The second quarter finally found its silver lining — Gap Inc., which topped earnings estimates and projected a little pep in the back half.
“As we move into the second half of the year, we remain focused on growing revenue and driving continued momentum across our portfolio of brands,” said Glenn Murphy, chairman and chief executive officer.
But Murphy stands almost entirely alone in the full-priced world, where if sales don’t recover, retailers are going to have to contend with inventories that were planned when the consumer outlook was, if not robust, significantly better.
Abercrombie & Fitch Co., Aéropostale Inc., Sears Holdings Corp. and The Bon-Ton Stores Inc. all offered weak results or cautious takes on the fall season Thursday, following in the footsteps of Macy’s Inc., Target Corp., Wal-Mart Stores Inc. and others.
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Abercrombie & Fitch was particularly weak, with a 33.3 percent drop in second-quarter profits as fewer people visited its stores.
“The reasons for the weak traffic we’ve seen in the U.S. are not entirely clear,” said Mike Jeffries, chairman and ceo. “Our best theory is that while consumers in general are feeling better about the overall economic environment, it is less the case for the young consumer. In addition, we believe youth spending is likely diverted to other categories. We assume that these effects will abate at some point but until we have some clear evidence of that, we are planning sales, inventory and expense levels on a conservative basis.”
Many retailers have been betting that consumer trends would continue to improve.
Of 20 prominent retailers weighing in with second-quarter results over the past two weeks, all but three — American Eagle, Abercrombie and Sears — had more dollars wrapped up in inventory than a year earlier as they headed into the key back-to-school season.
Among those adding inventory, the average increase was 7.2 percent. When inventories are on the rise and sales are tepid, retailers can get left holding the bag. The extreme case is J.C. Penney Co. Inc., which saw sales fall 14.2 percent in the first half and still ended with a 5.4 percent rise in inventories. And there are plenty of others who might potentially end up sitting on more inventory than they wish. Saks Inc.’s first-half sales rose 3 percent while inventories ended 11.1 percent higher. Kohl’s Corp.’s inventories are up 9.5 percent while third-quarter sales are slated to rise 1 to 3 percent.
“Inventories are high right now,” said Joel Alden, a partner in A.T. Kearney’s retail practice. “Many retailers do their budgeting based on last year’s performance. They’ve come in with higher expectations for sales, so they’ve ordered more inventory.”
Alden said the second quarter was hurt by unseasonable weather and that sales trends could still turn around for retailers.
“It’s too early to tell,” he said. “What we don’t know yet is how the back-to-school season will play out. It could turn out to be a moderately positive year.”
So far, retailers appear to be keeping calm.
Bon-Ton missed its sales number, blaming inclement weather and higher gas prices, ending the quarter with comparable inventories up 3.7 percent.
Brendan Hoffman, president and ceo, said “While we originally hope to have [inventories] reduced more, we believe, in light of the sales miss, we are in good shape with our inventory composition. We will continue to focus on this and drive the inventory levels down further in the fall.”
If the b-t-s season flops and chains look to clear inventories, price reductions to move goods would cut into margins and profits.
Despite the darker outlook for retailers, the S&P 500 Retailing Industry Group rose 0.8 percent, or 6.48 points, to 821.02, in what was a strange day in the market, where a glitch shut down the Nasdaq Stock Market for more than two hours.
Wall Street punished some retailers, though. Shares of Abercrombie & Fitch Co. fell 17.7 percent to $38.53, as Stage Stores Inc. slipped 6.5 percent to $19.91 and The Buckle Inc. dipped 1.2 percent to $52.38. On the Nasdaq, The Bon-Ton Stores Inc. fell 11.9 percent to $12.68; Sears Holdings Corp. dropped 8.2 percent to $39.72, and Stein Mart Inc. decreased 4.3 percent to $12.80.
After-hours trading for companies with afternoon earnings reports showed Aéropostale down 11.7 percent to $9.70, as Gap was down 0.3 percent to $41.90 and Ross Stores Inc. inched up 1.4 percent to $69.30.
Here, look at Thursday’s second-quarter reports.
GAP
Gap Inc. may still be battling negative traffic trends and industry doubts about a turnaround, but its long series of recovery efforts appears to be paying off this year.
On Thursday, the $16 billion specialty retailer reported second-quarter net earnings rose 25 percent to $303 million from $243 million, and sales rose 8 percent to $3.87 billion compared with $3.58 billion in the second quarter a year ago. Sales came in ahead of the $3.83 billion analysts expected.
As a result of the healthy quarter, Gap raised its earnings outlook and said it would return to advertising the Gap brand on television this fall, after about a five-year absence. It’s a decision reflecting renewed confidence in the assortment and a stronger desire to invest in attempting to gain market share. No decision about Gap doing TV advertising for holiday has been made yet.
“All of our product for fall and holiday is bought. The design and merchandise teams have done a very good job from my perspective,” Murphy said during a conference call.
Murphy added that the Gap has put its “focus and energy behind the areas which you can dominate,” such as denim.
In another sign of confidence, the company now expects to earn between $2.57 and $2.65 a share for the full year, up from the previous forecast of $2.52 to $2.60 a share. Second-quarter diluted earnings per share increased 31 percent to 64 cents compared with 49 cents last year.
Gap also said it would increase its annual dividend from 60 cents to 80 cents beginning in the third quarter of 2013.
Comparable sales rose 5 percent in the quarter ended Aug. 3. Online sales grew by 27 percent, the same as the first quarter, the growth reflecting increased investments in the channel. Inventory was up to $1.84 billion from $1.67 billion; inventory per store was up 6 percent versus down 6 percent in the year-ago quarter.
Murphy outlined some of the key ingredients behind this year’s success story, citing three or four years of balancing out the company portfolio and noting that the store closing program, launched in 2008, would be completed by the end of this year.
He also said that ensuring that there was enough differentiation between Gap Inc.’s core brands — Gap, Banana Republic and Old Navy — was a key factor as were pushing the online business, pushing the outlet business and making investments in international growth driven by franchising.
Other growth initiatives are also on track, Murphy said, citing Athleta, store openings in China and franchising.
Discussing the issue of getting enough customers into the stores, Murphy acknowledged, “Traffic has been slightly negative. We would love to be able to find the innovative and creative solutions to get us to positive traffic.”
But he also said the company has been able to adapt to the industry’s “new normal,” which he characterized as being subject to consumers going into periods of hibernation. “It’s something we are accustomed to. Our attitude is, ‘Let’s make the best of it.’”
Marketing efforts in the past to lure customers, Murphy explained, have been too focused on hanging onto those still shopping the store and those who once did. Gap is now seeking “the right balance of loyal, lapsed and new customers,” as Murphy said.
“This has been another year where the team has moved the needle forward,” Murphy said. “The first half was a market-gaining first half.”
SEARS
The second-quarter loss at Sears Holdings Corp. was wider than a year ago, but the company said its membership program gained traction in the period.
For the three months ended Aug. 3, the net loss was $194 million, or $1.83 a diluted share, compared with a loss of $132 million, or $1.25, in the year ago quarter. The results included a gain on the sale of assets of $58, after tax and noncontrolling interest, in connection with certain U.S. and Canadian stores and leasehold interests.
Revenues fell 6.3 percent to $8.87 billion from $9.47 billion. Same-store sales fell 2.1 percent at the Kmart nameplate, and were down 0.8 percent at Sears domestic stores.
The company said the decline at Kmart reflected decreases in grocery and household, pharmacy and drugstore, as well as consumer electronics and toys. At Sears domestic stores, the decline was attributed to lower sales in its home appliance category, partially offset by increases in lawn and garden, apparel and home. The company said, “Sears’ domestic apparel category has now achieved comparable-store sales increases for eight consecutive quarters.”
Sears said its Shop Your Way membership program gained traction in the quarter, with members generating over 65 percent of revenues at Sears domestic stores and Kmart, versus over 55 percent a year ago.
For the six months, the net loss was $473 million, or $4.46 a diluted share, against net income of $57 million, or 54 cents, a year ago. Revenues for the first half fell 7.5 percent to $17.32 billion from $18.74 billion.
Edward Lampert, chairman and ceo, said, “We made meaningful progress this quarter in our transformation to a member-centric company….At the same time, we recognize how important it is to improve the profitability of our company and I am disappointed that we did not deliver a better result.”
The company’s chief financial officer, Rob Schriesheim, said that Sears Holdings ended the quarter with $700 million in cash and availability under its credit facilities of $1.6 billion. He said there still has not been any final determination on what it plans to do with its service protection agreement business. The company has said that it was reviewing its options, including the sale of the operation.
Credit Suisse analyst Gary Balter, who called the earnings report “another disappointing quarter,” said: “Sears remains on a dangerous downward spiral. To finance operations and create liquidity, Sears continues to pare back on inventory, spin off select businesses and to sell some of its best locations. This is leading to even weaker operating results, which in turn is leading to additional dispositions of good locations. Given the multiple assets that Sears owns, including Lands’ End and some excellent real estate locations, this trend can continue for awhile. However, at some point, if EBITDA does not improve one wonders if vendors get more concerned on the direction. Problems with retailers usually begin with vendors paring back, not with obvious liquidity issues.”
ABERCROMBIE & FITCH
Abercrombie & Fitch Co. took a big hit in the second quarter as traffic in its stores waned.
Earnings fell 33.3 percent to $11.4 million, or 14 cents a diluted share, versus $17.1 million, or 20 cents a share, a year earlier. Stripping out 2 cents a share connected to its profit-improvement plans, earnings were 16 cents a share — far below the 28 cents Wall Street analysts projected on average.
Net sales for the quarter ended Aug. 3 slid 0.6 percent to $945.7 million from $951.4 million a year earlier.
Jeffries pointed to the firm’s e-commerce business and its strong growth in Asia as bright spots, adding that in China, comparable-store sales rose about 60 percent for the quarter.
Total comps for the company, including e-commerce sales, decreased 10 percent with U.S. comps declining 11 percent and international comps dipping 7 percent. Including e-commerce sales, A&F’s comps fell 6 percent; comps at the kids’ business slid 3 percent and at Hollister & Co., comp sales declined 13 percent.
The ceo said the company was nearing completion of its long-term strategic review, but noted that there is still much uncertainty in terms of traffic trends, and ultimately, demand.
“We operate in a business that has ups and downs and we have certainly seen both over the years,” Jeffries said, while adding that he feels “optimistic,” as the next “key milestone” will be a mid-September review of the business with the board of directors.
Nonetheless, Abercrombie provided lower-than-expected third-quarter EPS projections of between 40 and 50 cents, much less than Wall Street’s estimate of $1.06 a share.
BON-TON
The Bon-Ton Stores Inc. narrowed its loss in the second quarter but fell short on the top line.
While comparable-store sales fell 6.4 percent in the quarter ended Aug. 3, the net loss improved to $37.3 million, or $1.95 a diluted share, from a loss of $45 million, or $2.43, for the second quarter of 2012.
“We were disappointed in our second-quarter sales performance, but we were pleased we were able to deliver on several of our goals, including a 100 basis point increase in the gross margin rate and reduced expenses, which led to 23 percent growth in adjusted EBITDA,” said Hoffman.
He attributed the sales weakness in part to inclement weather and higher gas prices altering consumer spending patterns.
The retailer revised downward its fiscal 2013 guidance to diluted EPS in a range of 15 to 75 cents, down from the 40 cents to $1 previously forecast.
Bon-Ton continues to seek the right balance of merchandise for core customers and new brands and categories to attract younger customers. “We were pleased that our ladies’ ready-to-wear business trended better than the overall store in the second quarter. We had particular strength in dresses, women’s apparel and casuals, casual being driven by both denim and active,” Hoffman said. The ceo also cited “significant progress in localization” of assortments.
The second-quarter results included a charge of $3.9 million, or 20 cents a diluted share, for fees associated with senior notes due 2014 and 2017. The results for the second quarter of 2012 included a charge of $6.3 million, or 34 cents a share, for fees associated with the exchange of senior notes. Gross margin rate increased to 37 percent versus 36 percent in the year-ago period.
Total sales for the second quarter fell 6.3 percent to $557.1 million. Analysts, on average, were looking for sales of $616.8 million. Bon-Ton operates 270 department stores in the Northeast, Midwest and upper Great Plains under the Bon-Ton, Bergner’s, Boston Stores, Carson Pirie Scott, Elder-Beerman, Herberger’s and Younkers nameplates.
AEROPOSTALE
Teen retailer Aéropostale Inc. posted a second-quarter loss of $33.7 million, or 43 cents a diluted share, for the period ended Aug. 3, against net income of $71 million, or zero cents, in the year-ago quarter. The quarter’s results included store asset impairment charges, among other items. Excluding the special items, the adjusted net loss was $26.9 million, or 34 cents a diluted share. Net sales fell 6.4 percent to $454 million from $485.3 million. Comparable-store sales, including e-commerce, dropped 15 percent.
For the six months, the net loss was $45.9 million, or 59 cents, against net income of $10.6 million, or 13 cents. Net sales for the half decreased 7.8 percent to $906.3 million from $982.6 million.
Thomas P. Johnson, ceo, said, “Our business was pressured by a challenging teen retail environment with weak traffic trends and high levels of promotional activity.”
The company expects to post a third-quarter net loss in the range of 21 to 26 cents a diluted share, compared with earnings of 31 cents a diluted share a year ago. The diluted EPS projection does not include potential store asset impairment charges in the quarter.
Aéropostale said it revised its store closure plans, upping the number to 30 to 40 stores for 2013 compared with its earlier plan to close just 15 to 20 stores.
“Our negative outlook for the third quarter reflects the challenges of a highly promotional and competitive teen retail environment, which we expect will continue,” Johnson said. He added that the company is “committed to turning our business around” and will remain “focused on shifting brand perception and recapturing market share.”
STAGE STORES
Stage Stores Inc. posted a 17.6 percent drop in net income to $9.6 million, or 29 cents a diluted share, from $11.7 million, or 37 cents, a year ago. On an adjusted basis, excluding one-time charges, diluted EPS totaled 41 cents. One-time charges were mostly connected to the consolidation of the retailer’s South Hill, Va., operations into its Houston headquarters.
Net sales rose 3.6 percent to $395.3 million from $381.6 million. Comparable-store sales at its Houston stores rose 3.3 percent for the period, but were down 1.9 percent in its former South Hill stores.
For the six months, net income plummeted 75.5 percent to $2.8 million, or 8 cents a diluted share, on a sales gain of 3.6 percent to $774 million.
Michael Glazer, president and ceo, said the quarter started slowly, but sales improved as the weather normalized. “We ended the quarter with a nice surge from the start of the back-to-school shopping period,” he said. “We are pleased with our sales performance and record adjusted earnings for the quarter. However, an elevated promotional environment and shortfall in sales at the South Hill stores prevented our earnings from being even higher. While the operational components of the consolidation have been completed, the alignment of merchandise assortments in the stores is taking longer than expected.”
The ceo told analysts during a conference call to Wall Street that the strong trends in the quarter were in men’s and the young men’s categories, followed by gains in children’s, junior, cosmetics and footwear. He also said that for the fall season, it “appears as if we will continue to be quite promotional and choppy.”
Glazer was also asked by an analyst if stores where the company competes with J.C. Penney Co. Inc. are feeling pressure now that Penney’s has ramped up its promotions. Glazer said, “You could walk the mall,” he said. “I think you see it as well as I do [that every] store seems [to have] the whole store on sale. But talking specifically about Penney’s, I will tell you that I’ve said several times, I think people have overblown that story. It’s a good soap opera and people like to talk about it as it relates to Stage….[In] the second quarter, we continued to pick up market share from Penney’s….There’s no question in those 120 stores where we compete directly that they’ve put in more inventory into it.”
The company adjusted its sales and earnings guidance for the back half, now forecasting comparable-store sales for the second half to be flat to up 2 percent. Due to lower sales assumptions, the guidance for adjusted EPS for the year is between $1.30 and $1.40 a diluted share. That’s lower than the prior guidance of between $1.45 and $1.55. Comps for the year are expected up at between 0.6 percent and 1.6 percent.
BUCKLE
The Buckle Inc. held its own in the second quarter giving its young customer base lots of options.
The retailer’s earnings gained 8.3 percent to $25.1 million, or 52 cents a diluted share, from $23.2 million, or 49 cents, a year earlier. EPS was on par with Wall Street’s consensus estimate.
Sales for the three months ended Aug. 3 increased 7.9 percent to $232.5 million from $215.5 million with a 3.2 percent gain in comps.
Men’s goods made up about 42 percent of sales in the quarter and saw average price points rise roughly 1.5 percent to $50.10. The women’s business, which accounts for the other 58 percent of the firm’s sales, saw average price points rise about 2 percent to $42.90.
“The young customer shopping our store I think is brand-focused and always looking for new colors, new ideas, new fabrics, and we’re able to show them quite a wide selection of product,” said Dennis Nelson, president and ceo, on a conference call with analysts
“We’re not narrow and deep, we show a lot of [stock keeping units] in all the categories and give them a lot of options to work with and I think that seems to be hitting well with our guests,” he said.
STEIN MART
Stein Mart Inc. had both good and not-so-good news for investors Thursday.
Just as the Stein Mart started to get its groove back, with an increase in second-quarter sales filtering down to the bottom line, the company said the Securities and Exchange Commission is “conducting an investigation related to our restatement of prior years’ financial statements and change in auditors.”
Earlier this year, the company had to restate its prior financial results and switched its auditor after discovering a series of errors in its books.
Net income rose 48 percent to $3.4 million, or 8 cents a share, from $2.3 million, or 5 cents, a year earlier.
Sales for the quarter ended Aug. 3 increased 3.8 percent to $291 million from $280.4 million with a 6.4 percent gain in comp sales.
“We’ve said for a long while that increases in sales and margin will leverage against our lean expense structure resulting in higher earnings growth,” said ceo Jay Stein. “This is now happening.” Stein had been the company’s chief from 1990 to 2001 and was reinstated in that roll in June.
The 262-door budget chain will spend about $500,000 in the second half to launch an e-commerce business in the next few weeks.
ROSS
Like its rival off-pricer The TJX Cos. Inc. did last week, Ross Stores Inc. reported better-than-expected double-digit gains in second-quarter profit but held to its full-year guidance nonetheless.
In the 13 weeks, the Pleasanton, Calif.-based chain saw net income expand 17.1 percent to $213.1 million, or 98 cents a diluted share, from $182 million, or 81 cents, in the 2012 quarter. Sales grew 9 percent, to $2.55 billion from $2.34 billion, and comps rose 4 percent. Gross margin increased 70 basis points to 28.5 percent of sales from 27.8 percent a year ago.
Analysts on average expected EPS of 93 cents on revenues of $2.52 billion.
Michael Balmuth, vice chairman and ceo, noted that operating margin reached a record 13.6 percent of sales, up from 12.8 percent in the 2012 quarter. He credited “solid execution of our core off-price strategy of delivering compelling name-brand bargains to today’s value-focused consumers” for the strong showing.
Ross stuck with its earnings guidance for the third and fourth quarters of the fiscal year, calling for second-half EPS of between $1.74 and $1.81.
“Looking ahead, given the ongoing uncertainty in the macroeconomic environment and the potential for a more promotional and competitive retail climate, we believe it is prudent to maintain a somewhat cautious outlook for the remainder of the year,” Balmuth commented.
