­­­­­Hudson Reports Third Quarter 2019 Results

PRESS RELEASE

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Hudson Group Reports Third Quarter 2019 Results

 

East Rutherford, NJ – November 4, 2019 – Hudson Ltd. (NYSE: HUD) (“Hudson Group”), a leader in North American travel retail, announced today its results for the quarter ended September 30, 2019.

Highlights of the Quarter:

  • Turnover of $523.0 million, a year-over-year decline of 0.7%;
  • Organic net sales declined by 1.0%;
  • Gross margin increased 80 bps to 64.5% for the quarter;
  • Adjusted EBITDA of $75.1 million; adjusted EBITDA margin of 14.4%
  • Key win for duty-free concessions at Newark Terminal B

 

Recent Highlights:

  • Entered into agreement to acquire food and beverage concessions operator OHM Concession Group on October 31, 2019
  • Entered into agreement to acquire 34 Brookstone airport stores and signed agreement to be the exclusive airport retailer for Brookstone on October 10, 2019

 

“During the third quarter, we continued to face macroeconomic pressures to our duty-free operations. In addition, we experienced travel disruptions due to Hurricane Dorian and the continued 737 MAX groundings that temporarily impacted our duty-paid business,” stated Roger Fordyce, CEO of Hudson Group. “Despite these short-term disruptions, our industry continues to exhibit extremely attractive long-term growth fundamentals.  We also continued to drive efficiencies in the business with another quarter of strong gross margin performance.”

 

Mr. Fordyce continued, “Subsequent to quarter end, we announced our agreement to acquire food and beverage concession operator, OHM Concession Group.  We also agreed to acquire Brookstone’s U.S. airport locations and serve as Brookstone’s exclusive airport retailer. These strategic acquisitions further strengthen our already diverse portfolio of concepts and enhance our ability to expand our food and beverage category, which will help drive the long-term growth of our business.”

 

 

Management Discussion of Third Quarter 2019

 

Income Statement

  • Turnover decreased $3.6 million or 0.7% to $523.0 million for the third quarter compared to $526.6 million in the third quarter 2018.
    • Third quarter net sales decreased $5.1 million to $511.7 million or 1.0% from the year-ago period.
    • Third quarter organic net sales declined by 1.0%, compared to an increase of 6.5% in the year-ago period, primarily due to continued macroeconomic pressures around Chinese spending that impacted our duty-free and luxury business, as well as Hurricane Dorian and the 737 MAX jet groundings.
    • Third quarter like-for-like net sales declined by 1.1% (down 0.9% in constant currency), compared to 3.3% growth (up 4.2% in constant currency) in the year-ago period due to the factors described above.
  • Gross profit increased $1.9 million or 0.6% to $337.4 million in the third quarter compared to $335.5 million in the year-ago period. Gross margin increased 80 bps to 64.5% during the quarter due to improved vendor pricing, as well as continued sales mix shift to higher margin categories.
  • Leases expenses (formerly included in Selling expenses) decreased $75.4 million or 65.3% to $40.1 million in the third quarter as compared to the year-ago period due to the adoption of IFRS 16 Leases, which requires the capitalization of the fixed portion of rent payments. Beginning January 1, 2019, lease expenses are only comprised of lease payments that are variable in nature.
  • Personnel expenses increased $3.8 million or 3.6% to $109.2 million in the third quarter as compared to the year-ago period primarily due to wage increases as well as opening new store locations. As a percentage of turnover, personnel expenses increased to 20.9% from 20.0%.
  • Other expenses (formerly General expenses) increased $0.3 million or 0.8% to $40.3 million in the third quarter as compared to the year-ago period. As a percentage of turnover, other expenses were 7.7%, compared to 7.6% in the prior year period.
  • Adjusted EBITDA decreased $1.1 million or 1.4% to $75.1 million in the third quarter as compared to the prior year quarter.
  • Depreciation, amortization and impairment increased $60.9 million or 201.7% in the third quarter as compared to the year-ago quarter due to the adoption of IFRS 16 Leases which requires the capitalization and depreciation of right of use assets, which are comprised of our concessions and other leases.
  • Reported net profit attributable to equity holders of the parent decreased $12.1 million to $14.5 million in the third quarter compared to $26.6 million in the year ago quarter, while reported basic and diluted earnings per share decreased to $0.16 per share compared to $0.29 in the prior year quarter.
  • Adjusted net profit attributable to equity holders of the parent decreased $4.2 million to $23.7 million in the third quarter ($24.6 million excluding IFRS 16 impact), while adjusted diluted earnings per share decreased to $0.26 ($0.26 excluding IFRS 16 impact) from $0.30 in the prior year quarter. Beginning in the first quarter of 2019, the calculation of this item has been revised to include impairment of assets, one-off income tax items, and income tax adjustment on amortization related to acquisitions.

 

Balance Sheet and Cash Flow

  • Cash flows from operating activities for the nine months ended September 30, 2019 were $409.1 million compared to $197.1 million in the prior year period. The improvement in operating cash flows was primarily due to the adoption of IFRS 16, which reclassifies capitalized lease payments from operating activities to financing activities.
  • At September 30, 2019, the Company’s adjusted net debt (total borrowings excluding lease obligations, minus cash) was $216.0 million resulting in adjusted net debt to adjusted EBITDA leverage of 0.9 times, compared to 1.3 times at December 31, 2018.  
  • Capital expenditures in the first nine months of 2019 totaled $52.7 million compared to $55.1 million in the prior year period as the result of the timing of new projects.

 

Operational Update

As of September 30, 2019, Hudson Group operated 1,011 stores, across 89 locations, totaling 1.1 million square feet of retail space.

 

During the third quarter, the Company added new business through an RFP win at Newark Liberty International Airport which includes over 7,500 square feet of expanded retail space in Terminal B and includes six new duty-free stores.

 

Correction of First and Second Quarter 2019 Financial Information

 

On January 1, 2019 the Company adopted the new lease accounting standard IFRS 16. Given the complex nature of the Company’s business, the application of this new accounting standard required an elaborate analysis of the extensive portfolio of diverse lease payment terms, which dictated the initial interpretation of the application of this new accounting standard.

 

In October 2019 the Company determined that adjustments to certain of its previously issued interim financial statements were necessary, and that the previously published March 2019 and June 2019 interim financial statements could no longer be relied upon. The adjustments related to the accounting adopted upon the transition to IFRS 16 related to certain lease contracts for its retail stores. None of the adjustments have any impact on cash balances for any period.

 

These lease contracts contain complex features and certain payments that were previously considered to be variable lease payments, and as such recognized as lease expenses in the consolidated statement of income when incurred, were in-substance fixed payments. Therefore, these payments should have been included in the initial measurement of the respective lease liabilities and right-of-use assets on January 1, 2019.

 

Since the Company adopted IFRS 16 as of January 1, 2019 under the modified retrospective approach (and did not restate comparative information for 2018), the error has no impact on comparative information presented in its third quarter interim report and prior interim consolidated financial statements 2019.

 

For further details and corrected amounts, please refer to Footnote 2.2 in the September 30, 2019 Interim Report furnished on Form 6-K on November 4, 2019.

 

Board of Director Changes

 

Heekyung Jo Min resigned from the Company’s board of directors effective October 29, 2019 in order to increase her independence as the lead independent director on Dufry’s board.  In addition, Joaquin Moya-Angeler Cabrera, an independent director, has joined the Company’s Audit Committee, which is now comprised of four independent board members. 

 

Earnings Conference Call Information

Hudson Group will host a conference call to review its third quarter 2019 financial performance today, November 4, at 4:30 p.m. ET. Participants can pre-register for the conference by navigating to http://dpregister.com/10135530. The conference call also will be available in listen-only mode via our investor relations website: https://investors.hudsongroup.com/. To participate in the live call, interested parties may dial 1-833-255-2832 (toll free) or 1-412-902-6725.  A web replay will be available at https://services.choruscall.com/links/hson191104.html
for three months following the call.

 

Website Information

We routinely post important information for investors on the Investor Relations section of our website, investors.hudsongroup.com. We intend to use this website as a means of disclosing material information. Accordingly, investors should monitor the Investor Relations section of our website, in addition to following our press releases, SEC filings, public conference calls, presentations and webcasts. The information contained on, or that may be accessed through, our website is not incorporated by reference into, and is not a part of, this document.

 

Non-IFRS and Other Measures

Adjusted EBITDA is a non-IFRS measure and is not a uniformly or legally defined financial measure. Adjusted EBITDA is not a substitute for IFRS measures in assessing our overall financial performance. Because adjusted EBITDA is not determined in accordance with IFRS, and is susceptible to varying calculations, adjusted EBITDA may not be comparable to other similarly titled measures presented by other companies. We believe that adjusted EBITDA is useful to investors because it is frequently used by securities analysts, investors and other interested parties in their evaluation of the operating performance of companies in industries similar to ours. We also believe adjusted EBITDA is useful to investors as a measure of comparative operating performance from period to period as it is reflective of changes in pricing decisions, cost controls and other factors that affect operating performance, and it removes the effect of our capital structure (primarily interest expense), asset base (depreciation and amortization), charges related to right of use assets, and non-recurring transactions, impairments of financial assets and changes in provisions (primarily relating to costs associated with the closing or restructuring of our operations). Our management also uses adjusted EBITDA for planning purposes, including financial projections. Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for an analysis of our results as reported under IFRS as issued by IASB. A reconciliation of adjusted EBITDA to net profit is provided in the attached schedules.

 

Adjusted net profit attributable to equity holders of parent is a non-IFRS measure. We define adjusted net profit attributable to equity holders of parent as net profit attributable to equity holders of parent adjusted for the items set forth in the table below. Adjusted net profit attributable to equity holders of parent is a non-IFRS measure and is not a uniformly or legally defined financial measure. Adjusted net profit attributable to equity holders of parent is not a substitute for IFRS measures in assessing our overall operating performance. Because adjusted net profit attributable to equity holders of parent is not determined in accordance with IFRS, and is susceptible to varying calculations, adjusted net profit attributable to equity holders of parent may not be comparable to other similarly titled measures presented by other companies. Adjusted net profit attributable to equity holders of parent is included in this press release because it is a measure of our operating performance and we believe that adjusted net profit attributable to equity holders of parent is useful to investors because it is frequently used by securities analysts, investors and other interested parties in their evaluation of the operating performance of companies in industries similar to ours. We also believe adjusted net profit attributable to equity holders of parent is useful to investors as a measure of comparative operating performance from period to period as it removes the effects of purchase accounting for acquired intangible assets (primarily concessions), non-recurring transactions, impairments of assets, one-off tax items, changes in provisions (primarily relating to costs associated with the closing or restructuring of our operations), and tax adjustments where applicable. Management does not consider such costs for the purpose of evaluating the performance of the business and as a result uses adjusted net profit attributable to equity holders of parent for planning purposes. Adjusted net profit attributable to equity holders of parent has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for an analysis of our results as reported under IFRS as issued by IASB. A reconciliation of adjusted net profit attributable to equity holders of parent to net profit attributable to equity holders of parent is provided in the attached schedules.

 

Organic net sales growth represents the combination of growth in aggregate monthly sales from (i) like-for-like net sales growth and (ii) net new business and expansions. Like-for-like growth represents the growth in aggregate monthly net sales in the applicable period at stores that have been operating for at least 12 months. Like-for-like growth excludes growth attributable to (i) net new business and expansions until such stores have been part of our business for at least 12 months and (ii) acquired stores until such stores have been part of our business for at least 12 months. Net new business and expansions consists of growth from (i) changes in the total number of our stores (other than acquired stores), (ii) changes in the retail space of our existing stores and (iii) modification of store retail concepts through rebranding. Net new business and expansions excludes growth attributable to acquired stores until such stores have been part of our business for at least 12 months. Like-for-like growth in constant currency is calculated by keeping exchange rates constant for each month being compared from period to period. We believe that the presentation of like-for-like growth in constant currency basis assists investors in comparing period to period operating results as it removes the effect of fluctuations in foreign exchange rates.

 

Adjusted net debt to adjusted EBITDA leverage represents total borrowings (excluding lease obligations) less cash at September 30, 2019 divided by adjusted EBITDA for the twelve months ended September 30, 2019.

 

 

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