Retail Execs Brace for Lingering Weakness

Q2 bottom lines continue to sag for retailers as they look ahead to 2010 and 2011 for relief.

The black-and-white imagery at Victoria’s Secret.

Get ready for what could be another 18 months of tough slogging.

This story first appeared in the August 20, 2009 issue of WWD.  Subscribe Today.

Retailers are anxious to look ahead, especially given almost uniformly weak second-quarter results and a poor outlook for the key back-to-school season — and now a survey of top executives found many don’t expect any real improvement until at least 2011.

That’s not to say it’s all doom and gloom among retail’s top brass, however.

Seventy percent of retail executives surveyed by KPMG expect business conditions to improve next year, with 68 percent predicting stronger revenues and 66 percent forecasting better profits. But 44 percent of executives also thought the economy wouldn’t substantially recover until 2011 or beyond.

“These executives feel like they have done what they need to do to survive and be poised to take advantage [of conditions] when the economy recovers,” said Mark Larson, KPMG’s global retail sector chair, who was encouraged by the survey but acknowledged the improvement in 2010 will come off of plummeting profits and sales in 2009. Three-quarters of the retailers surveyed by KPMG said they had already trimmed their workforces and only 14 percent said they were still planning to issue pink slips.

The weakness of the consumer and the impact of lower spending levels on retailers’ bottom lines came into even sharper relief as specialty stores reported second-quarter results Wednesday, adding to the slew of poor numbers that have been reported since last week.

Limited Brands Inc. said profits for the quarter fell 27.2 percent. Still, the company outstripped analysts’ expectations after adjustments for special items.

Hot Topic Inc. and Tween Brands Inc. each posted losses that were narrower than analysts’ predicted, while Citi Trends Inc. turned in a small loss when Wall Street was looking for a profit.

Cost-cutting and inventory reduction have been major themes so far this year, but some retailers appear to have made their cuts and are planning to bolster their businesses where they can.

Overall, 54 percent of those surveyed by KPMG said their strategic focus was on investment, while the rest are still zeroed-in on cost cuts. Seventy-seven percent of executives are using technology to reduce operational costs.

Among the biggest challenges vexing the retailers were: restoring consumer confidence, cited by 55 percent of the executives; finding new sources of revenue growth, 51 percent; managing costs, 48 percent, and adjusting to changing consumer demand, 46 percent. The survey of 65 top retail executives was conducted by Clarion Research Inc. in May, June and July.

“The executives I talk to feel like we may have reached a bottom,” said Larson. “That provides some level of predictability. You’re losing some of the fear that business is going to continue to go down.”

Still, he said, forecasting business conditions with any degree of certainty remains very difficult — especially given that retail has already endured quite a fall.

Limited said its second-quarter profits declined to $74.3 million, or 23 cents a diluted share, from $102 million, or 30 cents, a year ago. Adjusting for certain items, the firm’s earnings of 19 cents a share beat out the 16-cent profit analysts projected. Sales for the three months ended Aug. 1 fell 9.5 percent to $2.07 billion from $2.28 billion.

The company, which operates the Victoria’s Secret and Bath & Body Works chains, will detail its results in a conference call today. For the full year, the company expects earnings of 75 cents to 90 cents a share.

Limited also completed a cash-tender offer to buy back $103.1 million in bonds that were slated to mature in 2012. The offer, which expired Tuesday, amounted to a refinancing, since Limited used the proceeds of a recent offering of bonds maturing in 2019 to buy back the debt.

Hot Topic’s second-quarter losses grew on sales weakness, notably in the women’s and music divisions, yet the mall-based retailer beat analysts’ estimates by a penny.

For the quarter ended Aug. 1, the City of Industry, Calif.-based firm posted a $3.2 million net loss, or 7 cents a diluted share. This compared with a loss of $450,000, or 1 cent, a year earlier. Net sales slid 5.4 percent to $157.8 million from $166.8 million. Analysts anticipated a loss of 8 cents a share.

Comparable-store sales fell 7.7 percent, with comps down 7.5 percent at the firm’s namesake chain and 8.4 percent at Torrid, its plus-sized chain.

Chief executive officer Betsy McLaughlin said the company expected the quarter to be a challenging one given the weak lineup of music and licensing catalysts and a later start to the b-t-s season.

“We did not, however, anticipate the sharp deceleration of traffic and the corresponding confidence across all categories and geographies,” she said.

The company said it expects third-quarter earnings per share between 11 cents and 13 cents based on a midsingle-digit decline in comps.

Tween said tighter inventory, increased promotions and lower expenses helped it reduce its second-quarter loss beyond analysts’ expectations. For the period ended Aug. 1, the company recorded a net loss of $2.8 million, or 11 cents a diluted share, compared with a loss of $6.7 million, or 27 cents a share, in the year-ago quarter.

Excluding one-time charges related to store impairment and merger expenses and offsetting tax benefits, the loss per share would have been 16 cents, better than the 37-cent loss analysts had expected.

Revenue slid 8.1 percent to $205.1 million from $223.1 million in the 2008 period as same-store sales declined 12 percent.

On the company call, executive vice president and chief financial officer Rolando de Aguiar said, “Our performance exceeded our internal forecast as sales for the period were better than our expectations and our cost savings were better than our plan…we believe the business is beginning to show improvement in response to consumer recognition of our value proposition and our strong back-to-school merchandise assortments.”

At Citi Trends, slumping sales led to an unexpected second-quarter loss, but the urban retailer said its comparable-store sales for the year would eke out a gain.

The Savannah, Ga.-based firm recorded a net loss of $69,000, or break even on a per share basis. This compared with a profit of $2.8 million, or 20 cents, a year ago. Sales for the quarter ended Aug. 1 slid 3.5 percent to $111.6 million from $115.7 million.

On average, analysts expected EPS of 5 cents on revenues of $124.7 million.

The company said the quarter suffered from a difficult comparison to the year-ago quarter, when spending was boosted by government stimulus checks. Same-store sales were down 12.4 percent in the quarter.

“Our customer endured very difficult economic conditions this quarter,” said David Alexander, president and chief executive officer. “This is particularly true for our teenage customers who use their summer jobs to purchase their summer fashions.”

Citi Trends said comps rose 3.5 percent in the early weeks of the third quarter and would increase by 4 percent in the second half.

Accordingly, the firm expects to finish the year with comps up 1 percent and EPS between $1.28 and $1.33. And the company is also continuing to expand its retail footprint despite the recession. Selling square footage is expected to increase by at least 15 percent this year.

Investors are largely looking past second-quarter results and placing bets on the holiday season, when retailers face much easier comparisons against last holiday season, according to analysts.

The S&P Retail Index inched up 0.7 percent, or 2.32 points, to 356.96 Wednesday, as the Dow Jones Industrial Average also advanced 0.7 percent, or 61.22 points, to 9,279.16.

Tween’s stock rose 2.7 percent to $7.53 after posting its second-quarter results. Prior to their after-market reports, shares of Limited increased 4.4 percent to $14.58, as Hot Topic rose 2.6 percent to $7.42 and Citi Trends advanced 0.9 percent to $28.23.