NEW YORK — Another dip in profits brought May Department Stores Co.’s streak of quarterly retreats to eight.
Net income in the fourth quarter dropped 10.2 percent to $387 million, or $1.26 a diluted share, from $431 million, or $1.36, a year ago. Excluding costs from divisional consolidations in the most recent quarter, profits sank 9.3 percent to $391 million, or $1.28 a diluted share.
Also boosting the firm’s results was a one-time tax rate benefit of 3 percent, or 8 cents a share. The firm’s effective tax rate for the year dropped to 33.9 percent from 38.3 percent in 2001.
Adjusting for the consolidations and the tax benefit, profits a share were in line with Wall Street’s estimation of $1.20. The St. Louis-based parent of Lord & Taylor and Hecht’s, among others, has now registered declining profits for each quarter of 2001 and 2002.
Yet, sensing the company is performing satisfactorily considering the brutal environment for department stores, investors traded up its shares 9 cents, or 0.5 percent, to close at $19.15, 25 cents above their 52-week low, on the New York Stock Exchange Thursday. Over the past 52 weeks, the stock has sold for as high as $37.75, nearly twice its current price.
Sales for the 13 weeks ended Feb. 1 dipped 4.4 percent to $4.37 billion from $4.58 billion a year ago. Comparable-store sales fell 6 percent.
Muddying results somewhat, May Co. reclassified certain prior-year amounts, including the way it presents sales, restricting comparability with prior quarters until restatements are made available.
"This was a disappointing year for us," said chairman and chief executive Gene S. Kahn in a statement. "We are not satisfied with our sales or earnings results. It is not the performance we expect of ourselves." However, he added that May’s merchandise, expense control and inventory management initiatives gave it a "strong foundation for 2003."
Several proprietary brands bowed last year in the firm’s full-line department stores, including i.e., which zeros in on women ages 31 to 44. The be label, which was launched with i.e. at the firm’s first-ever fashion show in June, hit a snag when May was enjoined from using the name after a trademark dispute with Bebe Stores Inc. New propriety brands also were added at the firm’s Lord & Taylor division."Our exclusive product offering is key to attracting a broader customer base, differentiating our stores from the competition, and offering our customers newness and fashion that are priced right with a superior price-to-value relationship," said Kahn.
May and other traditional department stores have been put on notice by the emergence of strong players in the more moderate department stores, such as Kohl’s Corp.; the reinvigoration of J.C. Penney, and the increasing fashion awareness of discounters Wal-Mart Stores Inc. and Target Corp.
One of the ways May has strived to meet this more difficult competition landscape is with a focus on younger customers through proprietary brands, its bridal group and new store designs. Last year, the company opened 30 David’s Bridal stores, bringing the total to 180, and has plans for 30 more this year. Three new concept stores opened last year — one each under the Filene’s, Hecht’s and Robinsons-May nameplates — with formats that are easier to shop and feature flexible merchandise presentations and express checkout. May Co. opened 11 department stores last year, bringing its total to 443.
Despite these overtures toward younger customers, Kahn asserted, "We remain committed to serving our Baby Boomer customer."
Davenport & Co. equity analyst David Campbell said, "Really there’s not a whole lot that is working [at May Co]." One of the bright spots has been the new concepts, though they are, as of yet, too small to make much of a financial impact. He also said the proprietary brands were coming up with "mixed" results.
"They’re under a lot of pressure and the only way they’re going to get out of it is for the economy to improve," he said.
With May’s financial results under unrelenting pressure, so, too, has been its chief executive, but Campbell and other analysts set aside reports that Kahn’s stewardship might be in jeopardy.
"I’m not sure if a management change would do a whole lot," said Campbell. "I think the company’s still operating as well as they can in this environment." The firm is generating "decent" cash flow and paying down its debt, he observed. "They’re doing a good job. It’s just that their segment is out of favor right now, but it’s in a secular decline as well, so there’s really no saying how they’ll get out of it."A.G. Edwards & Sons equity analyst Robert Buchanan observed, "If the board were going to make a change, they probably would have made it by now, so I don’t anticipate any change will be made in the near term. The time of year to change a ceo has passed and with the company reporting fourth-quarter earnings, I have to think that Gene’s job is secure for the time being."
A source at May said, "There’s no validity to the rumors" of a possible Kahn departure.
Speculation has circulated not only about Kahn’s future, but also about the possibility of a merger between May Co. and Federated Department Stores Inc. While a merger between the firms could help their collective bottom lines through greater efficiencies, there is some question as to how much anybody could do at the helm of May Co. in its current state.
Moody’s Investors Service fixed-income analyst Elaine Francolino noted, "Given the negative comparable-store sales, cash flow has been pretty good." The firm is "fairly disciplined," she said, and has cut back on its share repurchases and didn’t invest in an acquisition last year.
Francolino agreed May needs to attract a younger customer. "They’re doing what they can do now. Whether they hit the right proprietary brands or those brands resonate with the customer remains to be seen. They’re focusing on the things they need to be focusing on."
As reported, May Co. last year consolidated Filene’s and Kaufmann’s into one division, and Robinsons-May and Meier & Frank into another. Last month, the firm said it would close its Arizona Credit Center and realign its data centers, transferring functions to an existing facility in Lorain, Ohio.
For the year, profits fell 22.9 percent to $542 million, or $1.76 a diluted share, from $703 million, or $2.21, the preceding year. Without costs to consolidate divisions, earnings fell a lesser 12.1 percent to $618 million, or $2 a diluted share, from $703 million, or $2.21, during the previous year.
Sales for the 12 months receded 2.8 percent to $13.49 billion from $13.88 billion in 2001. Comps were off 5.3 percent.May upped by 1 cent its annual dividend rate to 96 cents a share for shareholders of record March 1, payable March 15.
While the firm offered no guidance for 2003, Goldman, Sachs & Co. equity analyst George Strachan reduced his earnings estimates for this year by a dime to $2 a share, "reflecting the difficult top line and related expense outlook for department stores." He predicted May Co.’s stock would "underperform" the broadlines sector, which he rates "neutral" overall.
Fitch Ratings also on Thursday initiated coverage on the firm with a "BBB-plus" rating on its senior unsecured notes and bank facility and "F2" on its commercial paper. About $4.3 billion in debt is covered by the rating, the outlook on which is negative.
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