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NEW YORK — The already murky retail picture for the second half got even cloudier Thursday as both Limited Brands and Wet Seal expressed strong reservations about the balance of the year.
The cautionary note came as both retailers posted stronger second-quarter profits. Limited enjoyed a blow-out quarter, with earnings surpassing Wall Street’s estimates by 4 cents, but warned that a spending slowdown and declining mall traffic could dampen the back-to-school and holiday results.
Joining what’s becoming a of uncertainty among specialty retailers, Wet Seal projected that earnings would be lower in the third quarter and either flat or lower in the all-important fourth.
Limited shares rose 30 cents, or 1.8 percent, to close at $16.91 in New York Stock Exchange trading Thursday, but, on the Nasdaq, Wet Seal’s shares drifted downward $1.31, or 10.6 percent, to close at $11.01.
Increases in regular-price selling at Limited lifted gross margins, especially at its two largest units, Express and Victoria’s Secret. Like its peers, it professed caution about the second half of the year based on a laundry list of challenges, including below-plan August sales trends, higher unemployment and erosion in consumer confidence and mall traffic.
Limited reported net income of $83.2 million, or 16 cents a diluted share, for the three months ended Aug. 3, 16.3 percent above income of $71.6 million, or 16 cents, in last year’s quarter. Excluding year-ago gains from the initial public offerings of Galyan’s Trading Co. and Alliance Data Systems in 2001 and the recombination of Intimate Brands, as well as year-ago results from Lane Bryant, which was sold to Charming Shoppes, year-ago net income would have been $34.5 million, or 7 cents, and the increase for the most recent quarter 141.1 percent.
Overall sales fell 3.6 percent to $2.11 billion from $2.19 billion last year, but were up 7.7 percent for continuing operations. Comps grew 4 percent versus a 5 percent decline a year ago. Overall apparel sales extended 4.2 percent to $791.5 million from $759.4 million as comps increased 7 percent. Except for Bath & Body Works, which had a 2 percent comp decline, all divisions comped positively: Limited stores was up 13 percent; Lerner New York, 7 percent, and Express and Victoria’s Secret, 5 percent each.
“The strong response to our merchandise assortment that occurred in the first quarter continued as we achieved 4 percent comparable-store sales in both quarters in a difficult environment,” said Limited chief financial officer Ann?Hailey on a morning conference call. “We stayed with the strategy that has been working for us — that is maintaining our flexibility to chase proven winners and focus on inventory discipline.”
But, like other retail executives before her, Hailey said month-to-date August sales are running at the lower end of expectations, which were for low-single-digit comp increases.
Hailey referred to the National Retail Traffic Index, which said mall traffic was down 7 percent over the last few weeks, several points lower than spring.
Dana Cohen, retail analyst at Banc of America Securities, said, “It was an excellent second quarter. They have done a really good job at all brands of controlling expenses and inventory. The issue facing them in the back half, which is no different from anyone else, is the macroenvironment.”
Dana Telsey with Bear, Stearns agreed, saying, “Second-quarter earnings came in better than expected, and the improvement in gross margins and the reduction of SG&A (selling, general and administrative expenses) was quite impressive. While the current environment is certainly choppy for all retailers, we believe [Limited] management’s attention to operations is quite intense and they are very much on track.”
One of Limited strengths, the analyst said, is its ability to sell more inventory at full price coupled with new merchandise and product introductions, especially at VS and Express, which help drive customers into its stores on a repeat basis.
Limited believes third-quarter comps, especially at B&BW, will benefit from easier comparisons against the comparable 2001 period.
Limited said it’s comfortable with consensus estimates for the third and fourth quarters of 4 cents and 76 cents, respectively.
Michael Weiss, president of the Express division, said the unit generated $932 million in revenues during the quarter, the most ever, and also produced its highest operating profit since 1995.
He noted women’s sales were driven by knit and active tops, skirts, casual bottoms, fashion denim, dresses and accessories. In men’s, he said the business is continuing to achieve strong growth in woven shirts and denim, although knit tops and sweaters were disappointing.
However, he said sales at Express are trending at the low end of expectations as disappointing results in sweaters and core denim from the spring continued into the fall. But he said fashion denim is trending beyond expectations and more inventory is expected in the category as it moves into the fourth quarter.
For the first half, Limited reported income rose 30.2 percent to $133.1 million, or 26 cents a diluted share, versus year-ago first-half income of $102.2 million, or 23 cents. On an adjusted basis, income rose 177.3 percent to $165 million, or 31 cents a share, compared with year-ago income of $59.5 million, or 11 cents.
Sales declined 4.1 percent to $4.14 billion from $4.32 billion, but rose 7.5 percent on an adjusted basis.
Inventory shortfalls in its July pants business tempered Wet Seal’s second-quarter net income, which notched up 2.6 percent to $3.7 million, or 12 cents a diluted share, matching expectations that were lowered earlier this month. In the year-ago quarter, earnings were $3.6 million, or 12 cents. Sales rang in an additional 7.8 percent to $146.2 million from $135.6 million, and were up 1.6 percent on a comparable-same store basis.
The company also announced that Susan O’Toole, who joined Wet Seal as president of its Zutopia division in February, had been named to the new post of president of the Wet Seal division, its largest. These duties had been handled by Kathy Bronstein, chief executive of the company, to whom O’Toole will continue to report. A search for a successor at Zutopia has been initiated, and O’Toole will continue to manage the unit until one is named.
Prior to joining Wet Seal, O’Toole operated a global apparel consulting business. Earlier, she was with Limited, where she served as president of Limited Too.
Speaking about the second quarter, Bronstein said on a conference call, “We were disappointed with the July results, especially after positive comparable-store sales of 6.5 percent over the prior year for the first nine weeks of the quarter. In the month of July, we experienced a significant reduction in the overall bottom business.”
Bronstein said she blamed results on a lack of selection of seasonal bottoms, which failed to perform in the first quarter and were in short supply in the second.
“I do not believe anything in July inventory was bad,” she said. “Rather it was fashion issues where we did not have key fashion items. We were missing bottoms, both denim and casual.”
Tops were closer to plan, and accessories performed well, she said.
As reported, WS was one of several teen retailers to pull back second-quarter earnings estimates earlier this month, lowering its projections to a range of 12 to 14 cents a share versus earlier consensus estimates of 17 cents.
Gap, American Eagle Outfitters, Gadzooks and Hot Topic all have said sales are slow heading into the b-t-s selling season.
Wet Seal now anticipates August comps will decline in a range of 10 to 15 percent. However, it said it can achieve a low single-digit comp increase for September and October, resulting in flat comps for the current third quarter. Based on that, WS anticipates earnings per share in the third quarter to be in the range of 18 to 22 cents, compared to earnings of 23 cents last year. For the fourth quarter, its best guess is flat comps and earnings ranging between 49 and 53 cents, versus 53 cents last year.
For the six months, income rose 38.7 percent to $12.4 million, or 39 cents, compared with $8.9 million, or 29 cents. Sales grew 10.7 percent to $302.8 million from $273.5 million and were up 4.9 percent on a comp basis.