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Specialty Retailers Struggle as Gas, Food Prices Rise

Given the ornery economy, competition among specialty stores has gone from fierce to downright Darwinian.

Given the ornery economy, competition among specialty stores has gone from fierce to downright Darwinian.

Shoppers are holding their pocketbooks closer than ever and any stumble on the part of stores can reverberate loudly when it comes time to report quarterly financial results. Proving the point, Limited Brands Inc., Talbots Inc. and Charming Shoppes Inc. all posted lower comparable-store sales in the first quarter as Ross Stores Inc. managed a slight gain.

Bottom lines also showed the pressure of a picky consumer who wants fashion in spite of the economic pressures faced by stores.

“A lot of retailers aren’t hot,” said retail analyst Jennifer Black. “They might be warm, they might be room temperature, but you have to be hot to capture the consumers’ attention and dollars.”

J. Crew and Abercrombie & Fitch Co. are two chains that have been on their fashion game, according to Black.

“In today’s world, there are so many great retailers that you have to be the best to get the consumer’s dollar,” she said.

Many specialty stores have struggled and are tightly controlling inventories and expenses.

“Earnings were terrible, but they beat the Street’s consensus,” said Richard Jaffe, retail analyst at Stifel Nicolaus.

Stores will only be able to get so far by trimming the fat, though.

“Retailers can only cut expenses for a couple of quarters, but they can’t do it forever,” said Jaffe.

Just when the consumer will be in the mood to spend again is retail’s million-dollar question. With gas prices at record highs, job losses mounting and higher food prices squeezing out other purchases, it might not be until 2009 before retailers see a real turnaround.

And investors are increasingly nervous, on Wednesday trading down retail shares as rising oil prices and inflation fears stirred concern. The Dow Jones Industrial Average lost 1.8 percent to close at 12,601.19, while the S&P Retail Index fell 2.5 percent to end the day at 394.34.

Among the chains reporting first-quarter results: shares of Talbots rose 5.9 percent to $7.88 on better than expected earnings, as Charming Shoppes was off 4.8 percent to $5.37 and Ross Stores dipped 2.3 percent to $34.12, despite a strong showing.

Limited Brands closed down 2.1 percent to $18.31 before earnings were released.

LIMITED BRANDS

Corporate reshuffling at Limited Brands Inc. lead to an 84.7 percent jump in first-quarter profits and lower sales.

Net income for the parent of Victoria’s Secret and Bath & Body Works rose to $97.8 million, or 28 cents a diluted share. This compared with $52.9 million, or 13 cents a year earlier.

Excluding a 24 cent a share benefit from the sale of a non-core joint venture and a 6 cent a share impairment charge, earnings slid 2 cents to 11 cents a share.

Sales for the three months ended May 3 fell 16.7 percent to $1.93 billion from $2.31 billion a year earlier.

The sales fell, in part, because year-ago results included turnover from Express, a majority interest in which was sold to Golden Gate Capital in July, and Limited Stores, a majority interest of which was sold to Sun Capital Partners in August.

Outside of the divestitures, the sales trend was still down.

Comparable-store sales fell 8 percent for the quarter.

For the second quarter, Limited is looking for earnings of 16 to 20 cents a share, versus 20 cents a year earlier.

Limited management will hold a conference call offering more details on the quarter today.

TALBOTS

Talbots’ first-quarter earnings dropped 68.7 percent as restructuring costs and the shuttering of the kids, men’s and non-core U.K. businesses took their toll.

For the three months ended May 3, earnings fell to $1.6 million, or 3 cents a diluted share, from $5.2 million, or 10 cents in the year-ago period.

Excluding a loss of $5.9 million, or about 11 cents a share, related to Talbots’ kids, men’s and U.K. non-core assets, which are closing, and about $3.5 million, or 7 cents a share, in restructuring costs, net income from ongoing core operations was $11 million, or 21 cents a share.

Adjusted earnings beat the 12 cents a share Wall Street was expecting.

Sales for the quarter declined 5.4 percent to $542.4 million from $573.6 million, while total comparable-store sales dropped 9.8 percent. By brand, comps at Talbots and J. Jill fell 7.4 and 20.2 percent, respectively.

“During the quarter, we focused on the strategic initiatives we put in place to better manage our inventories, control expenses, streamline our operations and innovate our marketing-promotional programs,” said Trudy Sullivan, president and chief executive officer. “We are encouraged with our progress, particularly in the Talbots brand, where we have seen a dramatic improvement in our merchandising gross margin.”

The specialty retailer reaffirmed its full-year guidance, expecting a loss in the range of 7 cents to 17 cents a share.

CHARMING SHOPPES

Plus-size women’s apparel retailer Charming Shoppes swung into a loss in the first quarter as the company continued to restructure its operations.

For the three months ended May 3, the retailer posted losses of $34.5 million, or 30 cents a diluted share. This compared with a profit of $26.3 million, or 20 cents, a year earlier.

Sales fell 7.9 percent to $641.3 million from $696.6 million, while same-store sales plunged 13 percent.

The retailer, which sells plus-size women’s clothing in its Lane Bryant, Fashion Bug and Catherines brands, expects second-quarter results to range from breakeven to a loss of 2 cents a share.

ROSS STORES

Ross Stores was the standout in the first quarter, with strong sales and a real estate settlement leading to an 18.6 percent jump in earnings.

For the three months ended May 3, earnings rose to $79.5 million, or 60 cents a diluted share, up from $67 million, or 48 cents, a year earlier. A real estate settlement boosted the bottom line by 2 cents a share.

Sales for the quarter swelled 10.3 percent to $1.56 billion from $1.41 billion. Same-store sales increased 3 percent.

Dresses and shoes were the top performing categories during the quarter, while the Mid-Atlantic states and Texas were the strongest geographical regions, the company said.

Management raised full-year guidance and now expects earnings in the range of $2.19 to $2.29 a share, up from previous guidance of $2.10 to $2.20.

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