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Retailers Beat Muted Profit Expectations

Wal-Mart, Kohl’s, Nordstrom, American Apparel and Urban Outfitters all turned in better-than-expected second-quarter profits.

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Five retailers filing second-quarter results Thursday, including the world’s largest, all exceeded or met analysts’ expectations despite declines in their same-store sales.

In a clear display of the importance being placed on inventory and balance-sheet management in a period of historically weak consumer demand, only one of the reporting companies — Wal-Mart Stores Inc. — posted an increase in earnings, and its 1.4 percent pickup came despite a 1.2 percent comparable-store sales decline, excluding fuel, after the first quarter in which it didn’t report its results monthly.

Muted expectations also put something of a sheen on Thursday’s results. Wal-Mart’s higher profits exceeded consensus estimates, as did the lower earnings at Kohl’s Corp., Urban Outfitters Inc. and American Apparel Inc. Late Thursday, Nordstrom Inc. came in as expected.

Wal-Mart

Wal-Mart’s net income grew to $3.45 billion, or 88 cents a share, 2 cents above expectations and at the high-end of its own guidance of 83 to 88 cents a share. Revenues slid 1.4 percent to $100.91 billion.

“Even with lower sales than expected, our comp-store sales outperformed the retail sector,” Mike Duke, president and chief executive officer of Wal-Mart, said. “We managed our operations in a disciplined manner and delivered earnings growth on top of last year’s growth. We’ve accelerated everything we do in terms of efficiency and operations and are widening the gap between ourselves and our competitors.”

The company noted inventory grew at half the rate of sales during the quarter. Eduardo Castro-Wright, vice chairman of Wal-Mart U.S., said the company achieved a 5.8 percent year-over-year reduction in inventory, about $1.4 billion less than a year ago. He said lower inventory not only provides an improved shopping experience, but improves gross margins, shrinkage and markdowns. Gross margin added 109 basis points from last year’s second quarter, he said.

“They’re showing dramatic improvement there,” said Bill Dreher, broadlines analyst at Deutsche Bank. “Now there’s a rationalization in the store. They’re trying to get the adjacencies right, putting cosmetics next to jewelry, the way women like to shop. It’s like what you’d see in a department store. As far as new brands, they have Miley Cyrus & Max Azria, which is nice, but we’re not seeing a migration of department store brands to the mass channel. They might go to Kohl’s and [J.C.] Penney and maybe Target.”

The low-end of Wal-Mart’s full-year earnings guidance was raised to $3.50 from $3.45 while the height of the range remained at $3.60. The company’s shares moved up 2.7 percent to $51.88 Thursday.

Nordstrom

Matching Wall Street estimates, Nordstrom said net income for the three months ended Aug. 1 fell 26.6 percent to $105 million, or 48 cents a diluted share, from $143 million, or 65 cents, in the year-ago quarter. Total revenues declined 5.4 percent to $2.23 billion from $2.36 billion as sales fell 6.2 percent to $2.15 billion and credit card income gained 20.8 percent to $87 million.

Same-store sales were down 12.3 percent at full-line stores and up 0.8 at Nordstrom Rack. Direct sales were up 3.5 percent.

Sales at the company’s anniversary event were down 6.6 percent, better than the Seattle-based retailer expected.

Dresses and jewelry were cited as top performers at full-line stores and Nordstrom Direct.

Noting improvement “over the last couple of months,” Blake Nordstrom, president, said on an afternoon conference call, “Our inventories today are clean and in line, positioning us well for the second half of the year.”

He called the current mix “balanced with fashion, quality and sharp price points.”

Peter Nordstrom, executive vice president and president of merchandising, said trends in its women’s business are improving. Additionally, he noted premium denim “has held up pretty well. I think where vendors have been able to deliver newness, it’s worked.”

Including its first Manhattan store, scheduled to open next spring, the company plans 12 new Rack units next year and is finalizing plans for some others, Blake Nordstrom noted.

The company raised earnings expectations for the year to $1.50 to $1.65 a share from earlier guidance of $1.25 to $1.50. Same-store sales are expected to decline 9 to 12 percent. Shares were up 1.2 percent to $29.76 in trading before the earnings announcement.

Urban Outfitters

Urban Outfitters posted a profit of $49 million, or 29 cents a diluted share, 3 cents above consensus estimates but 14 percent below the $57 million, or 33 cents, earned in last year’s quarter.

Net revenues inched up 1 percent to $458.6 million from $454.3 million, driven by a 17.2 percent increase in direct sales to $70.9 million. Net store sales dipped 1 percent to $361.8 million and wholesale sales slid 7.5 percent to $25.9 million. Same-store sales declined 6 percent.

Women’s accessories led the way at Anthropologie, while women’s apparel was strongest at the Urban Outfitters division.

“The customer is seeking fashion and there’s practically no evidence of price elasticity,” said Glen Senk, ceo of the Philadelphia-based specialty retailer. On the other hand, Senk said it’s a buyer’s market for basics and price is the bottom line for customers.

Urban’s second-quarter operating margin of 17.1 percent “reflects the relative strength of Urban’s product and its operating discipline,” said Roxanne Meyer, a retail analyst at UBS, in a research note.

Sales at Urban Outfitters fell 6.7 percent to $177.1 million and dropped 8 percent on a comp basis, while Anthropologie’s revenues grew 4.5 percent to $173.1 million despite a 4 percent comp dip. While Free People’s retail revenues grew 18.8 percent to $9.2 million, same-store sales were down 16 percent and wholesale revenues dropped 13 percent. Yet Senk said it “outperformed most contemporary brands on the selling floor.” He also said Leifsdottir, Anthropologie’s new wholesale collection, had revenues of $2 million, “far exceeding expectations.”

Senk said the company is planning on a minimum of 100 stores in Europe, “and probably more,” between the Urban and Anthropologie nameplates.

The firm’s shares ended the day ahead 3 percent at $29.06.

American Apparel

American Apparel lowered full-year guidance Thursday after reporting a 34.3 percent slide in second-quarter net income.

For the three months ended June 30, the maker of trendy basics said it recorded a profit of $4.5 million, or 6 cents a diluted share, compared with net income of $6.8 million, or 10 cents, in the year-ago quarter. Revenue grew 2.3 percent to $136.1 million from $133 million in 2008. Analysts surveyed by Yahoo anticipated EPS of 3 cents on revenues of $140.2 million.

Same-store sales slid 10 percent while wholesale volume slid 17.3 percent to $35.5 million.

“We have to continue to grow our top line from a manufacturing efficiency point of view,” Dov Charney, ceo, said on the company conference call regarding the Los Angeles-based firm’s vertical operations. “We are set up to do more business than we are doing. We have enough infrastructure to run an $800 million business.”

Despite difficult market conditions, Charney is also planning to increase American Apparel’s ad spending in the second half of the year. “We need to get back into the game of advertising a bit more than we have during the first and second quarter,” he said. “Advertising costs are down so we want to cherry-pick a few things.”

The company reduced full-year guidance to a range of a loss of $1 million to a profit of $4 million from earlier guidance of a profit of between $8 million and $15 million.

However, it still expects to open 25 to 30 stores this year and has opened 20 units and close three to this point.

American Apparel’s shares rose 2 percent to $4.00 prior to the after-market earnings announcement.

Kohl’s Corp.

Kohl’s Corp. maintained relative balance in the second quarter, with profits down 3 percent on a 2.2 percent rise in sales, but the value-oriented retailer said it was ready to pick up market share and additional stores from its faltering competitors.

“We believe there will continue to be more consolidation, which may open up more real estate opportunities, and our balance sheet and cash flow will allow us to act aggressively if that happens,” said Kevin Mansell, president and chief executive officer, on a conference call with Wall Street analysts. He called Kohl’s first-half market share gains “significant.”

The 1,022-door chain will open 37 stores next month, mostly in former Mervyns locations. By the end of October more than one-third of the chain will be new or remodeled over the last three years. Current plans for next year include another 20 to 25 new stores.

In its continued expansion, Kohl’s is a retail aberration. Last year, 6,913 retail doors were shuttered and the industry is on track to close another 4,600 stores this year, according to the International Council of Shopping Centers.

Kohl’s has also expanded on the merchandising front, with the relaunch of the Dana Buchman brand and the introduction of Hang Ten. The chain’s marketing hammers home its focus on lowering prices.

In the current quarter, the Menomonee Falls, Wis.-based firm said its sales would range from down 1 percent to up 1 percent and lead to earnings of 40 cents to 44 cents a diluted share. While the profit guidance falls below the 47 cents analysts projected, Kohl’s shares advanced 0.2 percent Thursday to $52.39.

 

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