By and  on November 17, 2008

Double-digit declines in earnings and same-store sales are becoming nearly routine for retailers as the third-quarter earnings season commences.


J.C. Penney Co. Inc. and Abercrombie & Fitch Co. on Friday both qualified for the dubious distinction on Friday. While Penney’s won plaudits for its investment in fresh merchandising and A&F for its attention to the long-term integrity of its brands, neither was able to stave off sharp declines in third-quarter profitability. Penney’s earnings were down 52.5 percent in the quarter as comps receded 10.1 percent and it cut full-year expectations. A&F’s net was off 45.7 percent and comps were down 14 percent as the retailer issued full-year guidance well below Wall Street estimates based on expectations of a 26 percent drop in fourth-quarter comps.

The results, coupled with a government report on lower retail sales, sent retail stocks into a tailspin Friday. The Standard & Poor’s Retail Index closed out the day with a 7 percent decline to 246.58, down 9.9 percent from the previous Friday’s finish and its fourth down session in five days. Penney’s shares dropped 10.4 percent to $17.27 Friday, while A&F’s fell back nearly twice as rapidly, losing 20.7 percent to close at $17.79.

J.C. Penney

J.C. Penney’s third-quarter earnings were halved by extremely cautious consumer spending, which is expected to keep wreaking havoc over the holidays.

Penney said earnings for the current fourth quarter would fall to 90 cents to $1.05 a share, well below analysts’ consensus estimate of $1.32 and year-ago profits of $1.93. Sales are slated to drop 7 to 9 percent as comp store sales fall 9 to 11 percent over the quarter in what is the most important part of the year for retailers.

“Everything we can control, we are controlling to battle the macro forces we can’t control,” Myron E. “Mike” Ullman 3rd, Penney’s chairman and chief executive officer, said on a conference call with Wall Street Friday.

Penney’s cut selling, general and administrative expenses by $50 million in the third quarter to $1.3 billion and Ullman said the company was looking “very carefully at our home office expenses” and would be “prudent with capital expenditures this year and into ’09 and ’10.” The company plans to cut capital expenditures to $600 million next year from $1 billion this year.

Even with aggressive cost cutting, net income for the three months ended Nov. 1 fell to $124 million, or 56 cents a diluted share, from $262 million, or $1.17 a year earlier. Sales slumped 8.7 percent to $4.32 billion from $4.73 billion as comparable-store sales reversed 10.1 percent.

Despite the weak results, Penney’s is getting credit from some analysts for its recent product launches, especially Decree and Fabulosity.

“These guys have pumped a lot of newness in,” Deborah Weinswig, equity analyst at Citi, said. “They have done a better job than everybody else. They’ve continued to innovate, which will position them quite well when the economy improves. Their traffic is much better than traffic at the mall as a whole. They are now a destination for style.”

Ullman said the company is planning for the tough environment to continue. “We are making less merchandise commitments up front,” the ceo said. “We think we have a competitive advantage with longstanding relationships with our suppliers in Asia that puts us in a strong position to react to positive trends from an inventory standpoint, supported by exceptional flow in our cycle time capabilities.”

The retailer’s in-house brand development expertise will allow it to react quickly, he said.

Although Ullman said it’s vital to focus on existing customers during the downturn, that’s not stopping the company from trying to grab as much of the Mervyns business as it can. Of the 177 Mervyns stores being liquidated this holiday season, 36 of them are co-tenants with a J.C. Penney store and another 88 are within 5 miles of a Penney’s.

Ullman, who is also a director at the Federal Reserve Bank of Dallas, offered up a laundry list of consumer concerns on the conference call, from shrinking home values and 401(k) portfolios to the employment picture and perceived cost increases in the food and energy areas.

“Consumer confidence has plummeted,” he said, noting President-elect Barack Obama’s administration has to make it “job one” to try to get consumers “back in the game.”

“People with money are not spending as freely as they otherwise would because they are concerned about the lack of visibility to ’09 and beyond,” he said.

Year-to-date earnings fell 47 percent to $361 million, or $1.62 a diluted share, from $681 million, or $3.01, a year earlier. Sales decreased 5.5 percent to $12.73 billion from $13.47 billion. Penney’s ended the period with cash and short-term investments of $1.6 billion and long-term debt of $3.5 billion.

ABERCROMBIE & FITCH


At Abercrombie & Fitch, net income for the quarter ended Nov. 1 slid to $63.9 million, or 72 cents a diluted share, from $117.6 million, or $1.29 a share, for the same period last year. Net sales contracted 8 percent to $896.3 million, from $973.9 million. Analysts were looking for EPS of 71 cents on sales of $909 million, according to Yahoo Finance.

With a continued focus on repositioning and strengthening its brands, Abercrombie, unlike rivals American Eagle Outfitters Inc. and Aéropostale Inc., has done its best to avoid weighty promotions and has seen comp-store sales suffer as a result. Quarterly comps were down 14 percent, according to the company, which included declines of 20 percent at abercrombie, 18 percent at Hollister and 8 percent at its namesake stores. At Ruehl, sales fell 25 percent.

Gross margin dropped 20 basis points to 66 percent of sales.

“Our third-quarter financial results reflect a pullback in consumer spending and a difficult economic environment that is having an effect on all retailers,” said chairman and ceo Mike Jeffries. “We are mindful of the current environment and will continue to operate the business with a seasoned and disciplined approach, looking for the efficiencies within our operations.”

Still, he said the retailer is “firmly committed to the aspirational positioning” and global expansion of its brands.

Abercrombie’s strategy to “protect its brand equity,” coupled with weak women’s wear sales, which have been declining more than 20 percent on a same-store basis while men’s has been flat, has been “pressuring results,” said Stifel Nicolaus retail analyst Richard Jaffe, who rates the stock as “buy.”

“We believe Abercrombie was able to remain true to the aspirational positioning of its brands by limiting promotions, which is important for the longevity of the brands,” he said. “However, in the near term, it is resulting in reduced sales.”

Susquehanna Financial Group retail analyst Tom Filandro was not as optimistic about Abercrombie’s current strategy.

“Given Abercrombie’s premium brand status, it is more susceptible to economic downturns, creating the potential for price and margin pressure,” he said, adding the retailer’s positioning and strategy of select category price increases across its brands is “not appropriate” in the current economic environment. This tactic, he said, is “causing a “substantial downturn in shopper traffic.”

For the nine months, net income fell 21.3 percent to $203.8 million, or $2.27 a share, from $258.9 million, or $2.82 a share, for the same 2007 period. Net sales grew 0.9 percent to $2.54 billion, from $2.52 billion.

Based on expectations of a 26 percent decline in comps, the company provided fourth-quarter EPS guidance between $1 and $1.05 a share. Analysts had been looking for $1.57 per share. For the year, the retailer anticipates earnings of $3.27 to $3.32 a share, while analysts had predicted $3.75 a share. At the end of the second quarter, A&F had projected full-year EPS of $4.95 to $5.

The New Albany, Ohio-based retailer said it now plans capital expenditures of $390 million to $395 million for fiscal 2008, down from the $405 million to $410 million forecasted in August, as it plans fewer store openings. Gross square footage is expected to grow about 9 percent, down from last quarter’s projection of about 9 to 10 percent, which it forecasted last quarter.

Abercrombie said it expects to open 94 stores in North America, five fewer than projected in August.

CHRISTOPHER & BANKS

Christopher & Banks’ third quarter ends later this month, but the firm on Friday revised its expectations for the period to a loss of 4 to 7 cents a diluted share, below its earlier projection of a profit of 10 to 13 cents. Same-store sales declines have been tracking at more than 16 percent.

“The company has noted that there have been more people in the stores since gas prices dropped, but that they are looking and not shopping,” noted Sterne, Agee & Leach analyst Margaret Whitfield, who is now estimating third- and fourth-quarter losses of 5 cents and 29 cents a diluted share, respectively. She maintained her “hold” rating but reduced C&B’s target price to $3 from $6.

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