Leaner Stocks Bode Well for Earnings

NEW YORK — Reduced inventories and renewed fashion interest could prod second-quarter retail earnings higher, despite Wall Street’s obvious concern about profit prospects.<br><br>Retailers last week released better-than-expected results...

NEW YORK — Reduced inventories and renewed fashion interest could prod second-quarter retail earnings higher, despite Wall Street’s obvious concern about profit prospects.

This story first appeared in the July 16, 2002 issue of WWD.  Subscribe Today.

Retailers last week released better-than-expected results for June and indicated that retail math was working in their favor. Sales and margins have moved higher, with strong activity in transitional and back-to-school merchandise, while inventories are down. Year-on-year inventory reductions were 22 percent at Talbots; 15 percent at Gap Inc.; 11 percent at Ann Taylor; 10 percent at Christopher & Banks, and 3 percent at The Limited.

“I expect earnings will outpace sales for the first time in about three years,” David Lamer at Ferris, Baker Watts Inc. said, noting that he is forecasting bottom-line improvement in the neighborhood of 5 to 8 percent and gross margin improvement beyond that, while sales could grow 2 to 5 percent.

Overall, the Lazard Frères comp-store sales index for June rose 4.8 percent, compared with its original forecast of 3.5 percent and better than the 2.3 percent reached in June 2001.

Observers gave retailers high marks for discipline as well as their efforts to more directly address the desires and needs of their individual customers. Stores also got a bit of a bonus as hot weather in the last month enticed consumers into air-conditioned stores and malls and pent-up demand lured them to pick up last-minute summer items and early fall merchandise.

As the dog days of summer proceed, a key question is consumer confidence and how will it endure declines in the stock market and the taint of ongoing financial scandals.

Marcia Aaron, a specialty retail analyst with Pacific Growth Equities Inc., said a key question for the second half will be how the current popularity of the bohemian and peasant styles holds up, and that much of that will depend on “how the the look evolves for the fall. We will still see a lot of the bohemian-type looks, but in new colors.”

As reported, Ann Taylor and Talbots upwardly revised their outlook for the second quarter last week based on strong full-price sales and gross margin expansion. In addition, Chico’s FAS and Christopher & Banks reported double-digit comp increases last month.

In reporting a better-than-expected 8.7 decline in June comps, Talbots raised it second-quarter earnings outlook to 30 cents a diluted share, in line with consensus estimates and better than the 29 cents it originally forecast and the 28 cent earnings per share in last year’s quarter.

Arnold B. Zetcher, Talbots’ chief executive officer, noted in a statement that the store’s lean inventory position, in the midst of a semiannaul sale, would “benefit our second-quarter profitability, despite having a significant negative impact on our July comparable-store sales.”

Ann Taylor raised its second-quarter forecast to a range of 29 to 30 cents, versus the previous forecast of 25 to 27 cents, despite reporting a negative 1.2 percent comp for the month of June. The New York-based retailer said it is continuing to see year-over-year improvement in its full-priced selling as well as achieving higher margins with its on-sale merchandise.

Pacific Sunwear of California Inc. said that, based in part on its 10.5 percent increase in June comps, it now expects second-quarter EPS to be 18 cents, exceeding Wall Street’s estimates by 3 cents and a far cry from last year’s 11 cents.

Although it did not raise expectations, Gap Inc. created a buzz among retail afficionados that the San Francisco-based retailing giant is on its way back. Last week, it reported a promotion-driven negative 6 percent comp for June, versus last year’s negative 7 percent. Although Gap’s drop in June was its 27th consecutive monthly decline, its comp performance has improved steadily from dips of 24 percent in April and 9 percent in May.

In reiterating her “buy” rating on Gap stock, Jennifer Black at Wells Fargo Securities, said: “The company’s comp performance has dramatically improved over the past several months. When the fall floor sets hit, Gap’s customer will be drawn to the stores in hordes.”