia A. Baker, Scotiabank Global Banking and Markets, Research Division - Analyst [28] -------------------------------------------------------------------------------- Okay. And then likewise, with the 75 new brands that you're adding, are also those apparel as well? -------------------------------------------------------------------------------- Helena B. Foulkes, Hudson's Bay Company - CEO & Director [29] -------------------------------------------------------------------------------- Yes. A lot of this edit work has been in apparel because I do feel good about the work we've been doing in home. -------------------------------------------------------------------------------- Patricia A. Baker, Scotiabank Global Banking and Markets, Research Division - Analyst [30] -------------------------------------------------------------------------------- Okay, super. And then you did provide an indication in talking about the luxury market in Saks and indicated that Q4, knock on wood, have started better, trends are improved from what you saw in Q3. Do you have any commentary on what you're seeing in Canada with Hudson's Bay? And how the holiday season has started off? -------------------------------------------------------------------------------- Helena B. Foulkes, Hudson's Bay Company - CEO & Director [31] -------------------------------------------------------------------------------- Sure. Yes, in early November, we were quite soft in Canada. But then we had a very good Thanksgiving and Cyber Monday. And things have been relatively good since then. I still think we'll have pressure in the fourth quarter at the Bay, but I am more encouraged by what I'm seeing than I felt in Q3. And in Q3 -- even the trends in Q3, we were hit hardest in August and September and got a little bit better in October as the weather got colder. And we did see nice growth in our outerwear business, for example. So it's -- I feel encouraged by what we're seeing since the Black Friday break. On the other hand, I'm still very cautious because we need to see more than a few good weeks. -------------------------------------------------------------------------------- Operator [32] -------------------------------------------------------------------------------- And I'm currently showing no further questions at this time. I'd like to turn the call back over to Jennifer Bewley for closing remarks. -------------------------------------------------------------------------------- Jennifer Bewley, Hudson's Bay Company - Head of IR [33] -------------------------------------------------------------------------------- Thank you for taking the time to learn about HBC. For additional questions, please call investor relations at (646) 802-4631. Have a great day. Happy holidays, and we'll see you on Tuesday. -------------------------------------------------------------------------------- Operator [34] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.