Specialty Retailer Results Surpass Modest Wall Street Expectations

Sometimes poor is better than expected.

Sometimes poor is better than expected.

Such was the case with a number of specialty retailers that reported big earnings declines Wednesday, but still managed to beat Wall Street’s expectations.

The better-than-expected results from American Eagle Outfitters, Chico’s FAS and, after the market closed, Coldwater Creek and Dress Barn helped send the Standard & Poor’s Retail Index up 1 percent to 398.64. The Dow Jones Industrial Average gained 0.4 percent to 12,594.03, while the broader S&P 500 also rose 0.4 percent to close at 1,390.84.

The retailers that reported results said they were able to beat expectations through tighter inventory and expense controls.

But analysts continue to remain cautious going forward.

“We believe that the current macroeconomic environment, including lower housing prices and rising commodity and food prices, coupled with a weak employment picture, will continue to take its toll on discretionary consumer spending,” said Elizabeth Pierce, retail analyst at Roth Capital Partners.

Teen retailer American Eagle Outfitters Inc. posted a 44.3 percent drop in first-quarter earnings, hurt by an increase in markdowns and lower-than-expected sales. For the three months ended May 3, net income fell to $43.9 million, or 21 cents a diluted share, from $78.8 million, or 35 cents, in the year-ago period. Analysts were expecting income of 19 cents a share.

Sales for the quarter grew 4.6 percent to $640.3 million from $612.4 million, while total comparable-store sales decreased 6 percent.

While the company saw strength in its men’s business, the girls’ sector remained challenged, Susan McGalla, president and chief operating officer, said in a call to Wall Street.

The company’s contemporary brand, Martin + Osa, showed some improvement during the quarter but continues to drag down earnings, said Richard Jaffe, retail analyst at Stifel Nicolaus.

For the back-to-school season, American Eagle will launch new denim fits for men and women, as well as new washes, silhouettes and fashion details, in an effort to generate renewed excitement in the category, McGalla said.

American Eagle expects second-quarter earnings in the range of 28 cents to 30 cents a diluted share compared with 37 cents in the prior-year period.

This story first appeared in the May 29, 2008 issue of WWD.  Subscribe Today.

Shares of the company rose 8.1 percent to end the day at $18.61.

Women’s apparel retailer Chico’s FAS Inc. said first-quarter earnings declined 73 percent, marred by an increase in expenses and weak comparable sales. But, again, the company beat Wall Street’s estimates, sending shares up 13.5 percent to close at $8.14.

For the three months ended May 3, earnings fell to $12.7 million, or 7 cents a diluted share, 2 cents better than analysts expected, from $47.2 million, or 27 cents, in the comparable 2007 quarter. Results included a pretax charge of $2.2 million related to the closure of seven Soma stores.

Sales dropped 9.6 percent to $409.6 million from $453.1 million and declined 17.5 percent on a same-store basis.

By division, comps at Chico’s and White House|Black Market declined 22 and 10 percent, respectively.

Management said the Chico’s division was hurt by year-over-year declines in its Travelers collection.

The company expects to continue to post negative same-store sales and lower earnings in the first half of the year. But management forecast an improvement in the second half and a return to positive comps if the economic environment begins to turn around.

Coldwater Creek Inc. swung to a loss in the first quarter, but raised guidance after beating estimates. The company now expects a loss of 13 cents to a profit of 4 cents for the full year, and it maintained previously announced guidance for the three remaining quarters of the year.

For the three months ended May 3, the company suffered a net loss of $9.2 million, or 10 cents a diluted share, from a profit of $12 million, or 13 cents, in last year’s period.

Sales declined 3.6 percent to $271.1 million from $281.3 million, while total same-store sales sank 9.4 percent.

Beating the trend toward weaker earnings or losses, The Dress Barn Inc. saw a 7.9 percent increase in third-quarter earnings to $24.9 million, or 39 cents a diluted share, from $23.1 million, or 33 cents last year.

Sales for the quarter rose 1.3 percent to $352.6 million from $347.9 million, while same-store sales dropped 3 percent.

By division, comps declined at Dress Barn and Maurices 6 and 4 percent, respectively.

“We were pleased to have navigated a difficult retail environment during the third quarter,” said David R. Jaffe, president and chief executive officer. “While the sales from our Dress Barn stores reflect the continued slowdown in consumer spending, we controlled our inventory and saw strong merchandise margins.”

The company expects capital expenditures for the year to be about $80 million, which is down $10 million from previous guidance.

Management reaffirmed its full-year earnings outlook of $1.05 to $1.10 a diluted share and estimated a midsingle-digit decrease in same-store sales.

Also on Wednesday, regional department store operator Belk Inc.’s first-quarter sales and profits dropped as the consumer fretted. Net income fell 46.3 percent to $5.1 million from $9.5 million a year ago. Excluding asset impairment, store closing costs and other items in both the most recent and year-ago quarters, income fell 70.1 percent to $4.3 million.

Sales for the three months ended May 3 dropped 9.6 percent to $817.3 million from $904.5 million. Comparable-store sales fell 8.7 percent.

Tim Belk, chairman and ceo, said the results reflected declining consumer confidence and worries about the economy.

“Our focus has been on controlling inventories and expenses in keeping with lower sales trends,” said the ceo, echoing the statements of other retail executives.

Belk said the chain ended the quarter with comparable inventories below year-ago levels.

Still, the company is pressing forward and extending its footprint. Belk opened five stores during the quarter and completed two expansions of existing stores. Three additional stores and two expanded doors are slated to bow in the fall.

Belk operates 307 stores in 16 Southern states and is privately held, but reports financial results because it has public debt.

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