Most Recent Articles In Financial
Latest Financial Articles
- China Woes Dampen European Stock Markets in Midmorning Trading
- Europe’s Stock Markets Make Gains in Mid-morning Trading
- French Companies Make $47.8 Billion Climate Pledge
More Articles By
The U.S. consumer struggled in the second quarter and the world abroad continued to be an economic minefield, but some key retailers including Wal-Mart Stores Inc. and Gap Inc. gained enough confidence to cautiously raise 2012 profit guidance.
This story first appeared in the August 17, 2012 issue of WWD. Subscribe Today.
A string of retailers reported second-quarter results Thursday and while they varied wildly, there were a few commonalities. Among them:
• Europe remains a universal trouble spot as its debt crisis roils on, and Greece, Spain and Italy rush to sort out their woes;
• The Web continues to gather steam. The Commerce Department said Thursday that seasonally adjusted U.S. e-commerce sales jumped 15.3 percent in the second quarter to $54.84 billion, outpacing total retail sales, which rose 4.3 percent to $1.08 trillion. The Web accounts for 5.1 percent of total retail sales.
• Consumers may be spending but remain on edge — and the election cycle is unlikely to calm their nerves. “Consumers are tightening their purse strings, sharply cutting spending growth to barely half of the robust rate of earlier this year,” said Craig Johnson, president of Customer Growth Partners. “Consumers aren’t panicked about the economy, but they are worried, so they are still buying, but they’re buying less and they’re buying closer to need….Consumers are showing the biggest flight to value retailers since the recession.”
• Stocks go up and stocks go down — often with no rhyme nor reason. Wal-Mart had a strong second quarter and said apparel in the U.S. was selling better, but it cut its overseas growth projections for Brazil and China and its stock dropped 3.1 percent to $72.15. Gap Inc. boosted profit estimates for the year and saw its shares rise 1.5 percent to $34.84 in after-hours trading. But the big winner was Sears Holdings Corp., which saw its shares shoot up 6.5 percent to $60.29 even though it remains deeply in the red as investors focus more on the cash on its balance sheet and its planned divestitures than the results in its stores.
Here, a look at some of the major companies reporting Thursday:
In his most upbeat conference call since joining Gap Inc. in 2007, chairman and chief executive officer Glenn Murphy said Gap’s second quarter was marked by “a lot of bright spots” and fueled by having the right styles, capitalizing on color, focusing on fit and making “targeted investments in key categories where we wanted to dominate,” including babyGap, denim, and suits and woven shirts at Banana Republic.
Gap’s net income for the second quarter rose 29 percent to $243 million, from $189 million in the year-ago quarter. Diluted earnings per share increased 40 percent to 49 cents compared with 35 cents last year.
Net sales for the second quarter, which ended July 28, increased 6 percent to $3.58 billion compared with $3.39 billion for the year-ago quarter. Comparable-store sales increased 4 percent.
“Customers responded well to our product offerings across our brands, driving a healthy increase in sales and earnings per share during the quarter,” said Murphy, who for years has drawn skepticism from Wall Street and retail analysts about his ability to revive Gap, considering his background running drug stores in Canada and not as a fashion merchant.
“Our continued focus on product and store execution is helping to drive positive momentum and we’re committed to sustaining solid performance for the remainder of the year,” he said.
Given the second quarter performance, the company raised its estimate for fiscal year 2012 diluted EPS to be in the range of $1.95 to $2.00, compared with $1.56 in fiscal year 2011.
While the signs point to a turnaround, Murphy was cautious, stating, “Sustained performance is what matters. Everybody is working hard to make sure we maintain the momentum in the back half.”
In North America, Gap and Banana Republic each had a 7 percent comp-store sales gain, while Old Navy was up 3 percent, making for a 4 percent comp overall. Direct sales rose 24 percent.
The only real concerns Murphy expressed were that traffic overall was negative, with the outlets and Old Navy experiencing better traffic than the Gap and Banana Republic, and that comparable-store sales abroad, with the difficult European economy, were negative 5 percent. But Murphy said he likes how Gap Inc. stores are concentrated in London, Paris, Milan and Rome, and positioned properly for when the continent rebounds.
Gap was able to overcome the traffic trends through higher average unit retail prices and better conversion rates driving the quarter. He added that a faster pipeline, getting some early reads on products through social media and forms of crowd sourcing, also helped the business.
In other highlights, Athleta opened 11 stores and will have 25 stores by yearend. Old Navy opened a store in Tokyo, its first unit outside North America, and also had an impressive response, setting the stage for a Japan rollout.
Murphy suggested Old Navy may be in for some major changes when its new president Stefan Larsson, formerly with H&M, starts in October. “He is coming in with a very strong perspective and position when it comes to product,” conceptually as well as from a design and merchandising standpoint, Murphy said.
WAL-MART STORES INC.
Wal-Mart is starting to get its groove back in its basic apparel business, but now the firm’s international growth is waning.
Second-quarter EPS came in just ahead of Wall Street expectations and annual guidance was nudged up, but the company said it was being more cautious as it expands in Brazil and China — two major international growth markets.
In the U.S., Bill Simon, president and ceo of the flagship chain, said, “Our focus on basics is working” in the apparel area.
Apparel showed a low-single-digit comparable-store sales gain — the second consecutive quarterly gain for the category.
“Our customers continue to turn to Wal-Mart for their basics,” Simon said. “A key element of our apparel strategy is built around jeans, underwear, socks and Ts. You see this executed in every store. In the second quarter we had solid results in [the] ladies’ and men’s departments as well as positive comps in shoes, which benefited from the addition of new brands.”
Key back-to-school apparel categories are up 7 percent for the season so far.
Simon said the chain’s second-quarter comparable traffic was up 0.4 percent, which represents a slowdown from the 1.1 percent uptick in the first quarter. Even so, Simon said the quarter’s increase equaled an additional 80,000 customers each day versus a year ago.
Overseas, the company is taking its foot off the accelerator slightly.
In addition to slower growth plans for Brazil and China, the retailer’s Mexican operation is also taking longer to open new stores and is “reinforcing documentation that supports real estate projects.” The company expects to spend $70 million to $80 million during the second half looking into allegations that its expansion in the region was fed by a pattern of bribes. This week, lawmakers also suggested the scandal extends into money laundering and tax evasion, while Wal-Mart in the past has said it is expanding its internal investigation in the matter into other geographic markets.
This year, Wal-Mart plans to add 21 million to 23 million square feet to its footprint, fed by capital expenditures of $3.6 billion to $5 billion. Previous forecasts called for an additional 30 million to 33 million square feet and spending between $5 billion and $5.5 billion.
Total profits attributable to the company rose 5.7 percent in the quarter to $4.02 billion, or $1.18 a diluted share, from $3.8 billion, or $1.09, a year earlier. EPS beat analysts’ expectations by 1 cent.
Revenues for the three months ended July 31 increased 4.5 percent to $114.3 billion from $109.4 billion. Comparable-store sales at the Wal-Mart U.S. unit rose 2.2 percent — the division’s fourth-consecutive quarter of comp gains.
Wal-Mart narrowed and raised its earnings guidance for the year. The retail giant now expects 2012 EPS of $4.83 to $4.93, opposed to the $4.72 to $4.92 previously projected.
SEARS HOLDINGS CORP.
Sears may have narrowed its second-quarter loss, but the company couldn’t do anything to stop declines in revenues.
For the three months ended July 28, the loss narrowed to $132 million, or $1.25 a diluted share, compared with a year-ago loss of $146 million, or $1.37. The company said the operating loss was $103 million in the quarter versus a loss of $191 million last year. Sears attributed the improvement to a reduction in selling and administrative expenses as well as a better gross margin rate. Both were partially offset by a decline in gross margin dollars due to lower overall sales.
Total revenues fell 6.6 percent to $9.47 billion from $10.14 billion. That decline was attributed to fewer stores, as well as comp-sales declines of 3.7 percent at domestic stores. Comps fell 2.9 percent at Sears and were down 4.7 percent at Kmart. Sears said price compression negatively impacted sales in the consumer electronics category, while improved inventory positions in the apparel categories resulted in lower clearance sales activity. Comps at the Sears Canada nameplate fell 7.1 percent, due in part to a decline in sales of women’s and men’s apparel.
Despite the dismal earnings report, shares of Sears rose 6.5 percent because the company has a cash balance of $738 million and is on track to raise $446.5 million from the spin-off of the Sears Hometown and Outlet businesses in the third quarter. Also coming up is the partial spin-off of its interest in Sears Canada, which is expected to close in the second half.
Headed by chairman Edward S. Lampert, Sears has been slowly looking at what assets it can liquidate to raise cash. That plan was set in motion earlier this year when the company set about to shore up its balance sheet. A deal completed earlier this year was the sale of 11 store sites to General Growth Properties Inc. for $270 million.
While those moves have helped Sears’ balance sheet, the company did not offer anything new in its quarterly update about plans to improve merchandise assortments to draw consumers into the stores.
Lou D’Ambrosio, Sears Holdings’ ceo and president, said, “We have also successfully lowered inventory, reduced debt from yearend and enhanced our liquidity.”
Rob Schriesheim, chief financial officer, said, “To date, we have enhanced our liquidity by $1.2 billion and have progressed with our plans to unlock value in our portfolio of assets.”
THE BON-TON STORES INC.
Bon-Ton, hit by refinancing and streamlining costs and women’s apparel issues, widened its loss for the second quarter and lowered the full-year forecast.
Bon-Ton said it could see anywhere from a loss of $1.35 to a gain of 20 cents a diluted share for the year, from previously forecasting anywhere from a loss of 95 cents a share to a profit of 50 cents. Comparable-store sales are seen at flat to up 1.25 percent.
However, Bon-Ton president and ceo Brendan Hoffman cast a positive outlook Thursday by citing merchandise, marketing and online advancements, and the regional department store’s first comp-store gain since the fourth quarter of 2010. “We are planting the seeds for our future growth,” Hoffman told WWD. “I want customers to know we believe in certain categories like ladies shoes. Dresses is a real opportunity. It hasn’t been important enough for us. Juniors is a little trickier because there are so many great specialty stores, and ready-to-wear might not be a high growth area but it needs to be a much better performer.”
Shoe departments continue to be expanded and momentum in accessories will be upheld by adding Michael Kors handbags and intensifying Coach, among other changes.
In rtw, Hoffman said Bon-Ton veered too sharply in the first half, to a 70-30 percent balance of updated and traditional-moderate merchandise. The shift failed to capture enough new customers and deterred many existing moderate customers, but fall assortments have been recalibrated to a 50-50 balance. “We are in a clean position going into fall,” Hoffman said. “Our inventories are much more aligned with the customer base.”
The net loss for the quarter ended July 28 totaled $45 million, or $2.43 a diluted share, compared with a loss of $32.3 million, or $1.78, in the year-ago quarter. The results included a pretax charge of $6.3 million, or 34 cents a diluted share, for fees from the recent debt exchange of $330 million in senior notes due 2014 for new notes due 2017, and a pretax charge of $4 million, or 21 cents, for severance and one-time costs from selling Rochester, N.Y., locations and a prepayment penalty for paying off related mortgage debt. Comparable-store sales increased 0.1 percent; total sales slipped 0.1 percent to $594.9 million from $595.5 million.
Hoffman, in a conference call, said it’s been a “tough environment overall for ready-to-wear,” which was exacerbated by Bon-Ton’s own missteps. “It is still a delicate area. We are really going after key items we know have been proven winners in the past. Shoes, cosmetics and home will really be the growth drivers as we get ready-to-wear stabilized.” Home, shoes and cosmetics were the strongest categories last quarter; dresses and juniors were the toughest.
E-commerce is seen accounting for about 3 percent of the $3 billion Bon-Ton’s total sales this year. “Online needs to be 10 percent of the company’s business at the very least,” Hoffman said. “We are making major navigational changes on our Web site,” including adding search filters, brand landing pages, aggressive e-mailing and examining mobile options like texting coupons.
Also, Bon-Ton is shifting to fewer, lengthier promotions and more frequent coupons, in an apparent response to J.C. Penney Co. Inc.’s decision to eliminate coupons and go with everyday low pricing and clearances every other Friday.