hbc ipo presentation
TRANSCRIPT
The REINVENTION of TWO RETAIL ICONS
MANAGEMENT PRESENTATIONNovember 2012
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FORWARD-LOOKING STATEMENTS
Certain statements in this presentation about our current and future plans, expectations and intentions, results, levels of activity, performance, goals or achievements or any other future events or developments constitute forward-looking statements. The words “may”, “will”, “would”, “should”, “could”, “expects”, “plans”, “intends”, “trends”, “indications”, “anticipates”, “believes”, “estimates”, “predicts”, “likely” or “potential” or the negative or other variations of these words or other comparable words or phrases, are intended to identify forward-looking statements. Forward-looking statements are based on estimates and assumptions made by us in light of our experience and perception of historical trends, current conditions and expected future developments, as well as other factors that we believe are appropriate and reasonable in the circumstances, but there can be no assurance that such estimates and assumptions will prove to be correct. Certain assumptions in respect of the determination of the impairment of losses, claim liabilities, income taxes, employee future benefits, goodwill and intangibles are material factors made in preparing forward-looking information and management’s expectations.
Many factors could cause our actual results, level of activity, performance or achievements or future events or developments to differ materially from those expressed or implied by the forward-looking statements, including, without limitation, the following factors: (i) significant competition in the retail industry, (ii) changing consumer preferences and consumer spending, (iii) the prospect of unfavorable economic and political conditions, (iv) the seasonal nature of our business, (v) unseasonable weather conditions or natural disasters, (vi) our ability to continue to improve same store sales, (vii) our ability to retain our senior management team who possess specialized market knowledge, (viii) our dependence on our ability to attract and retain quality employees, (ix) maintaining good relations with employees that are not unionized as well as with our unions, (x) increased commodity prices, including for cotton, may affect our profitability, (xi) with a majority of our vendors we do not have a long term contract and therefore we cannot be assured of continued access to our brands that we offer (xii) our dependence on successful inventory management, (xiii) our dependence on our advertising and marketing programs, (xiv) a material disruption in our computer systems, (xv) our ability to comply with the covenants in our credit facilities, (xvi) breaches of privacy, (xvii) risk arising from regulation and litigation, (xviii) product liability claims and product recalls, (xix) fluctuations in the value of the Canadian dollar in relation to the U.S. dollar, (xx) loss of or disruption in our centralized distribution centers, (xxi) inability to protect our trademarks and other proprietary rights, (xxii) risks associated with the lease and ownership of real estate, (xxiii) our ability to profitably manage the portfolio of national and private label brands that we offer and that are preferred by consumers, (xxiv) the value of the brands we offer could diminish due to factors beyond our control, (xxv) our ability to maintain the brand value of our various retail banners, (xxvi) our ability to pay dividends is dependent on our ability to generate sufficient income, (xxvii) our principal shareholder will hold a material percentage of the common shares following the closing of the offering which may have an impact on the trading price of the common shares, (xxviii) our principal shareholder may sell its common shares at a time in the future and such timing will be beyond our control and may affect the trading price of the common shares, (xxix) no prior public market for our securities exists, (xxx) volatile market price for our common shares, and (xxxi) influence by our principal shareholder. These factors are not intended to represent a complete list of the factors that could affect us; however, these factors should be considered carefully.
The purpose of the forward-looking statements is to provide the reader with a description of management’s expectations regarding the company’s financial performance and may not be appropriate for other purposes; readers should not place undue reliance on forward-looking statements made herein. Furthermore, unless otherwise stated, the forward-looking statements contained in this presentation are made as of the date of this presentation, and we have no intention and undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. The forward-looking statements contained in this presentation are expressly qualified by this cautionary statement.
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SENIOR MANAGEMENT TEAM
RICHARD BAKER, Governor & CEO
BONNIE BROOKS, President
DON WATROS, COO
MICHAEL CULHANE, CFO
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Proven Track Record with Significant Ownership
HBC OVERVIEW
Richard Baker, Governor & CEO
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OUR HISTORY
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500 Years of Combined Iconic Department Store Banner Heritage
• Founded in 1826 by Samuel Lord and George Washington Taylor
• One of the oldest department store chains in the United States
• In 1914, one of the first department stores to open location on New York’s renowned Fifth Avenue.
• Targeting suburban markets, opened first branch department store in Manhasset, NY in 1941
• Opened stores in retail malls, shopping centres and free standing locations in prosperous suburban areas across the eastern seaboard of United States
• Affiliates of HBC’s Principal Shareholder acquired Company from Federated Department Stores (now Macy’s, Inc.) in October 2006
• Founded in 1670, originally incorporated by Royal Charter granted by King Charles II
• Longest continuously operated company in North America and one of the oldest commercial enterprises globally
• Primarily fur trading business in early years, moved into retail by the end of the 19th century, transforming trading posts into retail stores
• Opened first store in Winnipeg in 1881
• Acquired Henry Morgan & Co. Ltd. in 1960 , providing flagship locations in Toronto, Ottawa and Montreal
• Played significant role in consolidation of department store operators in Canada
• Affiliates of HBC’s Principal Shareholder acquired indirect 20% interest in July 2006
• In July 2008, HBC’s Principal Shareholder acquired the remaining 80%
LEADING NORTH AMERICAN DEPARTMENT STORE RETAILER
STORES1
RETAIL SALES2
PRO FORMA EBITDA2,3
207$3.9B
$373M
48$1.4B
69$0.3B
90$2.2B
9.7% of Retail Sales
Strong Banner Recognition
1. At September 30, 20122. FY2011
3. Includes additional Zellers cost reductions of $60 million
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REINVENTION OF TWO RETAIL ICONS
Successful Transformation and Repositioning
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THE OPPORTUNITY THE VISION
Poor merchandizing and operations World-class management team
Strong iconic, but tarnished brands Appropriate brand matrix, upgraded shopping experience, and effective marketing and promotions
Weak productivity and profitability Drive productivity through right sizing, inventory investment and brand management to create top-quartile sales productivity and EBITDA margins
Outstanding real estate portfolio Intelligent execution of capital investments
Exceptional value in Zellers leases Monetize Zellers assets
REPLACED 90% OF TOP 100 EXECUTIVES
RECRUITED A WORLD-CLASS MANAGEMENT TEAM
Richard Baker Governor & CEO
Brian Pall President, Real Estate
Don Watros COO
Debbie EdwardsEVP Stores
Suzanne Timmins VP Fashion Direction
Liz RodbellEVP Chief Merchant
Evelyn Reynolds SVP GMM - Home & Licensed
Marc MetrickEVP Chief Marketing Officer
Mary TurnerEVP PrivateBrands Design & Development
Bonnie BrooksPresident
Home OutfittersJarrod Johanns EVP Planning & Allocation
Kerry Mader SVP Store Planning & Design
Sheila RiderSVP Human Resources
Bill TracyEVP Supply Chain & IT
Mike Culhane CFO
Extensive Global Department Store and Real Estate Experience
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FOCUSED AND STRENGTHENEDBANNER RE-POSITIONING
Superior shopping experience with locally and customer edited merchandise assortment
Strong position in the mid-tier suburban department store segment
Hig
he r
Low
er
Mainstream Unique
Customer Experience
Valu
e P
rop
osit
ion
Hig
he r
Low
er
Mainstream
Unique
Customer Experience
Valu
e P
rop
osit
ion
STRONGER
REFOCUSED
Expansive consumer value proposition
Owns the mid-tier store position in Canada
Canada’s leading brand retailer
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A Compelling Value Proposition
LEADING AND RELEVANT BRAND PORTFOLIO
New brands generating 25%1 of sales
Introduction of more affordable brands
New brands generating 20%1 of sales
Added 330 new brands and discontinued over 900 underperforming brands since 2009
1. Since 2008
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Hudson’s Bay:
Focus On High Volume and Leading Brands
Number of Brands selling >$10M: +22%1
Number of Brands selling <$1M: -15%1
DIFFERENTIATED AND ENHANCED CUSTOMER SHOPPING EXPERIENCE
Multi-Billion Core Business Real Estate Portfolio
24,000 associates and managers trained
Staffing based on traffic
Manager on floor 90% of time
Product from dock to floor <24hrs
Launched “Brand Stewardship Program”
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1. Three year period ending FY2011
IMPROVED SHOPPING ENVIRONMENT BETTER MERCHANDISE PRESENTATION
INVESTED $212M 1 UPDATING AND MODERNIZING STORES
Higher Store Traffic, Sales and Customer Satisfaction
INCREASED MERCHANDISING AND SERVICE STANDARDS
EXTENSIVE PROPRIETARY CUSTOMER DATABASE
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42%Of Sales3
1.6MCredit Card Holders1
34%Of Sales3
3.1MCredit Card Holders1
1. At July 28, 2012 2. Includes Bay and Home Outfitters
3. FY2011
62%Of Sales3
4.6MHBC Rewards Card Holders1,2
Opportunity to employ CRM tools Collect and analyze customer data Better business decisions
Merchandise trends Brand selection
Using Customer Data to Generate Sales Growth
EFFECTIVE MARKETING AND PROMOTION
Rejuvenated Marketing and Promotion
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Storewide promotional eventsFriends and FamilyThe Signature Sale Introducing “One Day Sale”
Olympic SponsorshipPromotional strategy to enhance gross marginsOne Day Sales“Bay Days” events
New “Rewards” program in 2013“Spend more, earn more” model
Personalized direct mail programPresident’s letterCredit EventsE-Books
19% RESPONSE RATES 2
11% INCREASE IN ACTIVE 12-MONTH CUSTOMER BASE
96% INCREASE IN EMAIL DISTRIBUTION1
1. In the 2 year period ended FY2011
2. Last 18 months
GROWTHS T R A T E G Y
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HANDBAGS, JEWELLERY & ACCESSORIES
WOMEN’S FOOTWEAR
COSMETICS
WOMEN’S APPAREL
MEN’S WEAR
INVEST IN HIGH GROWTH MERCHANDISE CATEGORIES
Right sizing space allocations
Increasing inventory and new brands
Improving product presentation
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Increase Sales from High Growth Categories
25% 14%
SALES INCREASES IN HIGH GROWTH CATEGORIES (FY2009 - FY2011)
BURBERRY | KIEHL’S | BOBBI BROWN | MICHAEL KORS | MAC | CHANEL
STRATEGIC PARTNERSHIPS WITH EXCITING BRANDS AND VENDORS
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1. Reflects running totalsStrategic Partnerships Drive Strong Sales Growth
$750/sq. ft. In first full year (Yorkdale) – opened October 2011
Rollout strategy
19,000 sq. ft. store opened in Toronto Queen Street Oct 4, 2012
40,000 sq. ft. store opened in Vancouver Oct 17, 2012
FY2011 FY2012 FY2013
Stores1 1 5 11
Other strategic partnership opportunities
SIGNIFICANTLY INCREASEPRIVATE LABEL BRAND SALES
Transition from 25 to 5 cornerstone private brands
Build national brand awareness and importance
Higher Margins and New Loyal Customers
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Lord & Taylor
Black Brown 1826HBC Collections
Gluckstein
Exit or Re-Label
London Fog
PRIVATE BRAND SALES PENETRATION
FY2011 3–5 Year Target
9%
15%
9% 15%
Collect and analyze data
Stronger marketing campaigns
New digital marketing
Grow e-commerce sales
LAUNCH OMNI-CHANNEL PLATFORM
FY2010 FY2011 FY2012E
$140
$83
$44
HBC E-Commerce Sales($Millions)
Drive New Sales and Channel Leadership
70%
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INCREASE SALES PRODUCTIVITY TO ACHIEVE TARGETS
1. Excludes impact of Vancouver Olympics sales2. Includes: Belk, Bon-Ton, Dillards, J. C. Penney, Kohls, Neiman Marcus,
Nordstrom, Macy’s, Saks and Sears Holdings (in Canada)
Q1_x000d_ 2009
Q2 _x000d_2
009
Q3 _x000d_2
009
Q4 _x000d_2
009
Q1 _x000d_2
010
Q2 _x000d_2
010
Q3 _x000d_2
010
Q4 _x000d_2
010
Q1 _x000d_2
011
Q2 _x000d_2
011
Q3 _x000d_2
011
Q4 _x000d_2
011
Q1 _x000d_2
012
Q2 _x000d_2
012
-15%
-10%
-5%
0%
5%
10%
15%
20%The Bay Lord & Taylor North American Department Stores
Sam
e S
tore
Sale
s G
row
th
Continue to Achieve Superior Growth
SALES / SQ. FT.
HUDSON’S BAY1
FY2009 FY2011 3–5 Year TargetFY2009 FY2011 3–5 Year Target
US $175US $210
US $240-$250$122 $133 $170-$180
+20%+9%
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Outperformed North American competitors in past two years Strong Q4 PerformanceSAME STORE SALES PERFORMANCE
LORD & TAYLOR
2009 2010
2011
2012
FY2011
NORTH AMERICAN
PEER GROUP2
US $240
HIGHLY VALUABLE REAL ESTATE PORTFOLIO
Fee-Owned
Ground Leased
Leased Total
Average Yearsof Control1
The Bay 3.7 1.3 11.116.
167
Lord & Taylor 3.6 2.5 0.7 6.8 54
Home Outfitters - - 2.5 2.5 21
Total 7.3 3.8 14.325.
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HBC REAL ESTATE GLA (sq. ft. Millions)
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1. Ground leased and leasedEnhanced Business Flexibility and Long-term
Control
Number of Stores:
189
GLA 18M sq. ft.
Zellers Proceeds:
$1.832B
Price /sq. ft.
$101.80
ZELLERS REAL ESTATE Focused on core department store business
Sold 189 Zellers leases for cash of $1.8B+
Discontinued Fields operations
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WESTCHESTER
VANCOUVER
CALGARY
NEW YORK
TORONTO
MONTREAL
FLAGSHIP STORES
138 HIGH TRAFFIC STRATEGIC LOCATIONS
Major Competitive Advantage and Barrier to Entry
PRIME RETAIL LOCATIONS
LORD & TAYLOR
HUDSON’S BAY
* Opens Fall 2013
*
LEADING RETAILERT RA N S F O R M AT I O N T O A
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Michael Culhane, CFO
Consolidated Retail Sales 2
Normalized EBITDANormalized SG&A as % of Retail Sales 3
Sales / sq. ft.
9%Hudson’s Bay1
20%Lord & Taylor
12.6%
100%550bps
540bps
Normalized EBITDA Margin 3
1. Excludes Vancouver Olympic sales of $44.4M in Q4 FY2009 and $50.5M in Q1 FY20102. Lord & Taylor presented on a constant dollar basis and excluding Vancouver Olympic
sales3. FY2009 to Pro Forma FY2011 including $60M of Zellers cost reductions
STRONG SALES PRODUCTIVITY AND EARNINGS GROWTH: FY2009-2011
Powerful Operating Leverage
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FY2009 FY2010 FY2011 Pro Forma FY2011
CONTINUE TO DRIVE EXPENSE REDUCTION
Rapidly Attaining Leading Profitability
NORMALIZED SG&A EXPENSES AS % OF RETAIL SALES
Primary areas of incremental savings: Logistics, IT, and Shared Services
$20-25M of one-time expenses related to the savings to be incurred in 2H 2012 and 2013
$50M one-time restructuring expense in 1H 2012
1. Includes additional Zellers cost reductions of $60M
$60M
1
Achieved significant cost savings:
10 distribution centers in FY2008 reduced to 4 by end of FY2012
More direct logistics network and shorterlead time to stores
Reduced IT expenses by 18% while implementing best in class IT systems
Zellers Cost Reductions Underway with Near Term Realization
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Further expense saving to coincide with Zellers wind-down
38.8%
36.1%
34.9%
33.3%
STRATEGIC CAPEX DRIVING SALES GROWTH
CAPITAL EXPENDITURES($MILLIONS)
Rejuvenating flagship stores
Right sizing departments across store portfolio
Topshop / Topman store rollout
Expanding omni-channel capabilities
$112
$185-$190
$93
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$185–$195
$166
FY2009 FY2010 FY2011 FY2013 Proj. FY2013 Proj.
3719 25
39 65
10817
26
22
2
10
Maintenance MerchandisingIT Omni-Channel
FY2012 Proj.
FINANCIAL REVIEW
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($MILLIONS)
FY2009 FY2010 FY2011
$3,620
$3,718
$3,850
6.1%
CAGR
COMPARABLE SALES
Lord & Taylor (USD)
Hudson’s Bay (CAD)
FY2011 7.1% 6.8%
FY2010 12.4% 2.2%
FY2009 1.1% (5.2%)
RETAIL SALES
1. Excludes Vancouver Olympic sales of $44.4M in Q4 FY2009 and $50.5M in Q1 FY2010 and impact of foreign exchange
(2.7%) SSSG1
6.4%SSSG1
6.5%SSSG1
4.3%
7.1%
8.1%
9.7%
Normalized EBITDA Margin
($MILLIONS)
CONTINUOUS IMPROVEMENT IN EBITDA MARGINS
FY2009 FY2010 FY2011 Pro Forma FY2011
$156
$265
$313
$373
1. Includes additional Zellers cost reductions of $60M
1
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Enhanced sales productivity Above peer group same store sales
growth
Consistent gross margin rate Enhanced promotions focused
on key events Balancing sales growth and inventory
investment with margin rate expansion
Meaningful operating leverage 200 bps improvement in store
payroll and expense 50 bps improvement in marketing costs Reduction in corporate overhead $60M of pro forma FY2011 SG&A
related to Zellers $20-25M of one-time expenses related to
the savings to be incurred in 2H 2012 and 2013
$50M one-time restructuring expense in 1H 2012
$156
$265
$313
$373
FY2012 RESULTS AND OUTLOOK
($Millions)H1 2012 H2 2012E COMMENTARY
Retail Sales & YoY Growth
$1,7606.5%
Mid single-digit comp (constant dollar)
Historically strong Q4 comp performance
Recent major renovations drive 4th quarter sales performance
E-commerce growth New stores and 53rd week will
add about 2+% to total sales
Gross Profit as a % of Sales
$70640.1%
-40bps to LY
Expect modest rate improvement
Expecting margin rate improvement in Q4:• Better matching of inventory levels to store levels• Mix of higher margin cold weather merchandise
Normalized SG&A as a % of Sales
$68038.6%
Flat to LY
Improved leverage vs. last year
Accelerated comp rate in Q4 will improve operating leverage Decline of 60 bps / $10M related to change in credit card program –
impact is less than half that rate in second half 2012
Normalized EBITDAMargin
$854.8%
-10bps to LY
Moderate dollar and rate expansion vs.
2011 pro-forma normalized EBITDA
Earnings impact of $60M cost reduction from Zellers wind-down begins to be realized in Q3 FY2012
EBITDA margin expected to perform similarly or better than 1H 2012
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2012 SAME STORE SALES GROWTH
H1 Aug/Sep
HUDSON’S BAY 5.3% 2.5%
LORD & TAYLOR (US$) 4.3% 3.2%
• Q3 performance will improve as Bay Days and L&T Friends and Family drive Q3 sales
OPERATING AND FINANCIAL TARGETS
METRIC FY2011 PRO-FORMA 3-5 YEAR TARGET
Sales / sq. ft.
US $210 US $240-250
$133 $170-180
EBITDA Margin 8.1% 9.7%1 12.0%2
EBITDA Leverage 4.0x 3.0X3 2.0x - 2.5x
Capex $166MFuture spending in line
with FY2012E$185-195M
1. Includes additional Zellers cost reductions of $60M2. North America’s Top-5 department stores 2011 average
3. Pro-forma net IPO proceeds as at July 28, 2012
Well-Positioned to Drive Sales Productivity & Outsized Earnings Growth
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PRO FORMA CAPITALIZATION
($Millions)AS AT
JULY 28, 20121
PRO FORMA$400M OFFERING
Total Short-term Debt 440 399
Long-term Debt:
Existing HBC Term Loan 444 –
New HBC Term Loan – 250
Lord & Taylor Term Loan 202 202
5th Avenue Lord & Taylor Mortgage 245 245
Other 40 40
Total Long-term Debt 930 736
TOTAL DEBT $
1,370 $
1,135
LTM Pro Forma EBITDA2 373 373
TOTAL DEBT / LTM Pro Forma EBITDA2 3.7X 3.0X
Strong free cash flow available for debt repayment
Supports dividend in line with peer group
Low interest rate capital structure with attractive maturity profile
1H 2012 cash interest: $45M
Pro-forma: $24M
Revolving credit facilities provide significant flexibility
No debt maturing until November 2014
Pension plans are currently overfunded by more than $100M
1. As adjusted for refinancing of the L&T 5th Avenue Mortgage.2. Pro forma the $60 million of additional Zellers cost reductions.
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vI N V E S T M E N T H I G H L I G H T S
LEADING ICONIC NORTH AMERICAN RETAIL BANNERS
INCREASED SALES PRODUCTIVITY
POSITIONED FOR OUTSIZED EARNINGS GROWTH
STRATEGIC AND VALUABLE REAL ESTATE PORTFOLIO
MANAGEMENT WITH EXTENSIVE RETAIL EXPERIENCE AND OWNERSHIP
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OFFERING SUMMARY
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Amount:Approximately $400 million; $250 million Treasury Offering and $150 million Secondary Offering
Over-Allotment Option: Up to 15% from Secondary
Use of Treasury Proceeds: General Corporate Purposes including reduction of debt
IPO Marketing Range$2.2 billion – $2.6 billion
Listing: Toronto Stock Exchange
The REINVENTION of TWO RETAIL ICONS