NEW YORK — Three retail heavyweights — Target Corp., J.C. Penney and Nordstrom — weighed in with higher fourth-quarter earnings on Thursday.

However, all three demonstrated, in varying degrees, how inventory and expense discipline was critical to pumping up the bottom line. Target’s earnings advanced despite a decline in fourth-quarter comparable-store sales and Penney’s more than doubled despite a virtually flat sales performance. At Nordstrom, which filed its final number of the 2002-2003 fiscal year after the close of the market, net income leaped 18.3 percent despite a far more modest increase in sales of 7.3 percent.


More than a billion big ones.

That’s how many dollars Target Corp. ceded in price reductions last year, and the combination of macroeconomic trends and unrelenting competition should keep the pricing pressure up.

Still the Minneapolis-based discounter posted double-digit profit gains for the year, even though it managed only a 4.6 percent improvement in its bottom line for the fourth quarter.

Profits for the quarter ended Feb. 1 rose to $688 million, or 75 cents a diluted share, from $658 million, or 72 cents, a year ago.

While results matched consensus estimates, investors traded shares of the firm down $1.10, or 4 percent, to close at $26.77 on the New York Stock Exchange Thursday. Technical difficulties cut short the firm’s morning conference call with analysts and investors, pressuring the stock, as did an especially weak performance at the firm’s Mervyn’s division.

Total revenues rose 6.4 percent in the quarter to $14.06 billion from $13.22 billion a year ago. Comparable-store sales fell 2.2 percent.

Continuing to produce the lion’s share of the firm’s top and bottom lines, the Target discount store’s pretax profits, before certain items, rose 8.1 percent to $1.17 billion during the quarter. Sales at the division increased 9 percent to $11.93 billion, despite a 1.1 percent comp decline.

While the firm’s department stores faltered, Target’s credit card business, the results of which are included in divisional results, on its own increased revenues 42.4 percent to $383 million. Pretax profits from plastic fattened 41.5 percent to $150 million.For the full year, comps in the discount stores were below expectations and historical trends with a 2.2 percent rise. On a conference call, Target attributed this to a poor economy and more than $1 billion in price reductions for the year.

Douglas Scovanner, chief financial officer, offered, "as an explanation, not an excuse," that comps without the price deflation would have been up more than 5 percent for the year at the flagship division. Where the deflationary trend heads depends on competitive dynamics, he said.

Target, which is working to improve in its sourcing and supply chain efficiency, is one of the few retail players able to stand up to Wal-Mart Stores Inc. on price.

"We’ll continue to enjoy year-over-year beneficial impact in costs of sales," said Scovanner. "The open question is, how much of that will flow to the bottom line, versus how much of it will manifest itself in future price deflation?"

Gregg Steinhafel, president of the Target division, said the chain, through its internal sourcing organization, was working to enhance its internal design and development, up the volume of direct imports and implement a more comprehensive approach to vendor negotiations. Target is also speeding up its timetable for merchandise production, with an eye on reducing risk and increasing speed to market.

Speed to market is critical in apparel, where competition and the firm’s own brand positioning are pressuring it to be more on trend and therefore take on greater fashion risk. If Target can increase its inventory turns in apparel, it can lessen the negative impact of a fashion miss. Among the major labels carried by Target are Mossimo, Cherokee and Stephen Sprouse.

Key merchandising initiatives taking hold this year include a line of women’s apparel from Isaac Mizrahi and a maternity collection from Liz Lange, as well as sleepwear, fashion accessories and home items from Cynthia Rowley. "These as well as our other merchandise initiatives will allow us to maintain our distinctive brand image," said Steinhafel.

So far, he said, Rowley’s line is faring "very, very well," but is "a tad" below plan, while Lang’s merchandise is on plan and has been gaining momentum recently."With the back-end sourcing and the collaboration approach we take in design, we’re also able to deliver exceptional value and maintain our average, or increase our margins just slightly in some of these businesses," said Steinhafel. "It’s less about the profitability, it’s more about the differentiation, but certainly our objective is to do both."

The firm’s department store divisions didn’t fare as well as the discount stores. Mervyn’s pretax adjusted profits plummeted 42.7 percent to $75 million in the quarter. Sales fell 9.1 percent to $1.15 billion, on a 9.3 percent comp decrease. Pretax adjusted earnings at Marshall Field’s slid 19 percent to $51 million. Sales dipped 6.2 percent, on a comp and total basis, to $800 million.

WR Hambrecht & Co. analyst William Dreher noted, "The company’s doing a very nice job of blocking and tackling." This plays out in the new merchandising initiatives, which he described as "impressive," as well as improvements in sourcing and the supply chain.

The weakness at Mervyn’s on the eve of Kohl’s Corp.’s entry into California, the strongest Mervyn’s market, he noted, "is not going to sit well with investors." The increased competition, however, should only modestly impact the overall firm’s earnings. Dreher also said the inventories were "not great" and, with an 11.9 percent increase at the Target division, outpaced sales.

While the firm’s credit card operations represent about 15.4 percent of the firm’s pretax profits and appear to be adequately reserved, Dreher said they continue to be a distraction to investors, especially in the wake of continuing difficulties in Sears, Roebuck & Co.’s credit card business.

For the year, earnings shot ahead 20.9 percent to $1.65 billion, or $1.81 a diluted share, from $1.37 billion, or $1.50, a year ago. Revenues for the 12 months were ahead 10.3 percent to $43.92 billion, from $39.83 billion during the preceding year.

This year, Target said Wall Street’s recent estimates, calling for earnings of $2.05 or $2.06 a share, were appropriate. Growth is anticipated to be slow in the first three quarters with hopes that the fourth quarter, up against a weak holiday season in 2002, will pick up the slack.Looking out to 2004, Salomon Smith Barney analyst Deborah Weinswig said Target would be the biggest beneficiary of "any kind of directional improvement in the economy." She owed this to the credit card business, which would pick up in better times, and the fashion content of their apparel. After "hunkering down" for so long, Weinswig said, the consumer’s going to want to spend on fashion when the economy turns.


At J.C. Penney Co. Inc., a penny saved was many pennies earned in the fourth quarter.

Bolstered by its cost-saving centralization initiatives, strong margin growth allowed the department store giant to more than double its fourth-quarter profits even as sales remained essentially unchanged.

For the three months ended Jan. 25, the Plano, Texas-based retailer reported net income swelled 112.6 percent to $202 million, or 68 cents a diluted share. That compares with last year’s earnings of $95 million, or 32 cents. Earnings per share exceeded the Wall Street consensus estimate by 2 cents. The impressive performance was attained despite taking $83 million in pretax charges for asset impairment and severance costs related to the closing of approximately 10 stores in the U.S. and Mexico and the closing of some catalog facilities.

At Penney’s department stores, operating profits leaped 35.2 percent to $346 million from $256 million a year ago.

Total sales for the period, which include results from Eckerd drugstores, increased fractionally, up 0.1 percent to $9.55 billion from $9.54 billion a year ago. Net sales at the firm’s department stores and catalog regressed 2 percent to $5.77 billion from $5.88 billion last year, as same-store sales advanced 1.9 percent.

"Department store and catalog operating profits increased 90 basis points as a percentage of sales in 2002, the second consecutive year in which operating profit has increased by about 100 basis points," said Vanessa Castagna, chairman and chief executive officer of Penney’s stores, catalog and Internet, on a conference call. "Higher gross margin has driven the improvement the last two years and that’s a direct reflection of the benefits from our centralization initiatives in the department stores and inventory management at the catalog."Department store and catalog gross margin increased by 290 basis points as result of better merchandise assortments, Castagna said. Quarterly comps were helped by strong holiday sales, which were led by apparel, fine jewelry, children’s apparel and home products. Fine jewelry comped up in the double-digits on the strength of diamonds and watches. Other categories that sold above store average were fashion jewelry, women’s outerwear and sportswear.

"We continue to build and expand our merchandise assortment by adding more fashionable merchandise at value prices," said Castagna.

On the other side of the ledger, catalog sales, as expected, tumbled 20.7 percent. Castagna said the catalog was impacted by lower circulation, smaller page counts, changes to cost payment policies and fewer outlet stores. Penney has been restructuring its catalog operation and expects to save $40 million, or 10 cents a share, in 2003. Internet sales, however, grew 20 percent, she said.

Goldman, Sachs & Co. analyst George Strachan applauded Penney’s performance. In a research note, he wrote: "J.C. Penney achieved solid holiday sales momentum with comparable-store sales increasing 1.9 percent, a stand-out in the department store peer group, with strong apparel, jewelry and home results. Inventory is clean and current with a heavy spring content as management has sought to transition to spring two weeks earlier this year versus last year."

While profit increases based on margin enhancement are a viable growth strategy for a time, said A.G. Edwards analysts Robert Buchanan, they are unsustainable in the long term. Eventually Penney’s sales will need to fuel bottom-line gains.

"The department stores have done a great job of improving the art of retailing — the marketing, the in-store signage, the product assortment, colors and styles," said Buchanan. "I think the next challenge is to improve the science of retailing. The replenishment of key colors and sizes at stores is most important. That will be the key to driving sales."

Overall, for the full fiscal year, Penney said net income more than quadrupled, rising 313.3 percent to $405 million, or $1.25 a diluted share from continuing operations. That compares with last year’s profits of $98 million, or 32 cents. Net earnings per share including discontinued operations amassed to $1.37. Either way, earnings beat the Wall Street forecast of $1.21.At the department stores and catalog, operating profit increased 26.8 percent to $695 million from $548 million a year ago.

Total company sales inched up 1.1 percent to $32.35 billion from $32 billion a year ago. Department stores and catalog sales dipped 2.5 percent to $17.7 billion from $18.18 billion a year ago, but same-store sales expanded 2.6 percent.

Looking ahead, Penney said it expects first-quarter earnings per share in the low 30-cent range, and forecasts full-year fiscal 2003 earnings per share to be in the range of $1.50 to $1.70. However, Buchanan cautioned that the company’s earnings are now going up against much tougher comparisons.

"[Chief executive officer] Allen [Questrom] had an outstanding year last year," said Buchanan. "He’s starting to go against his own better numbers, so his earnings progress rate is probably going to start to decelerate."


Nordstrom Inc. late Thursday reported higher quarterly earnings, reflecting stronger sales and lowered expenses.

Still, the upscale retailer, which is based in Seattle, cautioned investors about the current quarter, noting it is expecting flat comps because of the blizzard blanketing the Northeast.

For the three months ended Jan. 31, the firm reported income of $60 million, or 44 cents a diluted share, an 18.3 percent increase over income of $50.7 million, or 38 cents, in the year-ago period. Result came in 2 cents above Wall Street’s estimates. Net sales during the quarter rose 7.3 percent to $1.75 billion over $1.63 billion. Comparable sales improved 1.9 percent.

"For quite some time, our strategy centered on executing key initiatives, including driving top-line growth increases, continuing to improve operational disciplines related to gross margin and selling, general and administrative expense, and completing the implementation of perpetual inventory," Blake Nordstrom, president, said on an afternoon conference call.

And progress it made as comps increased for eight of the last nine months and the firm saw modest improvements in both gross margin and expense levels. In addition, the company said all major elements of its perpetual inventory implementation were completed according to plan and under budget.

Nordstrom said goals for 2003 include providing superior customer service and distinctive merchandise with an emphasis on quality and value.Strong merchandise categories included cosmetics and accessories, both achieving mid-single digit comp increases. Women’s apparel was flat, but above expectations in designer and bridge departments.

Company executives said in 2002 it regained lost ground in sales by focusing on its core merchandise strategy of providing a balanced and differentiated wardrobe organized by lifestyle, not brands, as illustrated by its solid results in cosmetics and designer categories.

Nordstrom said it made progress getting younger shoppers to its stores through various marketing and merchandise efforts.

Chief financial officer Michael?Koppel said he is targeting first-quarter earnings per share of 23 to 27 cents and full-year profits of $1.33 and $1.39.

For the full year, profits slid 27.6 percent to $90.2 million, or 66 cents a diluted share, including a nonrecurring and impairment charge of $71 million net of tax related to the cumulative effect of an accounting change and the purchase of a minority interest in and associated reintegration costs. Excluding the charges, fiscal 2002 earnings were $161.3 million, or $1.19, respectively. Year-ago earnings totaled $124.7 million, or 93 cents. Sales rose 6.1 percent to $5.98 billion over 2001 sales of $5.63 billion and increased 1.4 percent on a comp basis.

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