MAY CO. NET OFF IN 1ST QUARTER

Byline: Thomas J. Ryan / With contributions from David Moin

NEW YORK — Stung by flat same-store sales and heavy markdowns in women’s ready-to-wear, May Department Stores Inc.’s profits dipped 1.6 percent in the first quarter ended April 29.
Results marked the sixth straight quarter May’s same-store sales performance lagged its main competitor, Federated Department Stores, and analysts weren’t sure how long it would take the new merchandising team set in place last January to rejuvenate May’s top line. Given its limited sales prospects, analysts said, the St. Louis-based department store operator is still eagerly looking at acquisitions, particularly one that would move them quickly into e-commerce. Additionally, May made a series of management appointments following release of its earnings.
Earnings in the three months slid to $120 million from $122 million, largely due to the soft sales and a decline in gross margins to 29.8 percent of sales from 30.2 percent a year ago.
Net retail sales climbed 3.5 percent to $3.04 billion from $2.94 billion, with same-store sales flat.
Earnings per share increased to 35 cents from 34 cents as a result of an aggressive stock buyback program. Results were in line with Wall Street’s consensus, but analysts had been trimming estimates as May’s disappointing sales were reported each month.
The margin erosion primarily stemmed from aggressive inventory markdowns, particularly in women’s ready-to-wear.
“Ready-to-wear was awful,” said Robert Buchanan at A.G. Edwards, based in St. Louis. Buchanan and other analysts said traffic trends are below par, particularly compared with Federated.
“Right now May has no answer to INC or Alfani,” said Buchanan. “I think they lack conviction in their merchandise, and I think they have some major work to do in the second half. If you walk the floors, you could fall asleep.”
Analysts don’t expect adjustments made by Judith Hofer, who was named president and chief executive of May Merchandising in late January, to start becoming evident on the floors until the second half.
Hofer, who was ceo of the Filene’s division, replaced William P. McNamara, who was named vice chairman to supervise the department store division. Federated seems to be outpacing May in sales with its strong private brand franchise, more successful promotional stance and inspired assortments.
“Clearly, it’s going to be a multiple-quarter process for her to have a real impact on the merchandising mix,” said Shari Schwartzman Eberts at J.P. Morgan.
Gene Kahn, May president and ceo, in February said that he wanted to change May into a “more merchandise-driven, sales-driven company,” with a renewed focus on capturing younger shoppers and the casualization of America. May is expected to particularly shake up its private label mix, where it is seen as having a more conventional opening-price-point stance than Federated, which has created more classy lifestyle private-label brands such as INC, Alfani, Charter Club and Style & Co. May’s private labels, which include Valerie Stevens and Karen Scott in women’s and Brandini and Clairbrooke in men’s, account for about 17 percent of revenues.
Fashion didn’t seem to work this spring for May as the chain told analysts it felt that the colors were too bright and the silhouettes were too narrow for its customers.
“The brighter colors were a good driver for growth at many specialty chains, but seemed not to have worked as well with the department store customer,” said Eberts.
A quicker way to realize growth, and catch Wall Street’s eye, is an acquisition. May, which owns the top balance sheet among its competitors, is telling analysts it will definitely be looking at acquisitions if the right opportunity arises.
“They can afford something, and the current landscape is providing some opportunities, given that the valuation levels of a lot of retailers are depressed,” said Brad D. McGill at Banc of America Securities.
May seems to most want to acquire another department store chain, but is also believed to be looking for a catalog company to jump-start its e-commerce presence. Federated is said to have gained a big edge over May on the e-commerce front through its 1998 acquisition of Fingerhut.
Some possible targets include those department stores with depressed stock prices such as Saks, Dillard and J.C. Penney, but the biggest impediment to any deal is whether these companies would be willing to sell, and at what price.
Even likely available chains such as Dayton, Ohio-based Elder Beerman may not be attractive since May is already well entrenched in Beerman’s Southeast markets.
A hot-and-heavy rumor earlier this year was that May was talking with Ann Taylor Stores. Many analysts didn’t believe this report, but Ann Taylor said last Thursday that its first-quarter results include $8.5 million in one-time selling, general and administrative expenses related to a review of strategic options with legal advisers on ways “to increase shareholder value.” Analysts speculated that the size of the charge indicated that acquisition talks with someone had been going on, but Ann Taylor officials declined further comment.
Even if discussions took place, many analysts were not too excited about a potential Ann Taylor acquisition, since Ann Taylor has not yet launched an e-commerce initiative and doesn’t own a catalog.
Many analysts said they would look more favorably on a multichannel specialty chain that would provide a catalog and a sizable Internet presence such as J. Crew, Spiegel (which owns Eddie Bauer) or Williams-Sonoma. J.P. Morgan’s Eberts also said that although she believes another department store chain would be May’s first acquisition priority, it may make sense to acquire a branded specialty store chain that could be used within the department stores.
“An ideal situation would be a brand that they could translate back to their department stores,” she said.
But analysts also said May has traditionally been a careful acquirer and might just keep plowing its heady cash flow back into its own depressed shares. May would have to justify paying a premium for another department store chain, they noted.
“Right now, they’ve got enough to do to fix their own business,” added Buchanan. Shares of May closed Monday at 28 3/8, up 3/8, on the New York Stock Exchange, close to its 52-week low of 23 3/4. Its 52-week high is 45 3/8.
During the quarter, May acquired $650 million in shares for a total of $789 million in 2000. May has purchased $2.5 billion worth of stock since 1996. Average shares outstanding were reduced to 344.2 million from 358.2 million.
May Co. also announced three top-level executive changes, affecting both the corporate office and its top divisions, Foley’s and Hecht’s. Thomas D. Fingleton, chairman of Hecht’s, was promoted to executive vice president of finance and operations for May corporate. Succeeding him at Hecht’s is Kenneth L. Wilkerson, currently chairman of Foley’s.
In addition, Mark J. Weikel, currently senior vice president and chief financial officer of Foley’s, was promoted to chairman of Foley’s.
The promotions go into effect on Monday.
Frank J. Guzzetta continues as president and ceo of Hecht’s, and Thomas J. Hogan continues as president and ceo of Foley’s.
Fingleton will report to John L. Dunham, May’s vice chairman and chief financial officer. Fingleton’s position is a new one and includes responsibility for financial planning and reporting, credit, tax and operations.
There was another big change at May Co. last week, as Jane Elfers was named chairman and ceo of the Lord & Taylor division, succeeding Marshall Hilsberg. Elfers was executive vice president of Lord & Taylor.
With management changing, it’s possible that the merchandising will change as well.
May Co. is known for a formulaic, matrix-driven approach, but recently Gene Kahn has expressed intentions to reach out to new and younger consumers and update certain departments.