’96: A YEAR FOR MOVING A BIT AHEAD

NEW YORK — Last year was one of modest progress for the nation’s retailers, but some of the gains were masked by special items.
In the accompanying chart, based on bottom-line figures, the department store group shows a decline in profits along with the specialty stores category. However, department store totals are distorted by the Sears, Roebuck results, which included earnings from Sears’ 80 percent interest in the Allstate insurance group, spun off in June 1995. Sears also sold the Homart Development Co. in 1995. Those discontinued operations accounted for $776 million of Sears after-tax income in 1995. Profits at Sears from continuing operations were ahead 24 percent, although net profit after the special 1995 items was down 29.4 percent. Adjusting total profits of the department store group for Sears’ special items, department store earnings in 1966 were ahead by about 14 percent.
In the department store group, May Department Stores, while growing relatively slowly with profits up just fractionally (they were up about 7 percent on a continuing basis), still stood well above the crowd, with its 6.5 percent after-tax return on sales. Its return on average equity was a respectable 18.3 percent. The decline in May’s equity reflects the spinoff of Payless ShoeSource in May 1996.
The growth leader in the department store group was Wisconsin-based Kohl’s value-driven operation. Kohl’s net profits were up 41 percent, and its after-tax return on net sales of 4.29 percent was second only to May in the group.
Similarly, in the specialty store group, bottom-line profits were off 26.45 percent, but the spinoff of Intimate Brands Inc. in 1995 inflated The Limited’s bottom line by $649.5 million that year. There was also a $118 million special gain from the initial public offering of Abercrombie & Fitch. Adjusting the total for the difference, the specialty store group’s profit was ahead about 14 percent.
While Limited continues to struggle with its core women’s apparel business, its remaining interests in IBI (83 percent) and Abercrombie (84 percent) leave it with a huge cushion of profits that can be realized whenever management sees fit to sell off bigger pieces of those businesses.
Meanwhile, in 1996, profits at Intimate Brands were up more than 26 percent, and after-tax profits to sales were 8.6 percent. At Abercrombie, earnings were up 72.6 percent, and return on sales was over 7 percent.
From an operating standpoint, Gap was a clean winner among the large specialty chains. It earned $453 million, surpassing Limited even after the special gain on Abercrombie and stood at the top of the specialty group for dollars earned. Gap’s after-tax return on sales was 8.6 percent, and its return on average equity was 27.5 percent.
The cleanest operating gains came in the off-pricers category, led by TJX Cos., which has blown away the competition with the acquisition of Marshalls in November 1995 and the smooth integration into the TJX operation. While TJX also had its share of special items, principally the disposal of Hit or Miss in September 1995 and the sale of Chadwick’s in December 1996, operating earnings were up over 300 percent. Return on equity was a sparkling 38.4 percent, the highest on the chart.
Ross Stores also made a strong recovery in 1996, turning in an uncluttered 87 percent gain in net profits and a return on equity of 26 percent.
Among the discounters, Wal-Mart just overwhelmed the group. With earnings of over $3 billion in 1996, it accounted for about 98 percent of the total for the entire discount group. This is distorted, however, because results of Target, which is the third-largest discounter, were buried in the Dayton Hudson figures. Target had sales of $17.8 billion and pretax profits in 1996 were about $1 billion. Based on Dayton Hudson’s overall tax rate, Target’s after-tax earnings would have been $625 million. With the addition of Target’s after-tax profits, Wal-Mart’s share of the total drops to 82 percent.

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