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Apparel Margins Disappoint as Limited Brands’ Net Falls 83%

NEW YORK — Sabotaged by below-plan sales and margins in apparel and extraordinary gains from the sale of Lane Bryant last year, The Limited Brands on Thursday said its third-quarter profits sank a hefty 82.5 percent.<br><br>The Columbus,...

NEW YORK — Sabotaged by below-plan sales and margins in apparel and extraordinary gains from the sale of Lane Bryant last year, The Limited Brands on Thursday said its third-quarter profits sank a hefty 82.5 percent.

The Columbus, Ohio–based operator of mall mainstays like Express and Victoria’s Secret said its net income for the three months ended Nov. 2 stumbled to $15.8 million, or 3 cents a diluted share, 1 cent above consensus estimates, but down from income of $90.2 million, or 21 cents, in last year’s quarter.

This year’s results were not only skewed, but literally reversed by one-time gains related to Limited’s sale of Lane Bryant to Charming Shoppes last August.

In this year’s quarter, a nonoperating gain of $6.1 million, or 1 cent a share, was realized from the sales of Charming Shoppes stock but, more significantly, last year’s quarterly results included a one-time pretax gain of $170 million, or 24 cents a share, from the Lane Bryant sale.

Excluding all special items, Limited said net income would have been $11.7 million, or 2 cents a share, versus a loss of $13.8 million, or 3 cents, in the year-ago period.

Net sales in the quarter inched up 4 percent, to $1.98 billion from $1.91 billion, and comparable-store sales leaped 3 percent. On an adjusted basis, excluding sales from LB, sales last year were $1.88 billion. Gross margins improved 160 basis points to 31.2 percent of sales, but selling, general and administrative expenses extended 50 basis points. Inventory was up 2 percent per square foot at cost.

In the apparel group, sales were $890.4 million, up 1.2 percent from $880.1 million, and up 2 percent on a comp basis. Both sales and margins were below plan as marketing and promotional activity accelerated in response to softening sales trends. Sweater sales were down in all brands, but picked up at the end of October when the cold weather arrived. Inventory was up 3 percent.

“I am disappointed with the apparel group performance,” Ann Hailey, chief financial officer, said on a morning conference call.

Limited’s two largest divisions, Victoria’s Secret and Express, posted positive comps of 8 percent and 1 percent, respectively, while New York & Co. was flat and Limited stores and Bath & Body Works dropped 10 percent and 1 percent, respectively.

Express results were elevated by knit and woven tops, knit pants and dresses, but hampered by weakness in sweater and woven pants. Men’s results were helped by woven shirts, denim, accessories, and suiting elements, offset by softness in knit tops and sweaters.

VS beauty comped up by double digits. At VS, which aired its Victoria’s Secret fashion show on Wednesday, results were boosted by a number of merchandise and marketing initiatives.

To help improve results for the holiday selling season, Hailey said, sweaters were reassorted, denim was remerchandised for greater novelty and efforts were undertaken to further capitalize on the romantic-top trend.

Hailey stood by the First Call earnings consensus for the fourth quarter of 73 cents a share, versus the 71 cents reported in last year’s period, despite questions about consumer sentiment, mall traffic and geopolitical tension. To reach the consensus mark, she noted, the company needs to deliver low– to mid–single digit comp gains for the quarter. She also noted that she’s forecasting a gross-margin decline compared with last year’s strong results.

For November, she said, the nation’s second-largest apparel specialty store chain is projecting a low–single digit comp gain, including the impact of the later Thanksgiving. In addition, she said the post-Christmas period has become increasingly important to fourth-quarter performance, but that its brands are positioned to optimize results with initiatives, including VS’ semiannual sale and a denim sale at Express.

“Limited Brands will need a very strong post-Christmas and January comp to make up for potential weakness prior to the holiday,” Todd Slater, retail analyst with Lazard Frères, said. “It will need to manage inventory and markdowns carefully. B&BW will need to generate dramatic upticks in conversion rates versus last year and get more than its fair share of what seems to be weak mall traffic.”

For the nine months, net income dropped 22.6 percent to $148.9 million, or 29 cents a diluted share, from $192.4 million, or 44 cents, in the year-ago period. Excluding previously mentioned gains as well as the effects of the recombination with Intimate Brands and the initial public offerings of Galyan’s Trading Co. and Alliance Data Systems, net income would have reached $176.6 million, or 33 cents, 286.6 percent above the $45.7 million, or 9 cents, recorded in last year’s nine months.

Sales tallied to $6.12 billion, 1.7 percent lower than the $6.23 billion logged in the first nine months of 2001. Excluding Lane Bryant results in the year-ago period, sales rose 1.6 percent. Comps were up 4 percent.

CHARMING SHOPPES

Charming Shoppes Inc. on Thursday posted earnings for the third quarter ended Nov. 2, but the plus-size specialty chain would have been left in the red without a one-time restructuring credit.

For the three months, income was $502,000, or 0 cents, versus $160,000, or 0 cents, in the year-ago quarter. Excluding the credit, the loss would have been $321,000, or 0 cents. Sales dipped 1.3 percent to $542.3 million from $549.3 million, while comparable-store sales dropped 4 percent.

Dorrit J. Bern, chairman, president and chief executive officer, said in a statement: “While we are disappointed with our performance at Lane Bryant, our Fashion Bug and Catherines businesses performed on plan. At Lane Bryant, we underperformed in a number of merchandise categories, and our efforts are now focused on moving forward and correcting our merchandise offerings.”

The company reiterated that, excluding the restructuring credit and the cumulative effect of an accounting change, a break-even performance is expected in the fourth quarter. Comps in the quarter should be in the negative mid– to high–single digit range at Lane Bryant and up in the low–single digits at Fashion Bug and Catherines.

Fourth quarter earnings per share will be 0 cents, excluding the restructuring credit and the cumulative effect of an accounting change. The chain said it expects fourth-quarter comparable-store sales for Lane Bryant in the negative mid– to high–single digit range and for Fashion Bug and Catherines in the positive low–single digits.

For the nine months, the chain lost $1.6 million, or 1 cent, against income of $23.4 million, or 22 cents, in the year-ago quarter. Excluding the restructuring credit and accounting change, income was $41.5 million, or 34 cents a diluted share. Boosted by the inclusion of LB throughout this year as opposed to just a portion of last year, sales jumped 35 percent to $1.8 billion from $1.3 billion. Comps for the period decreased 1 percent.