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Investors Retreat Retail

Wall Street pummeled retail stocks Tuesday as the impact of higher fuel prices and Wal-Mart's slow quarter weighed heavily on investors.

NEW YORK — Despite robust earnings from J.C. Penney Co. Inc. and stellar results from Nordstrom Inc., Wall Street pummeled retail stocks Tuesday as the impact of higher fuel prices weighed heavily on investors. Wal-Mart Stores Inc.’s 5.8 percent profit gain for the second quarter — the slowest earnings growth at the retailer in four years — also sent investors fleeing from the sector.

As a result, the S&P Retail Index dropped 2.6 percent to 459.07. The broader S&P 500 finished the day down 1.2 percent to 1,219.34.

The worry on Wall Street is that consumer spending on apparel, shoes, electronics and cars will slow as shoppers are forced to dole out more money on gasoline and home heating oil. But for the second quarter at least, it seemed consumers didn’t mind spending their hard-earned dollars at all.

J.C. Penney a Winner
J.C. Penney’s rip-roaring 79.4 percent jump in second-quarter income from continuing operations and its ninth consecutive quarter of same-store sales gains proved that the moderate consumer is willing to spend.

For the three months ended July 30, net income came in at $131 million, or 50 cents a diluted share, which compares with net income of $1 million, or a 2-cent loss, in the same year-ago quarter. Reflecting the sale of the retailer’s interest in Lojas Renner SA on July 5, income from continuing operations climbed to $122 million, or 46 cents a diluted share, from $68 million, or 22 cents, a year ago. The Wall Street consensus estimate called for earnings per share between 35 cents and 40 cents.

Sales in the quarter rose 5.4 percent to $3.98 billion from $3.78 billion. Same-store sales came in with a gain of 4.2 percent, which is on top of a 6.9 percent comp increase in the year-ago quarter.

For the six months, net income rose to $303 million, or $1.13 a diluted share, from $42 million, or 14 cents, in the year-ago period. Income from continuing operations rose 58.4 percent to $293 million, or $1.09, from $185 million, or 60 cents, last year. Sales in the period rose 4.5 percent to $8.1 billion from $7.75 billion.

Kenneth Hicks, president and chief merchandising officer, said during a conference call that in the quarter, “we had sales increases in all regions of the country and across all merchandise divisions. We were also pleased to see an increase in transactions over the prior year, which we believe is a good proxy for higher store traffic. Among the highlights, our private brands continue to grow with sales gains on our big seven private brands well above the store average.”

The chief merchant said the strongest divisional performance in the quarter came from family shoes, women’s accessories and men’s apparel. Categories such as fashion jewelry, juniors’ and women’s career sportswear also performed well in the quarter.

The company is planning to open 19 stores this year, 12 of which will be in the company’s new off-the-mall format.

“Our new stores as a group continue to generate sales productivity that is higher than the chain average, and the off-mall stores are a good complement to our already strong mall presence. The majority of our new store openings are planned for fall in time for the holiday selling season, with 10 stores opening in October and November,” Hicks said.

Myron “Mike” Ullman, chairman and chief executive officer, said the company is still undecided about adding beauty to the stores.

“We recognize beauty as a category that our customers are looking for, and they’re obviously finding it elsewhere today. We haven’t made a firm decision yet. We know that beauty is a frequent purchase. We know that it’s an emotional purchase, and therefore we have a desire to understand it. Many of our competitors, as well as Penney’s itself, have stumbled in the past in terms of introducing beauty, and we want to make sure we have a strategy that will resonate with the customer before going forward,” Ullman said.

The company said it expects earnings from continuing operations around 82 cents per share and $1.52 per share in the third and fourth quarters, respectively. Full-year EPS from continuing operations are expected around $3.35, a 52.3 percent gain from the $2.20 earned in 2004.

Shares of J.C. Penney fell 4.2 percent to $49.74.

Wal-Mart’s Woes
Wal-Mart’s stock dropped 3.1 percent to $47.57 after the company’s second-quarter net income rose 5.8 percent to $2.81 billion, or 67 cents a diluted share, from $2.65 billion, or 62 cents, in the prior year. Sales rose 10.2 percent to $76.81 billion from $69.72 billion, with total U.S. same-store sales rising 3.5 percent. For the three months, sales at its Wal-Mart Stores division — including its Supercenters, discount stores and neighborhood markets — rose 10.4 percent to $51.81 billion from $46.91 billion, while comps rose 3.6 percent. International sales rose 12.3 percent to $15.03 billion from $13.39 billion.

For the six months, income rose 9.3 percent to $5.27 billion, or $1.25 a diluted share, from $4.82 billion, or $1.12, a year ago. Sales rose 9.8 percent to $147.72 billion from $134.49 billion.

In a prerecorded conference call to Wall Street analysts, Thomas M. Schoewe, executive vice president and chief financial officer, said the company “did not meet our goal of increasing income as fast as our sales.”

H. Lee Scott Jr., president and ceo, said the start of the quarter was impacted by a cool, wet spring, which affected sales of seasonal items. “Fortunately, summer did arrive and it proved to be one of the best in recent history, allowing us to have a strong end to the quarter,” he said.

Scott said while the company is continuing to serve its opening price point customers, Wal-Mart is improving its product selection in depth at the mid and premium price points.

“Inflation in the United States appears to be well under control,” Scott explained. “A Wal-Mart customer who bought a basket of goods this year paid just about the same for that basket as they did last year. The only real economic concern I have is that oil prices will erase improvements and employment and real income for a portion of our customer base, an important portion of our customer base.”

The company forecast third-quarter EPS to be between 55 cents and 59 cents, and for the year in the range of $2.63 and $2.70. Schoewe said the EPS estimate range is “wide” since its customers continue to be affected by higher gas prices. Still, the retailer kept third-quarter comps guidance at between 3 and 5 percent.

In addition, Wal-Mart said starting Feb. 1, it will no longer provide weekly sales updates because it wants investors to focus on a longer time frame.

“U.S. Wal-Mart stores are being invigorated by merchandising changes and expense controls, which, we believe, improve its long-term profit prospects,” wrote Bernard Sosnik, analyst at Oppenheimer & Co. Inc., in a research note.

Nordstrom’s Luxurious Results
It was a very good second quarter for Nordstrom, which posted a 39.3 percent jump in net income for the three months ended July 30 to $148.9 million, or 53 cents a diluted share, from $106.9 million, or 37 cents, in the same year-ago period. Sales rose 7.8 percent to $2.11 billion from $1.95 billion, while same-store sales in the period gained 6.2 percent.

For the six months, income rose 44.3 percent to $253.5 million, or 91 cents a diluted share, from $175.6 million, or 62 cents, a year ago. Sales rose 7.8 percent to $3.76 billion from $3.49 billion.

The company said in a statement that “regular-price selling was strong throughout the quarter and that the initial response to fall merchandise was favorable.”

Nordstrom plans to open three full-line stores during the balance of the year. Stores will open in San Antonio, Tex., at The Shops at La Cantera on Sept. 16 and in Irvine, Calif. A third store will open on Nov. 11 in Dallas at NorthPark Center.

The company raised its EPS guidance for the fiscal year ending Jan. 28, 2006 to $1.80 to $1.90, from its prior estimate of $1.70 to $1.75. Third-quarter EPS is forecast in the range of 30 cents to 35 cents and a comps gain of 3 to 5 percent.

In addition, the board approved a quarterly dividend of 0.085 cents per share, payable on Sept. 15, 2005, to shareholders of record on Aug. 31, 2005. The company repurchased 917,000 shares of common stock during the second quarter for a total of $26 million.

Abercrombie & Fitch Misses Mark
Abercrombie & Fitch Co. said after the bell Tuesday that second-quarter earnings rose 33.8 percent to $57.4 million, or 63 cents a diluted share, missing analysts’ consensus for 69 cents. Comparatively, the company earned $42.9 million, or 44 cents, a year ago.

Shares of the company dropped 3.7 percent in the day’s trading, closing at $61.23 and continued to decline in after-market trading.

Total revenues increased 42.4 percent to $571.6 million, while same-store sales surged 30 percent. By division, net sales at adult Abercrombie stores were up 22 percent at $305.6 million as same-store sales increased 26 percent. Net sales rose 52 percent at Abercrombie kids stores to $63.3 million, while same-store sales skyrocketed 57 percent. At Hollister, net sales totaled $199.8 million, up 82 percent, while same-store sales rose 29 percent.

The company said total denim sales in the second quarter jumped 97 percent.

In the six months, Abercrombie earned $97.8 million, or $1.07 a diluted share, compared with $72.2 million, or 74 cents, last year. Net revenues were $1.1 billion, up 37.5 percent.

“We have truly begun to realize the benefits of our efforts to normalize our business,” said Mike Jeffries, ceo of Abercrombie & Fitch, on a conference call with analysts. “Our investments in key merchandise categories like denim and knit tops, as well as in our home office and in-store management and staff, have dramatically increased our ability to dominate our niche as the premier casual apparel brand company in the United States.”

Looking ahead, the company lifted its full-year EPS guidance to $3.10 to $3.30, up from a prior guidance for $2.80 to $3, but below analysts’ consensus for $3.38.

Abercrombie also said it plans to open its flagship Abercrombie & Fitch unit on Fifth Avenue and 56th Street here in November and said its first international locations will open in Canada late this year. In Europe, the first stores are expected to open in 2006.

Outlook Mires American Eagle
Shares of American Eagle Outfitters Inc. dropped 9.2 percent Tuesday as investors digested unusually tepid third-quarter earnings guidance from the specialty retailer. The company had reported, however, that second-quarter earnings nearly doubled, beating analysts’ estimates by a penny.

The company said third-quarter EPS are expected to be 45 cents to 46 cents, compared with analysts’ projections for 46 cents and the prior year’s EPS of 39 cents.

For the three months ended July 30, Warrendale, Pa.-based American Eagle said net earnings rose 98.3 percent to $58 million, or 37 cents a diluted share, versus $29.3 million, or 20 cents, in the second quarter last year. Revenues in the second quarter increased 29.8 percent to $513.3 million, and same-store sales jumped 21.1 percent.

“Comprehensive on-trend merchandise assortments continue to drive positive sell-through rates, which has resulted in reduced markdowns,” said Jim O’Donnell, ceo of American Eagle, on a conference call. As a result, gross profits as a percent of sales expanded to 44.4 percent from 41.2 percent last year.

Net earnings in the six months rose 107.8 percent to $113.3 million, or 72 cents a diluted share, compared with $54.3 million, or 37 cents, a year ago. Total revenues spiked 32.9 percent to $967.3 million, while same-store sales were up 23.8 percent.

Meanwhile, American Eagle did not reveal too much about its previously announced new concept, which is still expected to launch in fall 2006.

“Our new concept is completely stand-alone and will not compete or overlap with American Eagle. We strongly believe in the brand we are creating and the demographic it will serve. Our team is complete. The brand name and concept are in place and we are now working on the store design and merchandise assortment. We are thrilled about the opportunity and look forward to sharing it with you when the time is right,” Roger Markfield, president and vice chairman, said on the call.

Cato Beats Street
At Charlotte, N.C.-based Cato Corp., earnings in the second quarter ended July 30 rose 31.6 percent to $10.7 million, or 34 cents a share, beating analysts’ consensus for a profit of 31 cents. Results in the quarter compared with net earnings of $8.1 million, or 26 cents, in the year-earlier period.

Revenues for the women’s specialty retailer increased 5.5 percent to $212 million, while same-store sales were flat with the prior year.

Cato president and ceo, John Cato, said in a statement that the quarter’s results were favorably impacted by higher gross margins reflecting improved sell-throughs of regular-priced merchandise.

In the six months, earnings at Cato were up 16.8 percent at $29.1 million, or 92 cents a diluted share, compared with $24.9 million, or 80 cents, a year ago. Total revenues increased 5.1 percent to $430.9 million and same-store sales were, again, flat with the year-ago period.

The company forecast third-quarter EPS of 2 cents to 5 cents, which would come in below the prior year’s profit of 6 cents and analysts’ consensus of 8 cents.

Shares of Cato closed down 4.2 percent to $19.60.

Dick’s Cuts Outlook
Second-quarter profits at Dick’s Sporting Goods rose 23.4 percent, but the retailer’s stock dropped 16 percent to $32.90 after it cut its profit outlook.

In the period ended July 30, the Pittsburgh-based athletic giant’s earnings grew to $22.1 million, or 41 cents a share, from $17.9 million, or 34 cents, including aftertax merger costs related to its July 2004 purchase of Galyan’s Trading Corp.

Sales gained 49.5 percent to $622 million from $416.1 million, aided by results from the former Galyan’s stores, and same-store sales edged up 0.5 percent. All the Galyan’s stores have now been converted to Dick’s.

Nonetheless, Dick’s said it was cutting its pro forma earnings estimates for the year to between $1.70 and $1.75 a share from $1.82 to $1.87 due to a sales shortfall at the former Galyan’s stores, which have now been converted to Dick’s. Key business categories such as golf and athletic footwear have increased, but still performed below plan, the company said.

On a call with analysts, Edward W. Stack, Dick’s chairman and ceo, said the company has continued to expand its private label program. In the second quarter, private label sales were 14.5 percent of sales, up from 13.7 percent last year. Dick’s now operates 239 stores, and said it expects to open 26 new stores this year.

In the six-month period, results, including charges, fell 48.2 percent to $14.8 million, or 27 cents, from $28.5 million, or 54 cents. Sales surged 52.9 percent to $1.19 billion from $780.3 million.

TJX Cos. Misses Estimate
After off-price retailer TJX Cos. missed Wall Street’s earnings guess by a penny, its shares ended up falling 2.9 percent to close at $22.09.

Net income climbed to $123.1 million, or 25 cents a share, from $118.2 million, or 23 cents, in the prior year. Sales rose 7 percent to $3.65 billion from $3.41 billion in the prior year. Same-store sales showed a gain of 1 percent.

Edmond English, president and ceo, said second-quarter earnings “were less than we had originally planned, primarily due to comparable-store sales growth that did not meet our expectations.

“That said, merchandise margins increased significantly over last year across all divisions, the result of effectively executing our inventory management and close-to-need buying strategies,” English said in a statement. “Also, expenses were well managed. As we enter the back half of the year, we are focused on improving comparable-store sales, and believe we have solid opportunities across our businesses. Our inventory position is very liquid, which allows us to continue to buy smarter, generate strong merchandise margins, and offer customers a constant flow of fresh fashions at great values.”