Byline: Thomas J. Ryan

NEW YORK — Traditional department stores limped their way to the finish line during the first quarter of 2000.
The inability of department stores to generate increases in sales or strong margins served as a common thread among several of the retailers reporting first-quarter earnings Tuesday.
While continuing problems at its department stores took the lion’s share of the blame for losses at J.C. Penney, so too did lackluster department store results apply earnings brakes to the results of Target and Saks Inc. Sales and profits were strong at both Target’s Target division and at Saks’ more upscale Saks Fifth Avenue operation.
In fact, the very absence of a department store format seemed to qualify retail companies for strong performances. TJX Companies, the nation’s largest off-pricer, turned in an 11.5 percent net income boost. Kohl’s, the surging Midwestern powerhouse now building market share in the Northeast, saw its profits jump by more than a third.
Specialty stores catering to various consumer niches also turned in stellar results, with Tiffany’s net income jumping nearly 90 percent and Gadzooks’ quadrupling during the period (see page 15).

Target’s first-quarter earnings surged 23.2 percent to $239 million, or 52 cents a share, from $194 million, or 41 cents, a year ago. Sales, including credit revenues, advanced 8.2 percent to $7.75 billion from $7.16 billion, with same-store sales ahead 3 percent.
“We are off to a strong start in 2000 and have confidence in our ability to grow sales and earnings again this year,” said Bob Ulrich, chairman and chief executive.
Gross margins expanded to 32.8 percent of revenues from 32.2 percent as a result of “substantial improvement” at the Target discount chain, which accounted for 79 percent of revenues during the quarter. Selling, general and administrative expenses inched ahead slightly to 23.7 percent of revenues from 23.6 percent.
Results for the Minneapolis-based company beat Wall Street estimates by 3 cents a share.
“I thought it was a very strong quarter clearly driven by the outperformance of the Target division, which offset a pretty disappointing performance at department stores,” said Shari Eberts Schwartzman, an analyst at J.P. Morgan.
Schwartzman said the Target chain is capitalizing on its moves to differentiate itself from its competition with new lines such as Calphalon, Stiffel, Discovery Channel toys, and designs by Michael Graves and Robert Abbey in the home area. In softlines, a Niki Taylor women’s apparel line will be tested in 150 stores this holiday, and an exclusive Mossimo sportswear collection will debut in early 2001.
At the Target discount chain, EBITDA (earnings before interest, taxes, depreciation and amortization) jumped 22.9 percent to $620 million. Revenues gained 11.5 percent to $6.1 billion, with same-store sales ahead 4 percent.
The same-store gains were led by hard goods, but apparel also performed well, with particular strength in women’s, kids’ and footwear. Men’s and intimate apparel lagged slightly.
Officials told analysts some editing of brands such as Cherokee and Merona will make room for the Mossimo label, and additional space will not be given to softlines, which currently account for about 25 percent of sales at the Target chain. Target also said it saw no impact from Kohl’s aggressive entry into the New York metropolitan region.
Regarding its Target Web site, the firm added its Sunday circular during the quarter and plans to “substantially increase” its stockkeeping units to between 12,000 and 14,000 by year end.
At Mervyn’s, EBITDA dipped 0.4 percent to $79 million as sales slid 2.3 percent to $891 million and were down 1.8 percent on a same-store basis. Officials said they were “a little bit disappointed” in sales, but said markdowns and inventories were in line with projections at the chain.
At the department store division, EBITDA fell 23.1 percent to $63 million. Sales slid 4 percent to $667 million and same-store sales slumped 4.9 percent. The division includes the Dayton’s, Hudson’s and Marshall Fields chains.
Linda L. Ahlers, president of the department store division, said the firm was “very disappointed” with its department store sales. “We think it was really related to the fashion cycle we are in and not the overall strategy, which we see as very sound,” Ahlers said. She added the department stores are clearing some younger fashion trends that underperformed and expect a better performance this fall with a good outlook for “traditional clothing” such as career and suits and some sharper pricing from key vendors such as Tommy Hilfiger.
At the quarter’s end, the firm had 921 Target stores, 267 Mervyn’s and 64 department stores.

With retail and catalog sales declining, ailing J.C. Penney reported a walloping $118 million first-quarter net loss, but managed to do better than analysts had expected.
The $118 million loss for the quarter ended April 29 compares with $167 million, or 61 cents a diluted share, in income for the comparable 1999 period. The latest quarter’s loss includes a one-time $325 million pretax charge connected to the company’s restructuring initiatives announced in the 1999 fourth quarter. Excluding the charge, the Plano, Tex.-based retailer would have earned $132 million, or 28 cents, for the quarter. The consensus among Wall Street analysts was 23 cents. Revenue for the quarter increased 2.6 percent to $7.7 billion from $7.5 billion.
As reported, the $530 million restructuring plan includes the closing of 40 to 45 department stores and 289 Eckerd drugstores. Penney’s said the restructuring could generate up to $300 million in annual savings when fully implemented. The store closings and related consolidations are projected to generate $55 million in savings in 2000 and $120 million on an annualized basis, the company said.
James E. Oesterreicher, chairman and chief executive officer, said in a statement, “During the first quarter, we made considerable progress with many of our initiatives to improve operating performance. Department store and catalog segment operating profit margins improved as a result of actions taken to increase inventory productivity and control expenses.”
The chairman added, “Internet sales continue to exceed expectations and are tracking above our $260 million sales plan for the year,” he noted.
Jeff Edelman, retail analyst at PaineWebber, in a research note following the earnings report wrote, “We believe J.C. Penney is making progress as expected, but there is still a lot of work to do.”
Edelman highlighted the quarter’s accomplishments on the brick-and-mortar front, noting that Vanessa Castagna, chief operating officer, is making progress at the department stores. Stores are less cluttered and inventory reduction continues, more experienced management is being added, closer relationships with vendors are producing better seasonal inventory flow and second-half 2000 marketing and merchandise plans are to be better coordinated. Edelman maintained his “attractive” rating of the stock.
Operating profit for the store and catalog division jumped 15.2 percent to $167 million for the quarter, compared with $145 million in the prior-year period. Sales decreased by 2.4 percent to $4.1 billion from $4.2 billion. Comparable-store sales was down 3.1 percent, while catalog sales dipped 0.5 percent. Internet sales — included in catalog sales — totaled $47 million versus just $6 million in the year-ago period.
Castagna said during a conference call Tuesday that women’s and men’s shoes and women’s casual sportswear did well in the quarter. The firm’s private label, Arizona Jeans, did exceptionally well, she noted.
The chief operating officer pointed out, however, that the company doesn’t expect a “meaningful” pickup in sales until fiscal 2002’s first quarter.
“Our plan involves lower levels of inventory, which will result in higher gross margins,” she noted. Castagna said Penney’s new merchandising process is “well under way” and that the company is on target to begin its planning and order placement in August, for which merchandise will start showing on the floors in January.

TJX’s earnings advanced 11.5 percent to $130.6 million, or 44 cents a share, from $117.1 million, or 36 cents, a year ago. Sales advanced 9.2 percent to $2.1 billion. Results beat Wall Street’s consensus estimate by a penny.
“Adverse weather conditions caused us to fall slightly below this year’s sales goal for the quarter, but where weather was favorable, we beat our objectives significantly,” said Edmond English, president and chief executive, in a statement. “Well-managed inventories and expense control helped us attain strong margins and contributed to TJX exceeding its earnings per share target for the quarter.”
At Marmaxx Group, the combination of T.J. Maxx and Marshalls, operating earnings rose 5 percent against a 31 percent gain in the 1999 first quarter. Same-store sales nudged ahead 2 percent. TJX told analysts apparel sales were soft, particularly in the Northeast and Midwest, due to cold spring weather. The firm said its customers buy much closer to need than those who shop at department stores and discounters, since TJX does not drive traffic through promotions.
“We continue to execute the fundamentals of this business extremely well,” said English in a statement about the Marmaxx chain. “By maintaining liquid inventories and through tight expense control, Marmaxx achieved its operating margin objective, despite the unseasonably cold weather in the Northeast and Midwest regions of the United States throughout the quarter.”
Home and jewelry, which are less affected by weather, sold the best. Men’s comps were up 2 percent, with particular strength in urban and club looks.
Women’s was weak, but analysts said the firm was satisfied with the performance because tight inventory controls helped offset the effects of inclement weather. TJX said it saw a “very, very nice bump” when hot weather arrived in the last two weeks. The company, with headquarters in Framingham, Mass., said it plans to focus on inventory flow and seeking opportunistic buying opportunities in women’s, telling analysts that it sees “a lot of distressed merchandise showing up all the time.” Sportswear “has righted itself nicely” with some good buys, but career “is in somewhat of malaise.” Career and juniors were down and special sizes continued to be weak, but strength was seen in casual sportswear, women’s activewear and lingerie.
TJX’s newer concepts all churned out a strong quarter, particularly Winners Apparel Ltd., its Canadian off-price chain, where same-store sales were ahead 12 percent and operating income surged 61 percent. Analysts said Winners benefited from the bankruptcy last year of Eaton’s. Same-store sales rose 6 percent at T.K. Maxx, its United Kingdom off-price chain; 10 percent at Homegoods; and 25 percent at A.J. Wright, its moderate-price point concept.

Saks said first-quarter income before special items slid 18.6 percent as weakness at its traditional department stores offset a better performance at Saks Fifth Avenue. Earnings before nonrecurring items slipped to $32.4 million, or 23 cents a share, from $39.8 million, or 27 cents, a year ago,.
After special items, earnings reached $33.9 million, or 24 cents, up from $24.5 million, or 17 cents. The latest year was boosted by a $1.5 million gain on the disposal of two properties. The year-ago period was dragged down by after-tax charges of $15.4 million related to merger and integration costs and an extraordinary loss on early extinguishment of debt.
Sales increased 2.5 percent to $1.5 billion, with same-store sales ahead 1.4 percent.
Results were in line with Wall Street’s average estimate of 23 cents, but the consensus had been lowered from 27 cents last week due to anemic April sales.
“Our income for the first quarter of 2000 fell below our targeted level,” said R. Brad Martin, chairman and chief executive, in a statement. “This shortfall resulted from a below-plan profit contribution from our traditional department store group, due to lower than planned sales and gross margin rate. This weakness reflected continuing softness in our women’s apparel business and higher than planned markdowns in this category. A strong sales and gross margin contribution from our Saks Fifth Avenue business partially offset the below plan results of the department store group.” The markdowns at its department stores caused gross margins to erode to 36.8 percent of sales from 37.7 percent a year ago.
Martin noted that selling, general and administrative expenses were trimmed to 21.6 percent of sales from 21.9 percent due to “diligent expense control and improved proprietary credit card contribution.” Inventories at yearend were $1.65 billion, up 5 percent.
Martin said the firm made “substantial progress” during the quarter on three of the firm’s four initiatives: increasing return on inventory investment and profitability at Saks Fifth Avenue, reducing overhead and preparing to launch “However,” he added, “we failed to achieve the results I expected from the traditional department store group.”
Same-store sales at the traditional department store group were below plan, and the firm said it is continuing to refine merchandise assortments by store, test service model changes and find ways to appeal better to its most loyal customers.
Martin said Saks Fifth Avenue “generated a solid operating performance in the first quarter. This was attributable to outstanding merchandise assortments combined with improved business processes and inventory controls.”
Regarding overhead, Martin said the consolidations of McRae’s home offices into its Proffitt’s division and Herberger’s into Carson’s are on schedule, to be completed in the third quarter. The move is expected to reduce operating expenses by $15 million annually beginning in 2001.

Kohl’s profits jumped 33.8 percent as a result of continuing robust same-store sales and a stupendous arrival into the metropolitan New York market. Earnings rose to $52.6 million, or 16 cents a share, from $39.3 million, or 12 cents, a year ago, and exceeded Wall Street’s consensus estimate by two cents.
Sales rose 35 percent to $1.23 billion from $910.3 million.
Larry Montgomery, ceo, said same-store sales rose 6.9 percent on top of a 10 percent comparable gain last year. Sales in newer markets, including New York, Denver and Dallas, exceeded expectations.
On a conference call, Kohl’s told analysts that all classifications performed well, but gains were led by double-digit same-store gains in men’s and misses’. The introduction of Arrow in the New York market exceeded expectations, and Columbia Sportswear, rolled out across the entire chain, generated “very, very strong sell-throughs.”
Gross margins improved to 34.7 percent from 34.4 percent due to a continued improved merchandise mix such as in men’s and misses’. Selling, general and administrative expenses were reduced to 23.1 percent from 23.7 percent.
Stores opened in March and April in the tri-state area, mostly in former Caldor stores, have far exceeded internal expectations, with the stores running close to 100 percent of a typical Kohl’s store versus expected rates of between 60 to 70 percent.
“We’re very excited about our stores in the tri-state area,” said Montgomery.
Kohl’s has 14 stores in New York, primarily on Long Island; 11 in New Jersey, and eight in Connecticut. It plans 21 new stores in the third quarter, including three additional stores in Long Island and three in Tulsa, Ok. Kohl’s said it plans to open a new distribution center in Chester, N.Y., in 2001 to support its Northeast expansion.
Montgomery also told analysts that the expected slowdown in consumer spending in the second half of the year shouldn’t derail Kohl’s success.
“We are in the business of taking market share and building fill-in stores in those markets, and we have a history of years and years of doing this no matter what happens to the economy. And I think that’s how we’re going to approach it,” he said.