(Adds dropped word in first paragraph)
By Nichola Saminather
TORONTO, June 5 (Reuters) - Canada's Hudson's Bay Co said on Tuesday it would sell its unprofitable online banner Gilt and close up to 10 Lord & Taylor stores, including its flagship Manhattan outlet, as its quarterly loss widened on declines in its European and Saks OFF 5th divisions.
Shares of the department store chain dropped as much as 12.5 percent in early trading on the Toronto Stock Exchange, and were down 6.5 percent at C$9.93 at 9:40 a.m. ET (1340 GMT), surrendering almost all their gains from Monday when they hit a four-month high.
Hudson's Bay, which owns the Saks Fifth Avenue luxury retailer, reported a net loss of C$400 million ($308.5 million), or C$1.70 a share, in its first quarter ended May 5, following a net loss of C$221 million, or C$1.21 per share, a year earlier.
Its adjusted net loss excluding one-time items was C$286 million, compared with analyst expectations of C$200.5 million, according to Thomson Reuters I/B/E/S.
Boston-based e-commerce operator Rue La La, which is owned by billionaire Michael Rubin's Kynetic, said late on Monday it had agreed to buy Gilt, which Hudson's Bay acquired in January 2016 for $250 million.
The companies didn't disclose the price, but the Wall Street Journal reported Rue La La paid less than $100 million, citing people familiar with the deal.
Hudson's Bay, which also owns GALERIA Kaufhof in Europe, is cutting costs and increasing efficiencies, as it wrestles with a run of earnings disappointments amid a shift in consumer preferences away from department stores to e-commerce and off-price offerings.
Its shares are down 12 percent for the year, compared with a 0.6 percent drop in the TSE benchmark, although Hudson's Bay shares have recovered 26 percent since their March trough. On Monday, they surged 7 percent.
The company plans to close its Lord & Taylor store in Manhattan by the end of 2018, with most of the other closures coming in the first quarter of 2019, Chief Financial Officer Ed Record said on a conference call.
Comparable sales rose 7.7 percent in Hudson's Bay's digital division and 6 percent at Saks Fifth Avenue in the recent quarter. However, those gains were offset by a 6.6 percent drop in comparable sales in its European division, which includes Kaufhof, Germany's largest retail chain, and new stores in the Netherlands, and a 3.5 percent drop in its Saks OFF 5th banner.
The department store group, which includes the Hudson's Bay, Lord & Taylor and Home Outfitters brands, saw sales slip 0.6 percent.
Hudson's Bay does not provide a breakdown of the earnings of individual divisions.
The company is working on improving marketing and merchandising in Europe, where too much inventory weighed on performance, Chief Executive Officer Helena Foulkes said on the call. Europe accounts for almost half of the company's total store space.
"We're constantly evaluating our store portfolio and we're excited about the real estate we own in Europe and its potential," she said. "But as I said before, everything's on the table in terms of focusing on driving improved profitability for the business."
Gross margins across the business rose 20 basis points to 42.1 percent.
Hudson's Bay engaged investment bankers and consultants to advise on potential deals regarding its department store portfolio and/or a restructure of its business, and reached a conditional agreement to sell its Vancouver flagship store building, people familiar with the matters told Reuters in April and May.
$1 = 1.2967 Canadian dollars Reporting by Nichola Saminather; Editing by Bernadette Baum and Paul Simao