Earnings Season Highlights The Different Challenges Facing Canadian Retailers

Last week proved to be an interesting week in Canadian business, as earnings releases were announced and some earnings were heralded better than others.

It was a big week for the home improvement industry but poor results continued to plague Sears Canada, which leaves many wondering about the future of this iconic retailer. Staples also rounded out the week announcing a new channel its stores will start to incorporate into strategic plans.

Major home improvement retailer Home Depot reported an unexpected good fourth quarter for 2014, driven in part by the recovering U.S. housing market. Revenue beat Wall Street’s prediction of US$18.68 billion and instead closed at US$19.16 billion. Net earnings were up 40% to US$1.4 billion and same store sales rose 7.9% for the best performance in six quarters.

On a conference call, Home Depot Chief Executive Officer Craig Menear stated, “Looking at the full year of 2014 we achieved our highest retail sales in company history and through driving productivity and expense control we also reached the highest net earnings in company history.”

The company also reported growth across all geographies including Canada, which posted 13 quarters in a row of positive results. But, the oil slump in Canada has left dealers experiencing a drop-off in demand as Canadians wait for oil prices to recover.

Lowe’s followed on the heels of Home Depot, announcing a year-over-year increase of 47% in quarterly earnings up to US$450 million. Key measure same store sales increased 7.3%.

“We remain focused on improving our profitability even while investing in key capabilities to drive sales growth,” said Lowe’s CEO Robert Niblock.

In other news, Sears Canada posted a decrease in fourth quarter revenue down 17.7% to C$972.5 million. The retailer said the decline was mainly due to store closures and a 9.1% decrease in key measure same-store sales.

The retailer experienced a net loss in 2014 of C$338.8 million in contrast to a net profit of C$446.5 million in 2013.

Desjardins Securities analyst Keith Howlett reduced the rating on Sears Canada from hold to sell following the latest earnings release.

“Our view is that a radical restructuring plan is urgently required to capture as much value as possible for all stakeholders, and to minimize further cumulative operating losses,” he added, noting that the company is expected to sharply reduce its capital budget for 2015.

The analyst also noted the timing for selling leases on the market is not ideal since Target Canada has 133 sites sitting on the market.

Hudson’s Bay, on the other hand, was on the move this week. The company announced a joint venture deal with RioCan Real Estate Investment Trust and Simon Properties to form real estate ventures worth $4.2 billion.

HBC will contribute $3.8 billion towards the deal and RioCan and Simon Properties will contribute $670 million.

In an interview, Hudson’s Bay Govenor Richard Baker stated, “We plan on diversifying our portfolio and our credit and bringing in a management team with a proven track record in place.”

Staples also released news this week of its latest venture on the heels of the latest merger announcement with Office Depot. This week, Staples announced it would provide small business loans to customers with help from new partner Lendio.

The company will provide online loan applications through its website and Lendio will handle the mechanics of the transactions.

Staples closed last week up $0.39 to US$16.76.


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