Hudson’s Bay Co., the parent company of Hudson’s Bay, Saks Fifth Avenue, Lord & Taylor and Gilt, drove positive quarterly results despite being unable to end its sales slide. Net income for the Canadian department store was $84 million in Q4 2017, compared to a net loss of $152 million in the fourth quarter a year earlier, but the improvement included a $181 million tax gain resulting from U.S. tax reforms.
Tax savings have been a major topic for retailers over the past few months, ever since the U.S. House and Senate passed the new tax reform bill on Dec. 20, 2017. The National Retail Federation (NRF) lauded the bill, which reduced corporate tax rates for retailers from as high as 38% to as low as 21%. Like Hudson’s Bay Co., many other retailers will be receiving these tax gains in their quarterly filings, essentially artificially boosting net profit totals.
Retailers are faced with questions about how to spend these windfalls. They would be well advised to invest them in improving the retail experience.
Hudson’s Bay has already made a number of cost-cutting moves, so the cash infusion comes at an opportune time. In 2017, HBC axed 2,000 jobs, reorganized management and centralized e-Commerce operations under a plan to win back customers that had turned away from its brands. The Toronto-based company, which is also facing pressure from activist Land & Buildings to monetize its real estate, agreed last year to sell its iconic Lord & Taylor flagship in Manhattan and unload a minority share to a private equity firm to reduce debt. Most recently, the retailer handed over the remaining lease of its vacated Manhattan office building to co-working space provider Jay Suites. These changes are part of a vast overhaul aimed at saving the retailer $350 million per year by the end of fiscal 2018.
Between the cost cuts and the tax savings, HBC has major decisions on its hands by the end of the year. With new CEO Helena Foulkes at the helm, HBC would be smart to invest money back into the company, particularly focusing on its employees and merchandise.
Walgreens, which unveiled its earnings on the same day as HBC, says the tax reform will bring in excess of $350 million in cash to the company for its fiscal 2018, well up from a previous savings estimate in January of more than $200 million. In an earnings call, Alex Gourlay, Co-COO of Walgreens Boots Alliance, noted that the drugstore would boost hourly workers’ wages by $100 million a year after similar moves by competitors. While Walgreens hasn’t directly tied the two scenarios together, the drugstore isn’t afraid to spend more in areas that could bolster its business.
When Costco received $74 million in tax benefits in Q2, CFO Richard Galanti said it was going to invest the tax savings in its employees, lowering prices, and other activities that he said will attract more customers and increase sales volumes, ultimately translating to greater profits.