By WWD Staff
with contributions from Ed Finkel
 on May 16, 2014

It’s not just the weather.

This story first appeared in the May 16, 2014 issue of WWD. Subscribe Today.

A string of retailers reported first-quarter results Thursday — including Wal-Mart Stores Inc., Kohl’s Corp., J.C. Penney Co. Inc., Nordstrom Inc. and Dillard’s — and the numbers reflected the tough winter weather in the first two months of the year and later Easter.

But there are deeper issues.

“The big macro issue we all face is that we have a consumer that is stressed,” Kevin Mansell, chairman, president and chief executive officer of Kohl’s, told WWD at the company’s annual meeting in Menomonee Falls, Wisc. “Real incomes haven’t risen much, and [costs of] nondiscretionary items like fuel and food have increased. We’re all fighting for a smaller dollar amount. There’s definitely been this bifurcation [of incomes].”

Higher-end retailers such as Nordstrom have been less impacted because “luxury” customers are doing better in the current economy, Mansell added.

Four of the five companies on Thursday reported lower profits for the quarter, while Penney’s registered slightly larger losses although outperformed Wall Street expectations in every other area, including sales, comparable-store sales and earnings per share. As a result, the retailer’s shares soared almost 20 percent in after-hours trading to above $10.

Craig Johnson, president of Customer Growth Partners, tied retailers’ weak results to a lack of disposable income. “In the middle of the last decade, real income growth was about 3.6 percent, and today we’re lucky if it gets to 0.6 percent,” he said. “It’s almost flatlined and you can only expect minimal growth under those circumstances. Weather can only explain some of what’s been going on, and it’s been going on since the middle of last year.”

Adding to the pressure is a still-difficult jobs picture, with only 48 percent of working-age adults holding a full-time job, and signs of inflation in areas including food and gasoline. “That’s contributed to a depressingly promotional atmosphere as it’s rotated spending — there’s less left for discretionary purchases like apparel because so much is being taken up by utilities and now with the upward movement in food prices,” he said. “That had a crushing effect on apparel and department stores.”

He continues to believe, like many in the apparel sector, that there will be improvement in the second half of the year based both on better consumer confidence and the weak comparisons against which many stores will be up against from the second half of 2013.

Mark Cohen, a retail veteran who’s now a professor at Columbia Business School, felt that the best performances from the first quarter will come from those who approached the quarter cautiously and with an emphasis on control of expenses and inventories.

“Business was really tough in the fourth quarter and it’s never good in the first quarter when it’s bad in the fourth,” he said. “Any reasonable expectation of problems suggests taking a conservative view of inventory and expenses, and there were more than a few of them in the way the second quarter moved along last year.”

David Bassuk, managing director of AlixPartners, said there’s certainly been an improvement in business conditions since the arrival of spring weather, but he’s reluctant to make too much of it.

“There is a fundamental reshaping of the market going on,” he said. “The decline in traffic and its changing patterns are here to stay. The ability to shift gears into social, digital and e-commerce — this is what will separate the winners from the losers.”

Mansell agreed, saying Kohl’s and other midmarket retailers are hustling to keep up with changes in technology and how they have affected consumer shopping behavior. Kohl’s has spent $600 million on technology in 2013 and 2014 and will be focused on mobile and in-store technology this year, Mansell said.

“The transformation of shopping is a big issue,” he said. “We need to be online. We need to be in-store. And we need to be seamless if they shop online and decide to come in and buy in-store. The money we’ve spent on technology is an acknowledgment that this is a changed world. It’s very different than it was five years ago.”

Here, Highlights From the Results Reported Thursday >>



Weak demand and severe weather drove down profits and comparable-store sales at Wal-Mart while overall revenues eked out a small gain. Net income in the three months ended April 30 was $3.59 billion, or $1.11 a diluted share, 5 percent below the year-ago mark of $3.78 billion, or $1.14 a share. Analysts, on average, had expected earnings per share of $1.15 from the Bentonville, Ark.-based retail giant.

Revenues also missed analysts’ estimates, rising 0.8 percent to $114.96 billion from $114.07 billion. Wal-Mart U.S. sales were up 2 percent to $67.85 billion, international sales down 1.4 percent to $32.42 billion and Sam’s Club sales up 0.1 percent to $13.89 billion.

In the U.S., comp-store sales were down 0.2 percent, with Wal-Mart down 0.1 percent and Sam’s Club off 0.5 percent. Wal-Mart traffic decreased 1.4 percent and average ticket increased 1.3 percent. Excluding fuel, Sam’s Club traffic fell 0.2 percent with average ticket down 0.3 percent.

E-commerce sales grew 27 percent on a global basis during the quarter.

Wal-Mart is testing the next wave of supply-chain efficiency — tethering smaller stores to Supercenters. The first fully tethered Wal-Mart Express opened on May 2 in North Carolina. Shoppers can order Supercenter merchandise and receive it at a rural Express store the same day. “Customers are buying products such as bicycles and swimming pools, which they can’t usually get in a 10,000-square-foot box,” said Bill Simon, president and ceo of Wal-Mart U.S.

During the quarter, the retailer opened 13 of its smaller-size Neighborhood Markets and 25 Supercenters. It’s on track to deliver by year’s end 115 Supercenters, 180 to 200 Neighborhood Markets and 90 to 100 Express units.

David Cheesewright, president and ceo of Wal-Mart International, said same-store sales declined in four of the five largest markets, the U.K., Mexico, Canada and China, but Brazil delivered a positive comp for the quarter.

In guidance, the company said it expected EPS from continuing operations of between $1.15 and $1.25 in the second quarter, below the analysts’ consensus expectation of $1.28.


The fast-changing retail landscape has lit a fire under Kohl’s Corp. — which weathered sales and profit declines in the first quarter, but is striving for improvement with a “greatness agenda.”

“We’ve built a new leadership team across the company over the last year and a half,” said Mansell on a conference call with analysts prior to the firm’s annual meeting. “Frankly, that’s been driven by the need to drive better results, particularly on the top line. And evolve our business more fully and with much greater speed. The only remaining leadership role to be filled is our chief merchandising officer position, which we will fill externally.”

Mansell has been said to be under pressure himself, but so far the executive changes have taken place outside the corner office. Last year, the often-insular firm hired Starbucks Corp. veteran Michelle Gass to be chief customer officer.

But Mansell said new merchant talent will be key to the company’s success.

Kohl’s said first-quarter profits dropped 15 percent to $125 million, or 60 cents a share, from $147 million, or 66 cents a year earlier. Sales for the three months ended May 3 fell 3.1 percent to $4.07 billion.

The ceo said he expects “greatness” and has a plan to get there. “Our greatness agenda is a multiyear vision built on five pillars; ideas that are fundamental to the way we do business,” he said. “They are amazing product, incredible savings, easy experience, personalized connections and winning teams.”
Kohl’s, like other retailers, has developed a laser focus on technology and the Web.

After the company’s annual meeting, Mansell said about 10 percent of the company’s business is done online, much of which is shipped directly from the company’s 1,200 stores nationally rather than dedicated warehouses. In the fall, 100 Kohl’s stores will launch a buy-online-pick-up-in-store program.

The growth of online means the company won’t be opening nearly as many stores as in the past, although Mansell doesn’t expect to close many, either.


Penney’s reported results that beat Wall Street’s expectations, driving its shares up sharply after the market closed. For the three months ended May 3, the company widened the net loss slightly to $352 million, or $1.15 a share, from a loss of $348 million, or $1.58, last year. Analysts’ consensus estimates was a loss of $1.25 a share. Operating income for the quarter improved to a loss of $247 million compared with a loss of $486 million a year ago.

Net sales rose 6.3 percent to $2.8 billion from $2.64 billion. Analysts were expecting net sales of $2.71 billion. Top categories include men’s and women’s apparel, home and fine jewelry.

The company said same-store sales rose 6.2 percent. Penney’s also said going forward it will simplify its same-store sales calculation, such as excluding certain items such as sales-return estimates and liquidation sales. Under this new calculation, comps for the quarter rose 7.4 percent, which includes online sales that grew 25.7 percent over the same period last year.

The retailer also said gross margin rose to 33.1 percent of sales, compared with 30.8 percent in the year-ago quarter, mostly due to the increase in private-label merchandise.

Penney’s guided second-quarter comps to a midsingle-digit increase. For full-year 2014, it also said liquidity is expected to be in excess of $2 billion at yearend, with free cash flow expected to be “breakeven.”

Penney’s also has a fully committed $2.38 billion senior secured asset-based lending credit facility to replace the existing $1.85 billion ABL bank line that was set to mature in April 2016. The company said the line will provide better pricing terms and add $500 million of incremental liquidity during peak seasonal needs. The facility will close in the second quarter.

Myron E. “Mike” Ullman, 3rd, ceo, said during a conference call to Wall Street that the “turnaround at J.C. Penney is taking place in three stages.” The first was the stabilization phase and the second was the rebuilding phase. “And now we’re in the third and final stage, which we call the go-forward phase, during which we are positioning J.C. Penney for long-term profitable growth.”

The ceo added, “Overall, our first-quarter performance was in line with our plans to grow the business and take back market share from our competitors.”

Ullman said April was the first time in the past 30 months that the company saw positive traffic trends.

The ceo noted during the call that “we continue to see the business environment as pretty tough and promotional.”


Nordstrom’s profits slipped in the first quarter but sales grew solidly as the company’s Web business continued to march on.

And the company, which already has plans to spend $3.9 billion over the next five years to develop its business, particularly on a technology front, might have some more cash to play with. Nordstrom said it hired Goldman, Sachs & Co. and Guggenheim Securities to help it sell its $2 billion credit-card receivables business. The chain is one of the last retailers to still own the back end of its credit-card business.

Nordstrom’s first-quarter net earnings dipped 3.4 percent to $140 million, or 72 cents a diluted share, from $145 million, or 73 cents, a year earlier. Even so, profits per share came in 4 cents better than the 68 cents analysts had anticipated.

Revenues for the three months jumped 6.6 percent to $2.93 billion from $2.75 billion. The company’s comparable-store sales dipped 1.9 percent at the full-line stores, underscoring the importance of the company’s Rack outlet division as well as Online sales through the firm’s direct unit increased 33 percent in the quarter, while Rack sales rose 20 percent.

Apparel, which had been a laggard, has bounced back at Nordstrom.

Peter Nordstrom, executive vice president and president of merchandising, told investors that the women’s apparel business is “pretty much” in line with the company average. But there’s more work to do.

And the merchandising chief noted, “When you look at women’s apparel in totality…we’ve got to figure out a way of improving the junior’s part of the business. That’s a big business for us and it serves more than just the teenage customer. It serves young women as well. And I think that we’ve got to make that better, and when we do I think it’ll benefit the entire women’s results.”


At Dillard’s, net profits for the quarter slipped 4.7 percent to $111.7 million from $117.2 million. EPS, however, rose to $2.56 a share from $2.50 as the company bought back stock.

Revenues for the three months dipped 0.1 percent to $1.59 billion with a 2 percent rise in comparable-store sales.

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