By  on August 13, 2008

After a larger-than-expected second-quarter loss, Tween Brands Inc. will convert 560 Limited Too stores to its more value-oriented Justice nameplate by May, expanding to more than 900 stores.

The move comes after a dismal quarter. The four-year-old New Albany, Ohio-based specialty retailer, which caters to girls ages seven to 14, posted a net loss of $6.7 million, or 27 cents a diluted share, against analyst expectations of a loss of 1 cent. In the year-ago period, Tween earned $2.1 million, or 7 cents a share. Sales rose 4.4 percent to $223.1 million, but fell 8 percent on a comparable-store basis.

However, the company said comps rose 3 percent at Justice stores and declined 11 percent at Too units.

“Dramatic times require dramatic moves,” Mike Rayden, chairman and chief executive officer, told WWD. “Limited Too basically started this segment of the tween business and, up until the end of 2007, Limited Too and Justice coexisted very nicely.”

But Limited Too’s merchandise, costing 20 to 25 percent more than Justice’s, performed poorly in the era of “$4-a-gallon gasoline and the meltdown on Wall Street,” he said.

Justice continued to average double-digit same-store sales increases, as it has for 14 quarters. Justice also was helped by parents’ growing acceptance of off-mall shopping. Ninety Limited Too units are being considered for possible conversion to off-mall Justice stores, and another 26 will be closed by the end of the current fiscal year.

Although the Limited Too nameplate will disappear, the brand will live on in the top 175 to 200 Justice doors and on the Internet, Rayden said. He expects fall and holiday merchandise to be gone by January and the reflagging of stores to be concluded by the end of April.

By narrowing its scope to a single brand, the company anticipates annual aftertax savings of $20 million to $25 million, including $15 million in home office head-count costs and $9 million in reduced marketing and store operation expenses. About 148 positions will be eliminated at headquarters, “but we’ll have the best people running a simplified brand situation that is already proven,” Rayden said.

The company will incur charges of about $18 million, or 45 cents a share, to make conversions during the second half of the current year. This will push earnings for the period down to a range of 35 cents to 65 cents, assuming a comp decline of 6 to 9 percent and gross margins of 33 to 35 percent of sales.

Although Justice has far less brand recognition than its older sister — 52 percent versus 97 percent — Rayden expects to narrow the difference as the company dedicates its “catazine” (a combination catalogue and magazine) and its Web site exclusively to Justice. “I would guess that Justice’s brand awareness would get to 75 percent this year and 85 percent next year,” he said.

Besides, Rayden said brand equity means less when customers will soon outgrow their demographic designation.

“We couldn’t sit around and let it bleed to death,” he said of Limited Too. “We’re not talking about adults who have a lifelong affinity for a brand. We went with the younger sibling.”

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