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Signs of Strength Seen in Specialty Stores

American Eagle Outfitters, Charming Shoppes, and Chico's managed to exceed consensus estimates for their first-quarter results.

Specialty apparel chains showed some signs of improvement as they reported first-quarter results Wednesday, but hopes for a speedy recovery were nowhere to be found in the third-quarter results of jeweler Zale Corp.


The Dallas-based chain reported that, in the third quarter ended April 30, its net loss mushroomed to $23.2 million, or 73 cents a diluted share, 27 cents worse than analysts expected and higher than the year-ago loss of $16.8 million, or 40 cents.

The large margin of the earnings miss at Zale pressured the firm’s shares down $1.03, or 20.4 percent, to $4.01, and stood in contrast to the performance of a quartet of specialty stores — American Eagle Outfitters Inc., Charming Shoppes Inc., Chico’s FAS Inc. and Coldwater Creek Inc. — which, while still under recessionary pressures, managed to exceed consensus estimates for their first quarters and report some signs of progress in their efforts to reignite consumer spending.

However, at Zale, the bottom line’s erosion followed top-line results. Sales fell 20.5 percent to $379.1 million and were off 20 percent on a comparable-store basis.

On a morning conference call, Neal Goldberg, president and chief executive officer, said the firm paid a price for its program to eliminate $100 million of dated stock. “While highly successful in allowing us to reach our goal of liquidating inventory, the clearance initiative does distort current performance due to the traffic and comp-store sales increases in the prior year,” he said.

Although not all analysts agreed, Jim O’Donnell, ceo of American Eagle Outfitters, said he saw “early indications that the business is stabilizing” despite the teen retailer’s 50 percent drop in first-quarter profits and a 10 percent decline in quarterly comps.

“The best-performing areas of our women’s business are those where we have delivered on-trend, differentiated fashion,” he said. “Going forward, you can expect more fashion, more often.”

Women’s comps declined 13 percent, better than the fourth quarter’s 23 percent drop, but merchandise margins and comps were said to be improving and denim, dresses and accessories were helping the American Eagle brand, although a number of areas required “considerable work,” he said.

Jeffries & Co. analyst Randal Konik, who rated the company a “buy,” cited improved margins, well-controlled inventories, a strong balance sheet and “signs of stability” for his stance. However, Eric Beder, his counterpart at Brean Murray, Carret & Co., felt that, with pricing still of paramount concern to teens, the Pittsburgh-based American Eagle will remain under “material competitive pressure” from rival Aéropostale Inc.

Net income slid to $22 million, or 11 cents a diluted share, 1 cent above estimates and down from $44 million, or 21 cents, a year ago. Revenues declined 4.4 percent to $612 million and gross margin slid to 36.1 percent of sales from 41.2 percent in last year’s quarter. EPS in the current quarter is projected at between 12 and 15 cents, versus a consensus estimate of 15 cents.

On Thursday, shares fell 15 cents, or 1 percent, to $14.33, while the S&P Retail Index dropped 2.2 percent to 318.50 and the Dow Jones Industrial Average fell 2.1 percent to 8,300.02.

At Chico’s FAS, a slight increase in sales helped boost first-quarter profits 13.8 percent. The Fort Myers, Fla.-based misses’ chain logged net income of $14.5 million, or 8 cents a diluted share, up from $12.7 million, or 7 cents a share, in the 2008 period. Excluding impairment, EPS was 11 cents, 3 cents better than the analyst consensus estimate from Yahoo Finance. Shares picked up 53 cents, or 6 percent, to $9.38.

Sales were up 0.3 percent to $410.6 million as comps fell 3.2 percent versus a 17.5 percent decline a year ago. Gross margin rose 90 basis points to 56.8 percent.

David Dyer, president and ceo, said on a conference call that comps at Chico’s stores, while still negative, showed signs of improvement earlier than he had anticipated. “The fashion business is not for the faint of heart, because you’re really only as good as your last delivery,” he said. “We think that each of our deliveries hopefully is going to improve.”

Charming Shoppes managed to reduce its first-quarter loss despite a double-digit sales decline, but the financial crisis also allowed it to pay down debt more cheaply. The Bensalem, Pa.-based misses’ firm said it bought back $30 million of convertible notes for $13.9 million, or just over 46 cents on the dollar. Total liquidity at the end of the quarter was $331 million, including $207 million available under its line of credit and $124 million in cash.

The net loss narrowed to $6.6 million, or 6 cents a share, from $46.8 million, or 41 cents a year earlier, and, excluding special items, translated to earnings of 1 cent a share, 8 cents better than analysts expected. Shares rose 9 cents, or 2.5 percent, to $3.67.

Reduced expenses helped limit losses, despite a sales decline of 16.1 percent to $538.1 million. Comps fell 13 percent, highlighted by a 15 percent drop at Lane Bryant. Gross margin improved 50 basis points to 30.8 percent of sales.

“Our results reflect comparable-store sales performance that was not on par with other retailers, and a disappointing level of earning power for our brands,” said Jim Fogarty, president and ceo, adding the firm was focused on improving its business model, marketing and assortment planning “to reflect more balanced and compelling offerings across our brands.”

After the markets closed Wednesday, Coldwater Creek said reductions in inventory and expenses helped it narrow its first-quarter loss and beat analysts’ estimates. The net loss fell to $7.6 million, or 8 cents a diluted share, from a loss of $9.2 million, or 10 cents a share, in the year-ago quarter. Revenue dropped 15.8 percent to $228.4 million, while comps fell 18.6 percent. Analysts anticipated a loss of 14 cents a share on sales of $235 million.

“While our performance in the quarter resulted in a loss, we continued to make progress implementing our strategies and have seen meaningful improvement in our sales trends in April and May,” said Daniel Griesemer, president and ceo.

The company said it expects “sequential improvement from the first-quarter results.”