NEW YORK — Last year’s traumatic finish brought the luxury sector’s financial winning streak to a halt, but added points to the ledgers of value retailers.

High-end shoppers were fewer and less acquisitive in the final months of 2001, dragging down Neiman Marcus Group’s earnings 39.1 percent in its second quarter as sales fell on both a net and comparable-store basis. A special charge reduced Tiffany & Co.’s fourth-quarter net to below the prior year’s as sales and comps dipped. Consumer anxiety following the Sept. 11 terrorist attacks combined with a faltering economy may have made purchases of prestige goods less fashionable, and tourism less prevalent, in the closing months of 2001, but those same factors helped to elevate the performance of Target Corp., which experienced nearly a 20 percent bottom-line increase for the quarter. Limited distanced itself from the number one specialty apparel retailer, Gap, with a stellar quarter in which earnings expanded strongly.

NMG said that aggressive promotional activity, including higher and earlier markdowns, ate away at its second-quarter profits, dropping them 39.1 percent for the period ended Jan. 26 to $24.3 million, or 51 cents a diluted share, a penny above consensus estimates. Last year, the retailer recorded profits of $39.9 million, or 84 cents.

“What a challenging season,” NMG president and chief executive officer Burt Tansky said on a conference call. Even so, Tansky said, “customers continued to shop and significantly continued to buy luxury and quality,” again declaring “luxury is not dead.” He noted that although spending was down in the quarter, customers did not trade down: “If it is exciting and special, customers will buy it.”

Still, customers were not as apt to pick up NM’s designer and luxury designer goods as sales declined 1.7 percent to $908.1 million, ahead of plan, from last year’s $924 million. Comps dropped 3 percent overall and were down 3.3 in its specialty retailing group. Revenues for Bergdorf Goodman were down 1 percent, while down 0.8 percent at NM stores. Comps declined 2.3 percent at NM. Top-performing merchandise categories included women’s contemporary sportswear, primarily driven by denim, as well as jewelry, designer handbags, boots and cosmetics, especially prestige fragrances.

Trends continued into February, as comps in the specialty retail segment decreased 3.4 percent.

As retailers carefully move through 2002, retail analysts said the worst may already be over. “Retailing, particularly luxury stores, has been slow, but we are starting to see the declines in earnings narrow,” Stacy Turnof, retail analyst with Merrill Lynch, said, referring to recent better-than-expected sales reports from Nordstrom, Saks Inc. and NMG. Arnold Aronson, managing director of retail strategies with Kurt Salmon Associates, said that although the leveling off in the luxury sector was exacerbated by the recession and the events of Sept 11, a comeback will be gradual, sustained and probably not moving forward until very late this year or 2003. He said purveyors of luxury goods will remain cautious for the rest of the year, conservatively planning inventory and cutting back on expenses until business picks up.

“Nobody is betting their ranch on inventory or new stores until things start to stabilize,” he said.

As business began to slow in its first quarter, NMG redefined its operating goals to focus on maintaining a strong balance sheet and maximizing its cash flow while maintaining its core strength of customer service and fashion leadership. Executives said to strengthen its financial position, all areas of the business were scrutinized, including merchandise, inventory levels and expenses, and a new post-Thanksgiving promotion was added. These strategies paid off by reducing inventory by $306 million, or 4.9 percent at the end of the second quarter from last year. By contrast, inventories at the end of the first quarter were up $56 million, or 7.6 percent, on a 10 percent sales decline.

On Jan. 30, when releasing an above-plan January comp of a 3.3 percent decline, NMG raised its second-quarter earnings forecast to between 45 and 55 cents a share based on successful efforts to control markdowns.

“Our sales ultimately exceeded our revised plan while markdowns were less than we had anticipated,” Tansky said in a statement. “I am particularly proud of the efforts of our entire team to reduce the inventory levels compared to last year and, as a result, our inventory is in excellent shape as we begin the spring season.”

Looking forward, James E. Skinner, chief financial officer, said, NMG expects spring sales to be down 2 to 4 percent due to the combination of a slow retail environment and a planned lowering of off-price sales compared with last year, when NMG implemented several promotional events during the spring to reduce inventory levels.

TIFFANY

Special charges dragged Tiffany & Co.’s bottom line down in the fourth quarter, though strength in January helped the firm beat estimates.

Net income declined 2.3 percent to $82.7 million, or 55 cents a diluted share. This compares with year-ago earnings of $84.7 million, or 56 cents. Excepting a $7.8 million pretax impairment charge to write down its investment in Internet retailer Wedding Channel, Tiffany’s profits rose 3.2 percent to $87.4 million, or 58 cents a dilute share, 2 cents above Wall Street estimates.

Sales for the quarter ended Jan. 31 slipped 1.8 percent, to $565.8 million from $576.4 million a year ago.

During the quarter, U.S. retail sales dipped 1 percent to $289.5 million on a 3 percent comparable-store drop. International retail turnover slid 4 percent to $214.8 million, but rose 5 percent in local currencies. Local currency comps in Japan and other Asia-Pacific markets were down 1 percent. Direct-marketing sales, though, managed a 2 percent increase to $61.4 million.

In a statement, president and chief executive Michael Kowalski said Tiffany’s, while navigating the economic storm, “prudently managed expenses and maintained profitability at a very respectable level.”

Christine Kilton-Augustine, an equity analyst at ABN AMRO, noted that margins on the basis of earnings before interest and taxes “expanded an impressive 130 basis points to 26.3 percent.” She also noted, “Inventory was down 6 percent, beating plan for flat inventory levels by yearend.”

The analyst maintained her “buy” rating on the stock and said she sees Tiffany’s “returning to targeted 15 to 20 percent longer-term earnings growth by fiscal 2003.”

For the year, unadjusted earnings fell 8.9 percent to $173.6 million, or $1.15 a diluted share, against $190.6 million, or $1.26, a year ago. Sales decreased 3.7 percent to $1.61 billion, compared with $1.67 billion last year.

In 2002, the firm, based here, said it will continue to roll out new stores in the U.S., Japan and elsewhere and will launch a new collection of watches.

Global sales growth is expected to be “minimal” during the first half and keep operating profits below those from the first half of last year. Sales and operating earnings should then ramp up to percentage-point growth in the teens. Earnings per share for the year are projected to range between $1.20 and $1.27.

Kilton-Augustine said she was watching the firm’s business in Japan closely as “comps seem to have taken a breather recently” in the region. Tiffany’s business in the country has remained strong over the last seven years, with comps averaging 11.5 percent, “despite a very tough economic backdrop.”

LIMITED-IBI

Inventory discipline, a focus on key items and a strong showing at Victoria’s Secret helped The Limited and its Intimate Brand Inc. subsidiary report fourth-quarter profits that were better than expected, despite weaker sales.

The Columbus, Ohio-based retailer of mall mainstays Express, Lerner New York, Limited and Structure said profits rose 37.1 percent to $326.5 million, or 75 cents a diluted share, for the three months ended Feb. 2. That compared with income of $238.2 million, or 54 cents. Sales fell 10.9 percent to $3.14 billion compared with last year’s $3.52 billion and were down 2 percent on a comp basis. On an adjusted basis, excluding special charges and reflecting the divestiture of Lane Bryant as if it had occurred at the beginning of 2000, last year’s income would have been $242.6 million, or 55 cents, on sales of $3.26 billion. Gross margins were up 500 basis points, or 42.2 percent of sales, due to increased merchandise margins while apparel inventory was down 15 percent per square foot at cost.

All divisions posted an operating profit, although sales fell 9.2 percent, to $1.19 billion from $1.31 billion, and fell 3 percent on a comp basis. Limited stores were up 1 percent and Express was flat, but Lerner New York and Structure were both down, 8 percent and 6 percent, respectively.

Michael Weiss, president of Express, said: “Moving into fall, our objectives were to reestablish momentum in women’s and start to gain some traction in men’s. We approached spring conservatively and I am happy with how we look.” He noted that this spring men’s assortment will be the first one totally designed, merchandised and sourced by the new Express team.

The company said it remains cautious about 2002 and is planning first-quarter comps to be down in the low single digits with a slight improvement in gross margins and flat EPS. It expects to see some improvement this fall with flat to slightly positive comps for the full year and EPS up in the low to mid-single digits compared to last year’s adjusted 82 cents. For the year, profits rose 21.3 percent to $518.9 million, or $1.19 a share, compared to year-ago income of $427.9 million, or 96 cents. Sales dipped 7.3 percent to $9.36 billion from $10.1 billion and were down 4 percent on a comp basis.

At IBI, profits rose 35.3 percent to $299.9 million, or 61 cents a diluted share, versus last year’s $221.6 million, or 45 cents. At $1.94 billion, sales were flat, as were comps.

For the year, profits fell 9.1 percent to $393.2 million, or 80 cents a share, compared with $432.5 million, or 87 cents. Sales fell 1.9 percent, to $5.02 billion from $5.11 billion and comps were down 5 percent.

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