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NEW YORK — A shaky economy and inclement weather kept the luxury customer at arm’s length, forcing Neiman Marcus Group to reduce prices to clear mounting inventories and leading to lower third-quarter profits.

This story first appeared in the June 5, 2003 issue of WWD.  Subscribe Today.

Although the company said inventory-related markdown pressures will continue into the current fourth quarter, Burt Tansky, president and chief executive, said sales trends appear to be improving.

“We are starting to see the customer begin to make a move,” Tansky said on a late afternoon conference call. “We are seeing quantity and spending going up. Certainly luxury is not diminishing and people are not ever trading down.”

He added that while it may be far too early to predict the worst is behind us, he said, “I think we are seeing a more relaxed attitude by many customers in their buying habits.”

The Dallas-based luxury retailer reported late Wednesday that net income faded 12.4 percent to $41.1 million, or 87 cents a diluted share, at the upper end of its previous guidance and 2 cents ahead of Wall Street’s average expectations for the three months ended May 3. That compared with net income of $47 million, or 98 cents, reported in the like period last year. However, adjusted for its new vacation policy and other charges related to its investment in the WeddingChannel.com and the write-down of two NM Galleries stores to estimated fair value, earnings last year were $42 million, or 87 cents.

Sales for the quarter rose 4.3 percent to $722.9 million from $692.7 million and same-store sales increased 1.5 percent. By division, sales at the specialty retail segment, which includes Neiman Marcus stores and Bergdorf Goodman, rose 3.1 percent to $591 million versus $573 million, with NM up 3.1 percent and BG up 4 percent. Comparable-store sales at NM decreased 0.9 percent. At the NM Direct direct marketing division, revenues increased 10.8 percent to $113 million from $102 million.

The two segments had virtually flat operating profits — $67.3 million in both periods in specialty retailing, and up to $10.4 million from $10.3 million at NM Direct.

Tansky said during the quarter customers continued to gravitate to designer merchandise, ready-to-wear, handbags and shoes. In addition, he said women’s contemporary sportswear performed well, indicating the company is attracting a younger customer base. Cosmetics and luxury skin care also did well.

“The current economic cycle coupled with conflict in Iraq and the seemingly endless winter represented a new set of business challenges,” Tansky said. In particular, he said the upscale retailer experienced initial softness with spring merchandise, because of the prolonged winter, particularly in the Northeast, which in turn contributed to a growth in inventory.

In the New York City area, Tansky said those stores are starting to see a lift in general and tourist traffic. “I think as the weather improved, people started to come out and think about the new season and started to shop,” the ceo said.

Inventory ended the quarter up 13 percent versus last year, but was up 4 percent on a comp basis, with a substantial amount in contemporary sportswear, shoes, designer handbags and designer jewelry. Tansky said these categories experienced strong sales in the quarter.

However, as the warmer temperatures arrived, Tansky said he saw sales trends pick up, including sandals, active and casual wear and denim. May’s comps increased 5.2 percent overall and 3.1 percent in the specialty retail segment. Growth trends were strongest in the rain-drenched Northeast. Top performing categories were designer handbags, women’s shoes, contemporary sportswear, dresses and suits. In addition, sales in the men’s category were strong particularly because of a shift in its promotional calendar, reflecting an extra week last year.

Based on the current sales trend, NM said it anticipates its fourth-quarter comps to increase in a range of 2 to 4 percent. It also said it is expecting the decline in gross margin to approximate the decline experienced in the third quarter, because of an expected year-over-year increase in inventory markdowns.

For the nine-month period, earnings increased 8.3 percent to $102.1 million, or $2.14 a diluted share, including a $24 million pre-tax charge reflecting a new accounting policy, versus income of $94.3 million, or $1.97, including the impact of its new vacation policy and other one-time items. Adjusted earnings were $117 million, or $2.45, compared with $90 million, or $1.89. Sales for the period rose 4.9 percent to $2.4 billion from $2.28 billion. Comps were up 2.3 percent.