Economy Takes Continued Toll on Specialty Stores

Economy takes continued toll on specialty stores as two retailers report double-digit drops in second-quarter profits.


J. Crew Group Inc. blamed its lower second-quarter earnings mostly on unexpected computer-system upgrades, as American Eagle Outfitters Inc. and Chico’s FAS Inc. each turned to a more familiar gripe — the economy and sluggish teen and misses’ consumers — for their own deteriorating bottom lines.

This story first appeared in the August 27, 2008 issue of WWD.  Subscribe Today.

J. Crew’s second-quarter profits dipped 12.2 percent, missing analysts’ earnings estimates as the firm spent to upgrade its systems and weathered the economic headwinds. The retailer also lowered its profit guidance for the year.

Net income for the New York-based company fell to $18.1 million, or 28 cents a diluted share, for the quarter ended Aug. 2, compared with $20.6 million, or 32 cents a share, a year ago.

Sales rose 10.4 percent to $336.3 million from $304.7 million.

Analysts polled by Yahoo Finance expected earnings of 32 cents on revenues of $337.9 million. Comparable-store sales decreased 0.4 percent.

J. Crew said $3 million in unexpected upgrade costs linked to its Internet and phone ordering systems was the main reason for the weak results. The firm apologized to its online shoppers recently for less-than-stellar service.

Chairman and chief executive officer Millard “Mickey” Drexler continued to push the service message on a conference call with investors Tuesday.

“We don’t sleep at night until every customer is satisfied,” said Drexler.

Still, the ceo noted that he is generally pleased with the fundamentals of the business.

“That said, we are clearly disappointed by the impact that the transition to our new systems had on our business,” said Drexler. “We view this as a short-term and temporary issue in continuing to build our long-term success.”

Drexler expects the impact of the upgrade to be resolved by the end of the third quarter.

For the first half, net income rose 7.4 percent to $48.6 million, or 76 cents a diluted share, on a 12.4 percent rise in revenues to $676.9 million.

Due to the unforeseen upgrade expenses, the specialty retailer now anticipates full-year earnings between $1.44 and $1.54, down from previous guidance of $1.70 to $1.75 a share. Analysts estimate profit of $1.71 a share. Additionally, the company expects third-quarter earnings between 28 cents and 33 cents a share, while analysts expect 42 cents a share.

Comps are expected to be flat to slightly negative for the second half of the year.

J. Crew operates 212 retail stores, including four Crewcuts and 10 Madewell stores, the J. Crew catalogue business, jcrew.com and 68 factory outlet stores. The company said it plans to open 42 stores this year.

Teen apparel retailer American Eagle posted a 26.4 percent drop in second-quarter profits, and said it would earn less than Wall Street anticipated during the current quarter.

The Pittsburgh-based company’s net income fell to $59.8 million, or 29 cents a diluted share, for the period ended Aug. 2, versus $81.3 million, or 37 cents, a year ago. Despite the drop, the bottom line beat analysts’ estimates of 28 cents by a penny, according to Yahoo Finance, and investors pushed shares of the firm up 4 percent to $14.29 Tuesday.

Sales fell 2 percent to $688.8 million compared with $703.2 million. Same-store sales dropped 9 percent in the quarter.

“The second-quarter financial results were not up to our standards,” said Jim O’Donnell, ceo. “While the consumer environment is clearly challenging, we are taking steps to invigorate our business. We are strengthening our competitive position by underscoring American Eagle’s value pricing, which is consistent with our heritage of great value together with excellent quality.”

O’Donnell told analysts during a conference call that the women’s denim business and weak back-to-school sales dragged down the quarter.

Like many retailers, American Eagle is working to tighten its inventories. Total merchandise inventories at the end of the quarter were $341.5 million, an increase of $20.2 million compared with last year. Inventory, excluding e-commerce, decreased 8 percent on a per-square-foot basis.

For the first half, profits sunk 35.2 percent to $103.7 million, or 50 cents a diluted share, on a 1 percent rise in sales to $1.33 billion.

American Eagle is looking for third-quarter earnings of 31 cents to 36 cents a share, compared with 45 cents last year. That brings the retailer in below the 39 cents analysts have penciled in for the quarter.

Although focused in on a different consumer entirely, Chico’s is dealing with many of the same macroeconomic ills.

Chico’s second-quarter profits declined 82.7 percent as sales waned, but shares of the misses’ retailer climbed 2.2 percent to $5.09 as the chain bested analysts’ lowered estimates.

The Fort Myers, Fla.-based women’s specialty retailer earned $6.7 million, or 4 cents a share, for the quarter ended Aug. 2, compared with profits of $38.7 million, or 22 cents, a year ago.

Analysts were looking for earnings of 3 cents a share on revenue of $405.3 million.

Sales fell by 7.1 percent to $405.2 million from $436 million a year earlier. Same-store sales decreased 15.9 percent across the company. Same-store sales fell 19 and 12 percent for Chico’s namesake brand and its White House|Black Market stores, respectively.

For the six months, net income slid 77.4 percent to $19.4 million, or 11 cents a share, on an 8.4 percent drop in sales to $814.8 million.

“The retail environment continues to be challenging as customers remain increasingly cautious in their spending across the entire retail sector,” said Scott A. Edmonds, chairman, ceo and president. “While we anticipate consolidated comparable-store sales for the fall season to remain negative, we expect to see an improvement in trend and continue to believe we will be profitable in the second half.”

While Edmonds said the results were “disappointing,” he noted that the company is “encouraged” by initial reads on its fall offerings. He added that Chico’s was cutting costs and limiting capital expenditures to those necessary to sustain the business.

Adrienne Tennant, analyst with FBR Capital Markets, said the company has cut its costs and trimmed inventories, but that its top line is “deteriorating rapidly.”

“[Chico’s] still has not elected to undergo a major restructuring as its misses’ competitors [Ann Taylor and Talbots] have done,” wrote Tennant in a research note. “As a result, we choose to remain on the sidelines until the company can reconnect with its customer and becomes much more deliberate about cutting expenses and inventories to match its top-line weakness.”