Byline: Valerie Seckler

NEW YORK — The May Department Stores Co. reported earnings grew 9.9 percent in the fourth quarter on an 8.3 percent sales gain, despite profit margins that were eroded by heavy promotions.
Net income for the quarter ended Jan. 28 was $401 million, or $1.51 per share, compared with $365 million, or $1.37, a year ago. Retail sales climbed to $3.9 billion from $3.6 billion. Revenue advanced 6.6 percent to almost $4 billion from $3.7 billion.
Sales at the company’s department stores increased 8.4 percent to $3.3 billion from $3.1 billion, as comparable-store sales gained 5.3 percent.
Department store promotions were heaviest in better women’s areas where the chain “gave up 0.4 gross margin points to drive (comparable-store sales) starting in November,” said Philip Abbenhaus, an analyst at Stifel, Nicolaus. May’s better-priced women’s merchandise generates about 15 percent of the chain’s sales, he noted. The category has been hurt by price resistance and “collections like Liz (Claiborne) which don’t have nearly the following they did four to five years ago,” he added.
The heavy promotional posture didn’t surprise Wall Street. Bear Stearns analyst Steven Kernkraut said in a Jan. 16 research report that “May Co. led the charge to lower prices,” as the sales environment for winter apparel proved harsh.
May Co.’s overall results were “very favorably affected by a post-tax positive LIFO swing of $29 million, which boosted fourth-quarter earnings by 11 cents per share,” said Abbenhaus.
The swing reflects the difference between the $62 million LIFO credit taken by the retailer in the fourth quarter and the $13 million credit the retailer took a year ago.
“Backing out the LIFO factor, which helps a company’s numbers in tough times, May’s Co’s overall gross margins in the quarter as a percent of revenue slid to 32.2 percent from 32.8 percent,” Abbenhaus said.
“For May to lose this much margin tells you how promotional the fourth quarter was,” he added. “Clearly, they gave up margin to drive comps.”
The retailer’s stock closed Tuesday at 37 1/4 on the New York Stock Exchange, up 3/8.
California, where about 15 percent of the chain’s stores are located, proved to be the strongest region for May Co., analysts observed. The Northeast, especially the Boston area, was the toughest.
“With California finally recovering from a severe recession that hampered retailing there for the past five years, comp-store sales in this region should see a positive impact going forward,” Kernkraut forecasted.
May’s overall earnings for 1994 grew 10 percent to $782 million, or $2.92 per share, from $711 million, or $2.65. The LIFO credit lifted fiscal 1994 earnings per share by 12 cents.
Retail sales increased 8.1 percent to $11.9 billion from almost $11 billion. Department store sales gained 8.2 percent to $9.8 billion from just over $9 billion, while comparable-store sales rose 5.4 percent. Overall revenue expanded 6 percent to $12.2 billion from $11.5 billion.
The retailer said that operating cash flow of $1.3 billion earned in 1994 gives it “a significant competitive advantage for increasing sales by acquisition of individual stores or groups of stores.”
According to Abbenhaus, May Co. has the “biggest financial capability among department stores right now” to shop for acquisitions.
Kernkraut said he wouldn’t be surprised to see May’s name “pop up again” concerning an acquisition of Mercantile Stores Inc. He also expects May to show interest in any Georgia stores that Federated Department Stores might put on the selling block. Federated operates Rich’s and Macy’s stores in the region, and may be seeking to put some on the block. Dillard’s is also interested in expanding in that area and has one store set for the Atlanta market.
In addition, over the past year, there have been recurring reports about May Co. negotiating to buy Mercantile Stores.
Moreover, May opened 19 department stores in 1994, which along with closings brought its yearend total to 314 from 301. Plans call for opening 37 units this year.
Abbenhaus predicted May’s first quarter will probably be “rough,” forecasting earnings per share of 45 cents, against 41 cents. He cited the ongoing need for promotions to clear out inventories and a late Easter as challenging variables. — Fairchild News Service