NEW YORK — So far this week it’s been a mixed bag for retailers posting quarterly results, but one theme is quickly emerging: Fall is going to be hot, and marked by more full-priced selling.
Although cautious about the performance of its department store group, Saks Inc. is expecting the sales momentum at its Saks Fifth Avenue division to continue in the second half. At J.C. Penney, the back-to-school season is surging ahead of expectations, while TJX Cos. anticipates its better inventory positions to pay off this fall.
Meanwhile, the market was digesting Kmart’s quarterly results, which included news that the board empowered its chairman to use its more than $2 billion in cash for investments.
Impacted by poor sales at its department store group, Saks Inc. delivered a wider loss on higher sales for the second quarter. The loss came in at $28.9 million, or 20 cents, compared with $25.8 million, or 18 cents, a year ago. The loss includes after-tax charges of $2.1 million in connection with the disposal of long-lived assets. Sales gained 9.2 percent to $1.35 billion from $1.24 billion.
During the period, the company retired $72 million of senior unsecured notes and paid a $2-per-share dividend to common shareholders totaling $285 million.
On a divisional basis, Saks Fifth Avenue’s operating loss for the quarter was nearly halved, to $12.4 million from $22.1 million, and operating income for the six months jumped 235 percent to $36.4 million from $10.9 million last year, with the gain driven in part by a reduction in promotional activity. In the department store group, operating income fell by 10 percent to $33.3 million from $37 million.
Including unallocated corporate expenses, Saks Inc.’s operating loss in the quarter grew to $19.7 million from $12.6 million last year, while operating income for the six months grew to $41.1 million from the year-ago mark of $33.9 million.
AG Edwards analyst Bob Buchanan was critical of Saks’ expenses. He said in his research note following the retailer’s results that the expense ratio “has now increased eight quarters in a row and 15 of the past 17 quarters.” Buchanan said “although the backdrop of surging high-end sales has helped lift results for Saks Fifth Avenue and the company as a whole during the past four quarters, at some point that surge will dissipate.”R. Brad Martin, chairman and chief executive officer, said in a statement, “For the remainder of the year, we have taken a cautious view regarding [the department store group] and now anticipate low-single digit comparable-store sales growth in the second half. We will manage expenses accordingly. At [Saks Fifth Avenue] we expect a favorable sales environment to continue, and we will continue to invest in the strategic initiatives for this business.”
For the six-month period, the net loss narrowed to $6.9 million, or 5 cents, from $11.3 million, or 8 cents, last year. Sales rose 10.4 percent to $2.89 billion from $2.62 billion.
Regarding capital expenditures, management said during a conference call with Wall Street that the retailer will continue to invest in its New York flagship. The company described recent press reports about an extensive and expensive upgrade of its New York stores as “way ahead of themselves in terms of business plans that have been developed at this point in time.” The company has earmarked some $250 million in capital expenditures for 2004.
The retailer also confirmed that Peggy Eskenasi, president of private brand and product development for the Saks Inc. department store group, is leaving the company. Eskenasi joined Saks as senior vice president of private label and brand development in 1997, and was promoted to executive vice president two years later.
“The department store team is spending a lot of time on what the right, long-term leadership and organizational structure looks like for the private brand organization,” management said on the call. “So, we’ve got more work to do in that regard.”
Meanwhile, free of its Eckerd drugstore unit, J.C. Penney Co. posted a second-quarter profit on rising sales.
For the three months ended July 31, the retailer reported net income of $1 million. Last year’s loss, including the Eckerd operation, was 2 cents a diluted share. On a continuing operations basis, the company posted a profit of 23 cents a diluted share versus a loss of 3 cents a year ago.
Sales rose 5.8 percent to $3.86 billion from $3.65 billion, which included a 7.1 percent gain in comparable-store sales and a 1.6 percent decline in Internet and catalogue sales. For the six-month period, income fell 31.1 percent to $42 million, or 14 cents a diluted share, from $61 million, or 18 cents, last year. Sales rose 7.3 percent to $7.89 billion from $7.36 billion.During the quarter, the firm completed its $4.5 billion sale of Eckerd to CVS Corp. and the Jean Coutu Group.
Allen Questrom, chairman and chief executive officer of J.C. Penney, said in a statement, “Early back-to-school results are exceeding our expectations. A number of external factors, including higher oil prices and concerns over terrorism, could impact future consumer spending patterns, but we remain confident that our third-quarter sales and operating profits will improve.”
With sales at its retail stores exceeding expectations, the firm is projecting third-quarter earnings from continuing operations will be between 35 and 40 cents a share, which includes a reduction to reflect the 11 cent per share impact from one-time charges related to early debt retirements.
For Kmart Holdings Corp., the big news was the board’s decision to give chairman Edward Lampert the power to invest the retailer’s growing pile of cash, which exceeds $2 billion.
Despite sliding same-store and total sales, the company recorded net income of $155 million, or $1.54 per diluted share, compared with a net loss of $5 million, or 6 cents per share, in the same period in 2003, while total sales dropped 15.3 percent to $4.79 billion from $5.65 billion. Same-store sales decreased 14.9 percent.
The company blamed the lower sales on reductions in promotional events and newspaper advertising, as well as the effect of unseasonably cool weather and a transition in apparel lines.
But the merchandising restructuring seems to be paying off. As reported in July, the company is applying a vertical approach to apparel development that is similar to the Gap Inc., moving sourcing and design in-house and manufacturing abroad, resulting in cheaper goods and tighter control. Kmart’s gross profit margin swelled 26 percent for the quarter.
Julian C. Day, president and ceo of Kmart, said he was “happy with the dramatically improved styling and quality of our recently launched fall product lines.”
Richard Hastings, retail analyst at Bernard Sands, said “gross profit at Kmart shows they are transforming their merchandise mix around higher-margin apparel, footwear, Martha Stewart Everyday softlines and other margin-driven items. With very little interest expense and staggeringly strong liquidity ratios, Kmart’s management has enough time and earnings stability to figure out their moves over the next 18 months.”Meanwhile, the figure that really wowed analysts was the $2.62 billion in cash and cash equivalents Kmart has amassed in the last two fiscal quarters. This is about double what Kmart had in its coffers last year.
There have been rumblings in the market that Lampert plans to turn the retailer into an investment company in a way similar to what Warren Buffett did with Berkshire Hathaway. Lampert, in prior news reports, has cited Buffett as a role model.
For TJX Cos. Inc., higher markdowns during the second quarter did little to bolster sales, dragging profits below expectations. The Framingham, Mass.-based company reported sales rising 12 percent to $3.4 billion from $3 billion in the prior year, while net income slipped to $118 million from $123 million.
“We maintained our inventory discipline when sales trends softened during the second quarter and took higher markdowns to keep merchandise turning,” said Edmond English, president and ceo, in a statement, adding that despite the rise in markdowns during the second quarter, “inventories are in great shape” for the fall.
For the six-month period, the off-price retailer posted net income that climbed 21 percent to $286 million from $237 million last year while sales rose 16 percent to $6.8 billion from $5.8 billion.
— With contributions from Jennifer White and Michelle Baran
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