Target, Others Top Muted Estimates

Low expectations paid some high dividends for retailers, including Target and AnnTaylor, reporting first-quarter results on Wednesday.

Low expectations paid some high dividends for retailers reporting first-quarter results on Wednesday.

This story first appeared in the May 21, 2009 issue of WWD.  Subscribe Today.

Beginning with Target, all seven of the apparel retailers checking in with quarterly numbers managed to beat analysts’ estimates, even though only three — Hot Topic Inc., Cato Corp. and Citi Trends Inc. — showed actual improvement on the bottom line.

What the results did signal, however, was that stores succeeded in their efforts to rein in expenses at least as quickly as consumers were limiting their own spending. Last quarter’s results and their guidance going forward suggest that stores believe the rapid declines in retail sales might at least be slowing.

“Broadly speaking, economic conditions appear to be stabilizing somewhat, and we believe this will prompt greater discretionary spending,” said Gregg Steinhafel, Target Corp.’s chairman, president and chief executive officer, on a conference call with analysts.

Even as Target continued to duke it out with activist investor William Ackman over the composition of its board and long-term strategies — with Ackman garnering the support of some investment advisers — the company said it was getting some of its retail mojo back.

Target’s retail business perked up modestly in the first quarter, but continued weakness in the credit card unit pushed earnings down 13.4 percent to $522 million, or 69 cents a diluted share, from $602 million, or 74 cents, a year ago. Even with the credit decline, results came in 10 cents ahead of analysts’ projections provided by Yahoo Finance of a 59 cent profit. Revenues for the three months ended May 2 inched up 0.2 percent to $14.83 billion.

Customers — or “guests,” in Target-speak — are still being creative with their dollars.

“Rather than buying complete outfits, guests are buying a single piece and accessories to go with it,” said Kathryn Tesija, executive vice president of merchandising.

And the same goes for other categories at the store as shoppers sweat out the recession. “Sales of microwave popcorn are very strong as guests re-create the theater experience at home,” said Tesija.

“Everybody was expecting a good quarter, but this was a really good quarter,” said David Strasser, an analyst with Janney Montgomery Scott.

He said Target was “caught flat-footed” when consumers began emphasizing value above all else last fall, but that the company had regained its positioning. The retailer has kept its “Expect More, Pay Less” tag line, but hammered home the “Pay Less” part of that message in its advertising since the financial crisis made clear that consumer attitudes were shifting dramatically.

“If the economy gets worse from here…they’ll be in much better shape than they were last year,” said Strasser.

The store also is working to keep its cheap-chic cred, and this month said it would have a limited-run collection from Anna Sui this fall as part of its Designer Collaborations program.

At Target’s 1,698 stores, earnings before interest and taxes inched up 0.3 percent to $962 million as sales rose 0.4 percent to $14.36 billion. Comparable-store sales dropped 3.7 percent as both the number of transactions and the average transaction amount fell.

However, in the credit card unit, EBIT dropped 67.3 percent to $65 million on a 5.6 percent decline in revenues to $472 million. Bad debt expense rose 63.5 percent to $296 million as credit card holders struggled to pay off their bills in the recession.

Investors gave the results the thumbs-up and traded shares of the stock up $1, or 2.4 percent, to $42.94 even as the S&P Retail Index declined 1.6 percent on the day to 322.47. The Dow Jones Industrial Average and S&P 500 fell 0.6 percent and 0.5 percent, respectively.

Further down the price chain, BJ’s Wholesale Club Inc. said first-quarter net income rose 41.6 percent to $24.4 million, or 45 cents a share, ahead of estimates, on a 0.3 percent increase in revenues to $2.31 billion.

Inventory and expense control helped AnnTaylor Stores Corp. log a smaller-than-expected first-quarter loss despite steep sales declines, but caution about the future and acknowledgement of an unexciting assortment in the recent past contributed to an 11 percent drop in its stock Wednesday.

The New York-based women’s apparel retailer reported a net loss of $2.3 million, or 4 cents a diluted share, in the three months ended May 2, 9 cents better than the 13 cent loss analysts expected, versus net income of $25.9 million, or 43 cents a share, in the year-ago period. Net sales dropped 27.9 percent to $426.7 million as comps declined 30.7 percent, with a 42.7 percent slide at Ann Taylor only partially offset by the 24.2 percent decline at the more value-oriented Loft chain.

Gross margin improved to 55.5 percent of sales versus 53.2 percent a year ago and 35.7 percent in the fourth quarter.

Kay Krill, president and ceo, said on a morning conference call that “internal factors” weighed down the Ann Taylor division, as did the difficult state of the market for women’s professional apparel.

Ann Taylor’s “product assortment was not compelling or relevant” to the consumer, she said, adding that, beginning this fall, the collection will have a “far more modern” point of view.

Gross margin for the year is expected to be flat versus last year, when it finished at 48.1 percent of sales.

Shares closed at $7.97, down 98 cents.

Reporting after the markets closed, Limited Brands Inc.’s quarterly net income dropped 97.3 percent to $2.6 million, or 1 cent a diluted share, beating estimates of a 3 cent loss by 4 cents.

Limited said sales declined 10.4 percent to $1.73 billion while comparable-store sales fell 7 percent.

The Columbus, Ohio-based operator of Victoria’s Secret, Bath & Body Works and other chains said it expects second-quarter earnings per share at 11 cents to 16 cents, and full-year 2009 EPS of 67 cents to 87 cents. Analysts, on average, had expected 11 cents during the current quarter and 74 cents for the year.

Also reporting after market, Hot Topic Inc. swung to a first-quarter profit Wednesday, beating analysts’ estimates by 1 cent, but provided second-quarter guidance below expectations.

The mall-based specialty retailer posted net income of $1.2 million, or 3 cents a diluted share, compared with a net loss of $1.4 million, or 3 cents a share, in the year-ago period. The company said first-quarter results included roughly a 2 cent-a-share expense related to its online music site, Shockhound. Quarterly revenue grew 10.2 percent to $175.1 million. Analysts forecast EPS of 2 cents on sales of $174.7 million.

Comps rose 7.3 percent, increasing 9.6 percent at Hot Topic and falling 1.7 percent at plus-size retailer Torrid.

Hot Topic said it expects a loss of 4 to 6 cents a share for the second quarter based on a comp-sales decline in the midsingle-digit percentage range. Analysts expected earnings of 1 cent.

Among the other firms reporting results Wednesday:

• Shares of Tween Brands Inc. leaped 34.5 percent, to $4.21, after the firm reported a net loss of $1.4 million, or 6 cents a diluted share, versus estimates of a loss of 19 cents. Ceo Michael Rayden assured investors the firm would boost its marketing expenditures in the current quarter to make consumers more aware of the conversion of its Limited Too stores to the Justice nameplate. He also said Tween was “comfortably in compliance” with its credit covenants.

• Value-oriented Cato Corp. joined a select group of retailers reporting gains in both earnings and sales for the quarter, with net income rising 11.6 percent to $18.8 million, or 64 cents a diluted share, as sales grew 5.4 percent to $238.1 million and advanced 3 percent on a same-store basis. In the second quarter, EPS was projected to reach between 48 cents and 54 cents against last year’s 41 cent profit.

• Citi Trends Inc. said after the markets closed that first-quarter profits gained 53.4 percent to $7.9 million, or 54 cents a diluted share, as sales picked up 18.3 percent to $143.1 million and comps rose 7.4 percent. The EPS figure was 9 cents better than the analyst consensus estimate. The firm raised full-year guidance to EPS of $1.33 a share, 3 cents above previous projections.