here for you Hudson’s Bay Company 2003 Annual Report Hbc is a shopping solution that offers Canadians superior products, assortments, service and ease of shopping. Supported by 70,000 associates and a retail network that is unparalleled, Hbc’s management team is guided by a single aligned vision. We are “one Hbc”. The Bay is the department store Zellers is the mass merchandise divi- Home Outfitters is Hbc’s specialty division of Hbc, with locations from sion of Hbc, with Zellers and Zellers kitchen, bed and bath decor super- coast to coast and a dominant Select locations in communities store chain with unbeatable selection position in the downtown cores of nationwide. Offering customers value, and service. With locations across Canada’s major cities. The Bay service and price competitiveness on Canada, Home Outfitters offers cus- offers a full line of quality fashion national and private-brand merchandise tomers more choices, more brands merchandise in apparel, appliances, is Zellers’ top priority. There are more and great ideas. Home Outfitters is accessories and home categories at than 300 Zellers stores. Canada’s fastest-growing specialty mid-to-upper price points, accompa- store chain. There are 45 Home nied by traditional department store Outfitters stores. services. There are 99 Bay stores. In 2003, after a thorough analysis of the Canadian retail market and Hbc’s opportunities to achieve growth, the Company outlined a plan for $1.5 billion in incremental sales growth from existing oper- ations by 2008. Six growth objectives, which are managed within our organization, were identified. These initiatives are targeted to deliver comparable store sales increases throughout Hbc’s family of stores: the Bay, Zellers and Home Outfitters. Big Ticket/Home: $430 million – Opportunity Buy: $350 million – Customer Relationship Manage- Based on Hbc growing market share Capture 7 per cent of potential ment: $130 million – Drive incre- from its current 3.5 per cent to 8 per “off-price” market in Canada. Create mental profitable behaviour from cent by 2008 in the highly fragment- excitement within the everyday Hbc’s best customers by servicing ed furniture, mattress, appliance and low price environment by adding key segments based on demonstrated electronics business. The initiative exciting deals. needs and shopping patterns. is based on leveraging Hbc’s new Store Service: $175 million – Merchandise Movement/ systems capabilities and customer Improve productivity across all retail Supply Growth: $165 million in service platform. formats through role specialization working capital improvement – Merchandise Continuum: and by driving incremental sales in Improve in-stock rates, gross $415 million – Build assortments specific areas with dedicated sales margins and inventory turnover as based on customer and local market associates. a result of a single efficient and demand, utilizing Hbc’s dominant effective Hbc merchandise pipeline. reach and full assortment. This will ensure the assortment by store better mirrors the customers in each market. Canada’s global leader in most trusted ethical sourcing retailer 334-year direct to commitment to customer outreach corporate social programs responsibility destination focus on driving serving Canadians for international sales growth coast-to-coast brands one customer customer-centric served through business strategy multiple channels common historically low integrated support debt levels services Canada’s most millions of popular loyalty Hbc Credit Card program users common Hbc Gift Card investing in communities recognized for exclusive and retail technology environmental differentiated leaders leadership assortments 70,000 dedicated strong fiscal associates management Hudson’s Bay Company 2003 Annual Report Over the past five years, we at Hbc have transformed the way we think, act and operate our business – with a singular focus on serving our customers. It is one thing to have a customer-centric focus. It is another to deliver consistently across all our channels. Our operations have been totally re-engineered. Today, we are equipped with the knowledge and understanding of what our customers need. With more of the products that they want. With a retail network that is unparalleled. And a commitment to create value for our many stakeholders. We are here for you. 2. To our Shareholders 11. Financial Highlights 12. Management’s Discussion and Analysis 41. Consolidated Financial Statements 44. Notes to Consolidated Financial Statements 63. Five-Year Financial Summary 64. Corporate Social Responsibility 71. Board of Directors 72. Senior Officers IBC Corporate Information Hudson’s Bay Company 2003 Annual Report to our shareholders George J. Heller President and Chief Executive Officer, Hudson’s Bay Company L. Yves Fortier, C.C., Q.C. Governor, Hudson’s Bay Company Fiscal 2003 began with a disappointing first quarter; however, performance by your Company gained momentum and the three subsequent quarters on a cumulative basis demonstrated year-over-year improvement in earnings per share, working capital management and cash flow. This, despite unprecedented external events throughout the year, such as public health crises, massive power blackouts and sweeping forest fires that affected the lives of Canadians and the retailers who serve them. Overall, normalized operating earnings of $173 million in 2003 were below 2002, the entire shortfall occurring in that weak first quarter. In fact, normalized operating earnings for the three remaining quarters were 6.3 per cent above last year’s results. Beyond these challenges, 2003 also marked an important transition point for your Company. Completed last year were the majority of the profound changes and new competencies set about five years ago to rebuild Hudson’s Bay Company into a modern, dynamic and valuable retailer to customers and shareholders alike. As we enter our 334th year of operation, 2003 represented a defining year in the history of Hudson’s Bay Company. 2. Hudson’s Bay Company 2003 Annual Report A new customer-centric Hbc for the long term, we are operating ready for growth Hbc with a fundamentally new and For the past five years, we have sustainable business model for the focused on the reconstruction of Hbc 21st century. With the science of as a shopping solution and brand, retailing our focus over the past five offering an end-to-end assortment of years, we now relish the opportunity goods and services that parallel to once again compete as merchants. Canadian consumer spending pat- Now, Hbc is focusing on the art terns. With that arduous rebuilding of retailing, building our business substantially behind us, we now around our customers and delivering have an efficient and effective retail growth to our shareholders through platform that rivals our peers. There merchandising initiatives. is no part of the foundation of this great Company that has not been The retail platform re-engineered and improved: from With an aligned and leveraged retail our financing structure to the tech- platform based on a fully integrated nology platform, from the logistics organization – “one Hbc” – we of our supply chain to our manage- can now effectively and efficiently ment of vendor relationships and execute our strategy and pursue the resulting product assortment. growth in precise, focused, measur- In a world where reacting tac- able and profitable ways. tically to short-term demands seems At the same time, we continue to be applauded more than building to refine our 500-plus store portfolio 3. Hudson’s Bay Company 2003 Annual Report into the largest, most accessible With respect to technology, your through product offerings based on retail network in Canada. In 2003, Company was lagging behind our customer demands in each market. we closed two Bay and four Zellers industry only five years ago. Not so In 2004, we will leverage the full stores, and opened a total of 11 new today. Hbc was named one of the power of our merchandise continuum Bay, Zellers and Home Outfitters 50 leading technology users in strategy with the introduction of locations, including new Bay stores our industry in 2003 by Executive Bay brands, such as Nine & Co. and in Victoria, British Columbia and Technology magazine. ToGo at 50 Zellers stores located Winnipeg, Manitoba. Home Outfitters In our Hbc Logistics group, in regions where we do not operate is Canada’s fastest-growing spe- we continue to consolidate existing a Bay store. cialty chain and with the opening of facilities into high-efficiency distri- With this centralized merchan- a new store in Halifax, Nova Scotia bution centres that handle all of the dise strategy, we are optimizing total is now national in scope and size, Hbc family of stores. Employing Hbc sales and effectiveness within with 45 stores by year-end versus a single Hbc logistics facility cuts our organization and targeting 37 last year. out three full days from the supply top-line sales growth, while taking Operating such a large Hbc chain. We have reduced inventory advantage of the consolidated retail force is possible only because while improving in-stock rates on buying power of all our banners. of advanced technologies and pro- the shelves. This means cost savings and higher cesses that are the backbone for The new Hbc is capable of quality merchandise. serving customers through our net- delivering the assortment, selection Consolidating financing support work of stores. Whether behind the and value to meet consumers’ and non-merchandise procurement scenes seamlessly moving inventory shopping needs no matter where functions across Hbc has resulted or up-front making in-store checkouts they live. We call this our merchan- in non-merchandise sourcing savings easier, it is built on a single efficient dise continuum strategy and it of $9 million on a run rate basis for Hbc support system. will enable us to achieve growth 2003. We anticipate further savings of $6 million in 2004. Hbc operates high-efficiency distribution centres that handle all of the Hbc family of stores.