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Despite a 9.8 percent sales gain, Neiman Marcus posted a 50 percent decline in first-quarter earnings Thursday as costs related to discontinued operations impacted results.

Operating income, however, soared 47 percent while the retailer’s gross margin rate rose.

“Over the past 18 months, we have completed several financial transactions, including the acquisition of the company in October 2005, the sales of Gurwitch Pro­ducts in July 2006 and most recently we announced the pending sale of Kate Spade,” said Stacie Shirley, vice president of finance, on a call to Wall Street analysts. “As a result, it is a real challenge to provide financial results on a meaningful comparative basis.”

For the three months ended Oct. 28, net income fell to $27.2 million from $55 million last year, but revenues jumped to $1.03 billion from $946.2 million in the year-ago period, and same-store sales increased 6.8 percent.

Excluding interest expense and taxes, operating earnings for the first quarter rose to $154.3 million from $104.2 million last year. Earnings from continued operations fell 7.4 percent to $51.5 million, while the luxury retailer recorded a loss of $24.2 million from discontinued operations.

“The dip in earnings is irrelevant and due to them putting debt on their balance sheet from the transactions,” said Carla Casella, consumer products and retail research analyst with J.P. Morgan. “All of their other numbers are extremely strong.”

In November, the firm, which owns and operates Neiman Marcus and Bergdorf Goodman stores, agreed to sell a majority of its interest in Kate Spade to Liz Claiborne for $124 million. The deal is expected to close by next month.

Gross margin, excluding the impact of the acquisition, jumped 30 basis points to 41.6, driven by an increase in full-price selling and a reduced level of markdowns.

Sales from direct marketing, which include the Neiman Marcus, Bergdorf Goodman and Horchow brands, rose 14.7 percent to $159 million. Leveraging this sales gain, the company said it achieved an operating margin of 13.1 percent, a 260-basis-point improvement from last year.

Internet sales for the quarter were $101 million, a 27.5 percent increase over last year.

This story first appeared in the December 8, 2006 issue of WWD.  Subscribe Today.

Management said it has a positive outlook moving further into the holiday season as the company’s jewelry category continues to grow rapidly, along with the strong performance in women’s contemporary sportswear and dresses, designer handbags, women’s shoes and men’ categories.

Last week the company reported November comps of 2.9 percent, which it attributed to increased staffing and the elimination and decreasing circulation of select catalogues.

“There are several factors that can impact net sales over demand, including backlog, initial fulfillment and return volume; all of these factors can vary from month to month,” said Burt Tansky, president, chief executive officer and director, on the call. “This November happened to be a month where several of these factors impacted the company negatively.”

During the quarter the company opened its second Cusp store, a new concept that targets the contemporary customer, and plans to open four new stores by the end of the year.