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Charges Stymie May Co. Net

NEW YORK — Charges to consolidate several divisions pulled May Department Stores Co.’s second-quarter profits into a steep dive.<br><br>Cost savings from that tightening, though, will help the St. Louis-based parent of Lord & Taylor and...

NEW YORK — Charges to consolidate several divisions pulled May Department Stores Co.’s second-quarter profits into a steep dive.

Cost savings from that tightening, though, will help the St. Louis-based parent of Lord & Taylor and Hecht’s in the second half, when sales — negative so far this year — also are expected to pick up.

Net income for the quarter descended 37.8 percent to $69 million, or 22 cents a share, from $111 million, or 35 cents a year ago. Without pretax charges of $59 million, or 12 cents a share, for the consolidation, profits slid 4.5 percent to $106 million, or 34 cents a share.

The firm beat Wall Street’s best guess of 33 cents by a penny, after adjustments, but shares fell 23 cents, or 0.8 percent, to close at $27.55 on the New York Stock Exchange Monday. The broader markets ended their three-day winning streak, however, as the Dow Jones Industrial Average finished the session at 8,688.69, down 56.76, or 0.7 percent.

Retail issues fared worse, however, as the Standard & Poor’s Retail Index eroded 6.33 points, or 2.3 percent, to end the day at 266.58.

Revenues for the 13 weeks ended Aug. 3, waned 2.5 percent to $3.09 billion from $3.17 billion a year ago. Comparable-store sales sank 4.9 percent.

At the close of the quarter, May completed its previously announced plan to combine its Pittsburgh-based Kaufmann’s division with Filene’s, headquartered in Boston, as well as the Portland-based Meier & Frank divisions with Robinsons-May, based in Los Angeles. As reported, these consolidations are expected to save the firm in the neighborhood of $60 million before taxes, or 13 cents a share, annually. The move eliminated about 1,800 jobs.

About half the expected annual savings should be realized this year.

Only $11 million, or 2 cents a share, of the $110 million, or 22 cents, in current-year charges from the reorganization plan remain for May. The remainder will be taken out of the second half.

May Co. also chipped away at its selling, general and administrative expenses, which were lightened by 40 basis points to 22.2 percent of revenues, or $688 million. May Co. attributed the improvement to decreases, as a percentage of sales, of 0.8 percent in credit expense and a 0.3 percent from the elimination of goodwill amortization. These were offset by a 0.6 percent rise in payroll expenses and a 0.2 percent uptick in insurance costs, again as a percentage of sales.

This story first appeared in the August 13, 2002 issue of WWD.  Subscribe Today.

Citing a 4 to 5 percent drop in period-ending inventories at the end of the quarter and expense control, A.G. Edwards & Sons equity analyst Robert Buchanan, in a research report, raised his third-quarter EPS estimate to 21 cents, an increase of 2 cents. In last year’s third quarter, May Co. posted earnings of 17 cents a share, before a 1 cent charge.

Of the lowered inventories, Buchanan said, “This is good news and attests to management’s continuing to keep an eye on stock levels in the wake of its fine performance on this important front during the second quarter.”

Buchanan said May Co. fared best in the Northeast, in its Filene’s business, and worst in Texas with Foley’s. While the firm’s strongest merchandise performance overall came from furniture, women’s better sportswear was also strong.

J.P. Morgan Securities broadline analyst Shari Schwartzman Eberts, in a research note, added, “The gross margin was worse than expected as below-plan sales made leverage of buying and occupancy impossible, while the SG&A margin was better than expected.”

Also during the quarter, May Co. moved into uncharted territory with its first-ever fashion show, showcasing new proprietary products, for the press and Wall Street. Featured in the show were schoolgirl looks, peasant ruffles, bright colors, suedes, sweater vests and even some bare bellies, although nothing overly edgy.

“This is hipper merchandise that’s distinctive from a fashion point of view and exclusive from a distribution point of view,” Gene Kahn, chairman and chief executive, told WWD, at the time.

Kahn also introduced the company’s two new in-house brands, called i.e. and be, making their debut this month.

While neither brand will be in Lord & Taylor, i.e. will be in all of the firm’s approximately 350 mainline department stores and be will be sold in about 100 locations.

For the half, profits retreated 36.8 percent to $139 million, or 45 cents a share. This compared with year-ago earnings of $220 million, or 69 cents. Exclusive of the combination costs, May Co.’s bottom line slid 8.6 percent to $201 million, or 65 cents.

Revenues for the six months backtracked 1 percent to $6.26 billion from $6.33 billion a year ago. Comps receded 3.6 percent.

Eberts noted: “May Co. continues to plan same-store sales up for the back half of the year given easy comparisons, but we remain cautious as the underlying three-year comp trend decelerated significantly” during the first half. Comps for the third quarter are planned to be up 1 to 2 percent, she said.

The analyst reaffirmed her “market performer” rating for May Co. “as we expect disappointing sales trends to continue to weigh on margins and the stock. Valuation is below historical averages, but we expect the valuation will remain under pressure, along with that of the retail group, as sales trends continue soft, even against very easy comparisons.”