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The evidence just keeps building that consumers have slammed their wallets shut when it comes to buying apparel.

This story first appeared in the May 16, 2008 issue of WWD.  Subscribe Today.

A trio of major department stores — J.C. Penney Co. Inc., Kohl’s Corp. and Nordstrom Inc. — all showed signs of wear and tear Thursday in reporting their first-quarter financial results. Profits at Penney’s fell 49.6 percent, the bottom line at Kohl’s slipped 26.8 percent and Nordstrom was off 24.2 percent.

Both Kohl’s and Nordstrom also lowered earnings guidance for the year, signaling the struggling economy s hitting consumers at all levels of the spending spectrum.

“It’s obviously a very difficult time for all U.S. consumers,” said Myron “Mike” Ullman 3rd, Penney’s chairman and chief executive officer, on a conference call. “They are facing uncertainty in their financial well-being. That uncertainty is caused by their lack of understanding of the true equity in their home. They are uncertain about their 401(k) or stock portfolio….They are uncertain about how they will manage their living expenses with the escalation of the cost of energy and food.”

Ullman could easily have gone on.

Gasoline prices hit an all-time high Thursday, with a gallon of regular averaging $3.78, according to the American Automobile Association. Employers have cut a seasonally adjusted 260,000 jobs, according to government statistics.

And the three retailers only added to the drumbeat of downbeat news. Thursday’s retail results came just a day after Macy’s Inc. revealed first-quarter losses.

Even cheap-chic specialist Hennes & Mauritz, which has only a small part of its business in the U.S., is feeling a sales pinch. The Swedish company’s sales, excluding currency changes, fell 1 percent last month. It is the first time in more than nine years the firm has reported a drop in monthly sales.

For retailers, that means markdowns over the next few months and cutting back on orders — not great for their vendors. Most retail executives have indicated they don’t expect any improvement in their businesses through the rest of this year — with most not foreseeing any significant improvement until 2010.

Still, investors were upbeat on Thursday, perhaps because the numbers weren’t quite as bad as feared by Wall Street. Overall, investors snapped up shares of women’s apparel retailers and department stores, sending the S&P Retail Index up 1.9 percent to close at 419.58.

Penney’s shares increased 4.7 percent to $46.32, Nordstrom’s stock increased 3.2 percent to $37.29 and Kohl’s was up 1.8 percent to $50.49. Both retailers reported first-quarter results after the market closed.

Elsewhere in the department store sector, Saks Inc. spiked 8.5 percent to end the day at $14.55, and Sears Holdings Corp. was up 2.2 percent to $96.85.




J.C. Penney Co. Inc.’s first-quarter earnings dropped 49.6 percent and the retailer said it would reduce future orders to align inventory with expected sales.

Women’s apparel, however, has been one of the chain’s brighter spots.

Net income fell to $120 million, or 54 cents a diluted share, from $238 million, or $1.04, a year ago. Sales for the three months ended May 3 dipped 5.1 percent to $4.13 billion from $4.35 billion. Comparable-store sales slid 7.4 percent.

“We will continue to take the necessary actions to align our business plans with the expectation that conditions will remain difficult for the remainder of 2008,” said Ullman. “Inventory will be managed through appropriate pricing actions on existing merchandise and by reducing our future merchandise commitments to better balance our inventory position with expected sales levels.”

The ceo is depending on fresh goods, such as the new Decree and Fabulosity junior lines, as well as a program to drive better customer service to differentiate Penney’s.

Women’s apparel has been an area of relative strength, unlike Macy’s, which reported weakness in the category on Wednesday.

“Our women’s apparel business has been one of the strongest parts of our business, and obviously, the areas where it’s meeting plan and exceeding last year we will continue to plan aggressively,” said Ullman on a conference call with analysts.

Women’s represents more than half of the store’s offerings.

The company’s executives said the customer was accepting the higher-priced American Living line, which is produced by Polo Ralph Lauren Corp.’s Global Brand Concepts.

“Obviously the environment is much weaker now than when we announced the launch of American Living,” said Ken Hicks, president and chief merchandising officer. “Within that context, we are pleased with the customer reaction.”

In the long run, Hicks said the brand’s sales could top $1 billion, growing to more than 5 percent of Penney’s sales.

For the second quarter, the 1,074-store chain expects comps to fall by a percentage in the midsingle digits as diluted earnings per share slide to 38 cents from 81 cents a year ago.


At Kohl’s Corp., the weakened economy translated into a 26.8 percent drop in first-quarter earnings and lower profit projections for the year.

Net income fell to $153 million, or 49 cents a diluted share, from $209 million, or 64 cents, a year ago. Sales for the three months inched up 1.5 percent to $3.62 billion from $3.57 billion. Comps fell 6.7 percent.

Kohl’s, along with other retailers, is turning increasingly to exclusive products, such as Simply Vera Vera Wang, to not only help it stand out to the customer, but support the bottom line, as well.

Gross profit margins were down 10 basis points to 36.8 percent, a smaller decline than some were expecting, thanks to exclusive goods.

“Our exclusive and private brands do provide higher merchandise margin rates, and the fact that the penetration of those brands continues to climb has got a positive impact on our margin, as well,” said president Kevin Mansell, on a conference call.

Even so, Kohl’s is expecting tough going for the rest of the year.

“We remain conservative in our sales expectations for the balance of the year and will manage our business accordingly,” said Larry Montgomery, ceo.

The firm said it expects comps for the year to be down 3 to 5 percent and diluted EPS to come in at $2.95 to $3.15. The firm had been projecting profits of $3.15 to $3.50.


Nordstrom Inc.’s first-quarter income fell 24.2 percent on a sales decline of 3.8 percent, and the retailer lowered its full-year EPS outlook.

For the three months ended May 3, income fell to $119 million, or 54 cents a diluted share, from $157 million, or 60 cents, a year ago. Sales were $1.88 billion from $1.95 billion. Same-store sales decreased by 6.5 percent.

The company said merchandise categories that performed above the comps average in the quarter were cosmetics, designer products, women’s activewear and intimate apparel.

The women’s business has been tough and the retailer might need help from designers to get it moving forward.

“The women’s apparel part of our business continues to be challenging,” said Pete Nordstrom, president of merchandising, on a conference call.

The contemporary and premium denim parts of the business have held up pretty well, though.

“But the rest has been tough,” he admitted, adding that the retailer is working closely with its vendors “to create compelling product.”

In the first quarter, merchandise margins declined over the prior year as the company used markdowns to align inventory with sales trends. Part of the decline in inventory was also attributable to the sale of the Façonnable business in the third quarter of last year.

Based on current trends, the retailer said it expects second-quarter diluted EPS in the range of 65 cents to 70 cents on a same-store sales plan of negative 5 percent to negative 7 percent. For the fiscal year ending Jan. 31, Nordstrom expects diluted EPS in the range of $2.65 to $2.80, down from the previous forecast of $2.75 to $2.90.

— With contributions from Vicki M. Young and Jeanine Poggi


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