HBC04_Book2E_sedar 4/20/05 3:50 PM Page FC1 Hudson’s Bay Company 2004 Annual Financial Report HBC04_Book2E_sedar 4/20/05 3:50 PM Page FC2 01 Letter to Shareholders 03 Financial Highlights 04 Annual Management’s Discussion and Analysis 34 Consolidated Financial Statements 37 Notes to Consolidated Financial Statements 58 Five-Year Financial Summary 59 Board of Directors 60 Senior Officers IBC Corporate Information HBC04_Book2E_sedar 4/20/05 3:50 PM Page 1 To Our Shareholders Left George J. Heller 01 President and Chief Executive Officer Right L. Yves Fortier, C.C., Q.C. Governor Retailing in Canada continues to evolve and change, and growing the business and profits is frustratingly slow in this climate of rapid change. However, success will go to those who are most responsive to the customer and marketplace while respecting the fundamentals of the business. Although we are disappointed with the year’s results, we remain confident and committed to the strategy of an integrated Hbc delivering increasingly better and targeted assortments through distinct yet integrated banners, backed by a solid balance sheet, great real estate and a robust “back-of-house” capability. The consumer continues to be ever more price conscious and selective, for the past decade we have experienced a low level general deflation that is forcing more units at lower prices into the marketplace as retailers look for sales growth. At Hbc, we are accelerating the pace of offering our customers ever better value through consolidating our purchases and finding or engineering great values internationally. Our programs such as Power Buys, Style Outlets and our newest entry, Designer Depot, are meant to ensure we remain in the forefront of delivering value to Canadians. We are adding to the list of exclusive lines throughout Hbc, giving shoppers differentiated assortments and products uniquely available at Hbc, ones that can’t be discounted by other retailers. We are forming strong relationships internationally with vendors, manufacturers and other retailers, finding more ways to offer our customers fresh, different and new product at prices meant to entice them while maintaining margins. Hudson’s Bay Company 2004 Annual Financial Report HBC04_Book2E_sedar 4/20/05 3:50 PM Page 2 Our greatest opportunity comes with the transition of The imperative for sales growth has seen a continua- our buying and marketing functions to one view of the tion of “category expansion” in many retailers. The market opportunity and the ability to assort our stores grocery industry, especially Loblaws, is adding sub- from a larger menu based on customer and market stantial incremental space to general merchandise. demand. We are adding product lines, enhancing Mass merchants are adding more and more grocery, assortments, adding new business and generally pharmacies are expanding to larger assortments of focused on rounding out our offer by banner and store cosmetic/fragrance and the like. based on the customer and not restricted by the channel paradigm. Hbc too has to grow through category expansion, not to support incremental square footage costs, To no one’s surprise, adding grocery, snacks, but to grow space productivity and profit. We are household supplies and much more to a downtown doing just that, leveraging our category skills to Bay store has been successful. Our customers were expand and migrate the in-house knowledge, vendor delighted that we filled their needs; non-traditional relationships and category competency. The Bay’s maybe, but certainly customer driven. Equally, pro- premier knowledge and market share in prestige 02 viding major appliances in pilot Zellers stores was cosmetics and fragrances will build the “masstige” appreciated by the customer. Though not traditional, assortment in Zellers’ 298 stores; as will the Bay’s the customer who bought TVs, digital cameras and competency in major appliances migrate to Zellers. soap detergent saw it as a welcome and natural In turn, the knowledge of running 241 pharmacies addition. In all cases, we have migrated the Hbc plus everyday needs and dominant categories like expertise to complete and enhance customer needs, children’s wear will alter the offer at the Bay. The and we are just beginning. execution risk is minimal as we own the compe- tency, the customer need is clear and the market The competitive environment is just that, competi- opportunity is quantifiable. tive. Of particular note is the rapid growth in retail space in Canada. In the past five years it has grown We want to thank the 70,000 associates and man- four to five times faster than the Canadian popula- agers who work hard to execute the strategy where it tion and disposable income. The explosive power most counts; on the floor and in the supply chain. As centre growth of the past five years mirrors the the marketplace and industry changes to meet new period of the mid-seventies to mid-eighties that saw opportunities and challenges, Hbc, first because of exponential growth in covered malls that ultimately necessity, and now from insight and determination, is came to an abrupt halt as the oversupply inevitably at the forefront of customer driven, market focused created failures. retailing that will ultimately reward the shareholders, associates and customers of this great Company. We have chosen to be prudent, entering power centres with Home Outfitters, Zellers and now Designer Depot, while closing about an equal amount of square footage in less desirable malls. We are strategically reshaping our portfolio and mix to improve our locations while retaining under-market rents and valuable Hbc-owned “George J. Heller” property. We are accelerating our capital expenditures on stores, expanding, renovating, opening and closing considerably more stores than in the recent past. Our de-leveraged balance sheet and past investment in George J. Heller infrastructure gives us the ability to invest in the “front President and of house”, the shopping experience. We will continue Chief Executive Officer our strategy of fewer, larger and newer stores that reflect changing customer shopping patterns, while not growing in total square footage. “L. Yves Fortier” Understandably, the introduction of far more space than spending power leads to competition for customer traffic. We believe the opportunity lies in better stores, better assortments and building new businesses within L. Yves Fortier, C.C., Q.C. our existing footprint; not taking on more exposure to Governor what will undoubtedly be an oversupply with conse- quences not far down the road. Hudson’s Bay Company 2004 Annual Financial Report HBC04_Book2E_sedar 4/20/05 3:50 PM Page 3 Financial Highlights January 31 (millions of dollars) 2005 2004 2003 (restated) (restated) 03 Sales and revenue 7,069.7 7,295.1 7,303.9 Net earnings 59.7 60.0 85.4 Cash flow from operating activities 267.5 377.1 160.7 Capital expenditures 190.0 114.8 133.1 Debt:equity ratio 0.20:1 0.23:1 0.37:1 (dollars) Per share Net earnings 0.86 0.87 1.23 Net earnings – diluted 0.86 0.86 1.19 Dividends 0.36 0.36 0.36 Sales and Revenue Net Earnings Earnings per Share ($ millions) ($ millions) ($) 7,303.9 7,295.1 85.4 1.23 7,069.7 60.0 59.7 0.87 0.86 2003 2004 2005 2003 2004 2005 2003 2004 2005 Hudson’s Bay Company 2004 Annual Financial Report HBC04_Book2E_sedar 4/20/05 3:50 PM Page 4 Annual Management’s Discussion and Analysis The following Management’s Discussion and Analysis (MD&A) for Hudson’s Bay Company (Hbc or the Company) should be read in conjunction with the Company’s audited annual consolidated financial statements and the accompanying notes for the year ended January 31, 2005. Additional information about the Company, including the Annual Information Form, can be found on SEDAR at www.sedar.com. Business Profile Hudson’s Bay Company, established in 1670, is Canada’s largest Department store retailer, its oldest corporation and one of Canada’s largest employers. The Company provides Canadians with a wide selection of goods and services through its various retail channels. The Company operates more than 500 stores, consisting mainly of the Bay and Zellers stores, and Home Outfitters, a kitchen, bed and bath superstore chain of 47 stores. It has also recently opened its first Designer Depot, a stand-alone store in the new Vaughan Mills regional mall in Ontario, 04 offering customers major savings on designer brands. The Company also operates Fields, a chain of 103 small value-priced general merchandise stores located in western Canada. In addition, Hbc operates a Financial Services division offering credit card, loyalty and other customer services, and is engaged in several other smaller operating and retailing activities: Hbc Direct, the Company’s direct-to-consumer business, which includes cata- logue operations, third party loyalty programs and the Company’s online customer fulfillment offering. Built on a 335-year tradition of serving the people of Canada, the Hudson’s Bay Company of today has been guided by the following mission statement since 1998: Hudson’s Bay Company is a seamless retail organization built to best serve the needs of the majority of Canadian consumers through several highly focused formats, linked by customer bridges and enabled by common and integrated support services. Strategy Since 1998, Hbc has been pursuing its mission to satisfy a greater proportion of the shopping needs of Canadians through Hbc’s various retail formats. It has engaged in a process of aligning and leveraging all of the assets of the Company in furtherance of this mission. Hbc’s unparalleled breadth of assortments, network of retail locations and historical relationship with Canadians assist Hbc in achieving its goal of selling more to Canadians.