PROFIT FEARS HURT OUTLOOK FOR FEDERATED, NEIMAN’S AND GUESS
Byline: Jennifer Weitzman
NEW YORK — Federated Department Stores led a group of retailers who used the day after the Fourth of July to report that the second quarter was ending with duds, not fireworks.
Most critically, Federated downwardly revised earnings expectations for the second quarter and the year and even pulled its projections for same-store sales for the fall into negative terrain.
In addition to reporting double-digit same-store sales declines at its retail and outlet stores for June, Guess said it expects second-quarter profits to be lower than anticipated. Neiman Marcus Group, which warned in June that it would record a loss in its current fourth quarter and that full-year earnings would fall below analysts’ expectations, reported a further erosion in monthly sales as June comps dropped 5.4 percent, indicating worsening conditions in the high-end market.
Federated, the Cincinnati-based operator of Bloomingdale’s and Macy’s, said second-quarter earnings are now expected to range between 40 and 50 cents a share, excluding restructuring charges, down from the 70 to 75 cents forecast earlier, while full-year earnings are now expected to fall between $3.60 and $3.90 a share, down from projections of $4 to $4.25. It said it also is lowering its fall comparable-store sales expectations to a negative 1 to 2 percent, from flat to up 1 percent.
Analysts polled by First Call had expected earnings of 65 cents for the quarter ending in July and $3.92 for the year.
Federated said it would start the second half in good shape, as markdowns being taken now would insure fresh fall inventories. It also noted that any sales reversal this fall could improve the company’s earnings results, as 65 percent of Federated’s profits last year were generated in the second half.
Investors sent Federated shares down 5.9 percent, to close at $38.01, and those of Neiman Marcus down 0.7 percent, to $31.57, in New York Stock Exchange trading. Guess shares dropped 1.7 percent, to $7.50, on the NYSE.
While analysts differed on whether Federated’s warning constituted understandable prudence or muted panic, all agreed it would not stand alone, as other retailers are expected to preannounce lowered earnings expectations in the coming weeks.
Bernard Sosnick at Fahnestock & Co. termed Federated’s announcement “dramatic.” The analyst said management, historically adept at responding to any downturns, obviously was surprised by the seriousness of the downturn in sales the last two months.
Christine Kilton Augustine at ABN AMRO concurred, noting that for a strong performer like Federated to come out now and warn about the second half, “conditions must be tough. We are not gong to see recovery in the second half since the consumer is nervous and not in the stores spending, even with all the markdowns.”
“Clearly, the environment is worse than anyone thought,” said Robert Buchanan with A.G. Edwards & Sons. He added that, with consumers’ closets well-stocked after a seven-year spending spree, consumers aren’t seeing any new fashion to entice them.
Some applauded Federated’s conservative views of the second half, calling management “prudent.”
Shari Schwartzman Eberts at J.P. Morgan observed that Federated’s announcement suggests “that if the best-run retailer is feeling the pressure, clearly all retailers are.”
Steven Kernkraut at Bear, Stearns concurred: “We have been and are going to be in a tough retail environment, particularly in apparel, and I think it was smart for Federated and others to become as guarded as can be in terms of business in the back half.”
He said that while retail executives realize that lower taxes, interest rates and gas prices can stimulate consumer spending, it is difficult to know exactly when shoppers will be back. That said, retailers don’t want to be stuck with elevated risk of markdowns, so, while they wait, they are continuing to buy conservatively.
Kernkraut said he is looking to the all important fourth quarter for a reversal of fortune. And with that, combined with tighter inventory controls and lowered expenditures throughout the industry, there is the opportunity for retailers to be rewarded with more full-price selling.
George Strachan at Goldman, Sachs, who downgraded both Federated and The May Department Stores Co., said: “Frankly, I don’t think any of this should come as any huge surprise. Sales throughout the industry have been running below plan in the second quarter, inventory is starting to build and we expect heavy second-quarter discounting in order to clear in front of fall receipts.”
Guess said comparable-store sales in June decreased 17.6 percent, including a 18.3 percent drop at its full-price retail stores and a 16 percent decline at its outlet stores. As a result, it now expects earnings per share for the second quarter to be in the range of 2 to 4 cents, down from the 8 to 9 cents the company originally expected.
“We obviously do believe the current weak retail environment will negatively impact results in the second half,” Carlos Alberini, president and chief operating officer, said in a telephone interview. He declined to further detail the company strategy and specific outlook for the second half, until the company reports second-quarter results July 30.
However, the day was not a dud for all retailers. Deb Shops, a junior specialty retail group, reported a 9.1 percent rise in June comps on a 13.5 percent increase in total sales, to $22.7 million. And Christopher & Banks announced a 4 percent jump in comps on a 33 percent increase in total sales, to $17.3 million.
Bill Prange, chairman and chief executive officer of Christopher & Banks, said in a statement: “We remain confident in our ability to achieve mid-single digit same-store sales increases and are optimistic about our second-quarter prospects despite the challenging retail environment.”