NEW YORK — The third quarter wasn’t pretty for May Department Stores Co.
This story first appeared in the November 12, 2002 issue of WWD. Subscribe Today.
Profits endured a nosedive of 69.2 percent, including charges, and were still cut in half before special items, while comparable-store sales dropped 7.3 percent in the quarter.
Luckily for retailing, the firm’s results, which informally kick off the third-quarter financial reporting season, aren’t expected to be typical.
“It’s all over the map,” said McDonald Investments analyst Jeffrey Stein of the results retailers are expected to report in the coming weeks. “There was not uniform performance in the third quarter.” He did note, though, that a value orientation continued to help merchants in today’s less-than-stellar economy.
May Co. got the third-quarter reporting cycle rolling with a plunge in net profits to $16 million, or 5 cents a diluted share, for the period ended Nov. 2. This compared with year-ago earnings of $52 million, or 16 cents a share.
The most recent period included an after-tax charge of $6 million, or 2 cents a share, to consolidate four divisions into two as well as $6 million, or 2 cents, for the early retirement of debt. Without the charges, as well as the effects of the early redemption of debt a year ago, profits still dropped 49.1 percent to $28 million, or 9 cents, from $55 million, or 17 cents, a year ago.
The St. Louis-based parent of Lord & Taylor and Hecht’s, among others, primed Wall Street for the news, though, and investors went easy on May Co.’s shares, which dipped 4 cents, or 0.2 percent, to close at $22.44 on the New York Stock Exchange Monday. It was a tough day for investors in general, with the Dow Jones Industrial Average off 178.18 points, or 2.1 percent, at 8,358.95 and the Standard & Poor’s retail index sinking 5.79 points, or 2.1 percent, to 273.63.
As reported, May Co. warned Nov. 3 its earnings would range from 8 to 10 cents a share for the quarter. Analysts at the time had been looking for 17 cents.
Revenues for the 13 weeks slid 4.7 percent to $3.05 billion from $3.2 billion a year ago.
McDonald’s Stein noted it’s been more difficult for May Co. to differentiate itself from competitors including Kohl’s Corp., Target Corp. and J.C. Penney Co. than some of the other old-guard department stores. He attributed this to May Co.’s relatively low private label penetration, which he estimated at 16 to 17 percent, or about three points lower than that of Federated Department Stores. The May Co. customer is also closer demographically, he said, to the national chains’ customer than Federated’s Macy’s unit. Federated, he noted, also benefits from more of a national brand strategy.
“May [Co.]’s problems reflect those of the industry writ large,” said Goldman Sachs analyst George Strachan, in a research note. For more than a decade, mall anchors have been market-share donors to freestanding competitors such as Wal-Mart Stores and Target Corp., he said. “At this point, Penney appears to be taking market share from other mall anchors, the most vulnerable of which are Sears, a direct middle-market competitor, and May, the most moderate of the traditional department store anchors.”
May Co.’s competitors also appear to have weathered the third quarter more successfully, with Federated and Penney recently giving positive updates for the quarter. Strachan added, “Both companies have done a better job stemming topline market share loss, and we suspect that Federated has maintained gross margin better and suffered less than May on the expense line.”
May Co.’s selling, general and administrative expenses rose 100 basis points, as a percentage of revenues, to 23.1 percent, or $706 million, in the quarter.
J.P. Morgan Securities analyst Shari Schwartzman Eberts, in a research note, said the firm “indicated that the quarter benefited from division consolidation cost savings, but the exact amount of the savings was not quantified.” Eberts said she expected more visible cost savings from the consolidation and, accordingly, described the SG&A result as “disappointing.”
She also observed that the firm’s three-year comp trend is down a “startling” 13.5 percent in the third quarter, decelerating from down 8.6 percent in the second quarter and a 3.5 percent depression in the first quarter.
A.G. Edwards analyst Robert Buchanan, noted May “got the margins, but not the sales.” He said that while the firm’s first-in/first-out merchandise margins rose 99 basis points in the quarter, it would be better for May “to sacrifice some merchandise margin — even in those cases where vendors can’t help out — in order to drive the top line.”
For the nine months, net profits fell 43 percent to $155 million, or 50 cents a diluted share. This compared with net income of $272 million, or 85 cents, a year ago. Sales for the three quarters dipped 2.2 percent to $9.31 billion from $9.53 billion a year ago. Same-store sales fell 4.8 percent.