NEW YORK — Despite several consecutive quarters of belt-tightening, retail firms were saddled with higher overhead, payroll and advertising costs during the first quarter.
Retailers also began expensing stock options during the first quarter, which pushed up selling, general and administrative costs as a percent of sales.
But many companies, such as the Neiman Marcus Group, Dress Barn Inc., Target Corp. and Charlotte Russe Holding Inc., among others, were able to leverage higher gross margins and more robust same-store sales to mitigate higher operating costs.
Still, an analysis of the 49 publicly traded retailers tracked by WWD showed that 34 had higher SG&A as a percent of sales ratios in the first quarter compared with the same period last year. The analysis also showed that the average change in the SG&A rate was a gain of 71 basis points.
Fueling some of the increase in operating costs is higher year-over-year payroll as well as executive bonuses. Retailers also are expensing stock options on the SG&A line of the income statement. On top of that, retailers have stepped up their advertising efforts to attract shoppers. In some cases, these costs end up outpacing the top-line growth and the SG&A rate jumps as a result. In other cases, retailers can leverage same-store sales and more full-priced selling against these costs. Either way, the challenge of controlling costs is likely to stick around for some time.
During a conference last month on the outlook of retail and apparel at the Princeton Club here, Emanuel Weintraub, president and chief executive officer of Emanuel Weintraub Associates, gave a keynote address that touched on the importance of controlling costs over the next decade as the industry consolidates and evolves.
“When you eliminate layers, you can be faster to market and make better high-quality merchandising decisions,” Weintraub said.
In some cases, improvements can be made on the store level. Charlotte Russe Holding Inc. said on its conference call last month that its SG&A ratio dropped more than 2 percentage points because the company was able to control costs on a store level.
Daniel Carter, executive vice president and chief financial officer, said the better rate was “primarily due to the improved store-level payroll expenses and other store operating expenses” as well as “a positive sales trend [that] provided us with the opportunity to leverage these costs.”
Results could have been better if not for new accounting requirements. The company, like the rest of the industry, is now including stock option expensing and “management bonuses” on the operating expense line. Although this adds another burden to the expense load, some retailers are finding ways to lighten it.
At Neiman Marcus, which reported first-quarter results last Thursday, the SG&A-to-sales ratio shed 89 basis points. The high-end retailer said its sales and margins were buoyed by improved, full-price selling as well as higher ticket prices. The company also is leveraging same-store sales, which gained 6.8 percent in the quarter, against its operating costs.
Another way to tame costs is to bolster sales productivity. In the case of Neiman’s, management said sales per square foot are running at about $605 this year, which compares with $567 in the same period last year. It’s the first time this metric has risen above $600 for the company, and the payoff is improved profitability.
At Dress Barn, SG&A as a percent of sales dropped 69 basis points during the quarter. Again, the retailer’s success in controlling expenses while driving up sales helped offset the pressure of rising operating costs. Consumers who are willing to spend freely in the store also helped.
David R. Jaffe, president and ceo, said on a conference call with analysts that comps for the quarter were up 7 percent at the company, with the Dress Barn division gaining 10 percent and the Maurices division rising 2 percent.
“Given the high price of gasoline, rising interest rates and falling consumer confidence, we entered the quarter with concerns about the strength of the economy in general and our target customers’ spending in particular,” Jaffe explained. “Fortunately, we have not been able to discern any impact on our business as a result of these factors and feel our consumer is still buying. We also believe that we may be benefiting from a trade-down effect as women discover the value at our stores versus the higher-priced mall specialty stores and department stores.”
From an operational standpoint, Jaffe said the retailer “entered the quarter with our inventories in very good shape. As a result, we were able to focus our selling on spring merchandise with less concern about fall clearance.”
Jaffe went on to say the quarter was “less promotional than last year, benefiting our gross margin. We did, however, become more aggressive with clearance markdowns in an effort to further improve the currency of our inventory.”
Armand Correia, senior vice president and cfo of Dress Barn, said on the call that the results were the “ninth consecutive quarter of comparable-store sales gains resulting in increased gross margins and leveraging our expenses in achieving record earnings.”
Correia said the drop in the SG&A rate was “primarily due to good expense control and sales leverage.”
“We believe our SG&A expenses can be leveraged with comp sales of approximately 3 percent,” Correia added.
During the first quarter, most of the retailers tracked by WWD experienced higher operating expenses. Nearly half of the companies had SG&A ratio gains of between 10 and 170 basis points.
AnnTaylor Stores Corp.’s experience was typical of the industry in the quarter. The specialty retailer’s SG&A rate rose 51 basis points. Stepped-up marketing, designed to drive sales, fueled some of the increase.
Kay Krill, president and ceo, reminded investors on the company’s conference call last month that the Ann Taylor brand “had minimal advertising activity in the first quarter of 2005, since we determined that we wanted to save our dollars for when the product was back on track.”
Krill said this year, “Ann had a good media mix, balancing advertising and direct marketing. From a direct-mail perspective, the significant reduction in our inventory levels from last year has afforded us the opportunity to be much more strategic in our approach in order to drive more profitable sales.”
For Ann Taylor Loft, Krill said the retailer is also bolstering its marketing efforts. “We have scaled back promotional activity and are testing new mailer formats and offers to drive full-price sales productivity.”
As Weintraub said during his presentation last month, companies have to spend money to make money.