NEW YORK — May Department Stores Co. and J.C. Penney Co. Tuesday added to the growing body of evidence that both consumer spending and department store performance are poised for a fourth-quarter comeback.
This story first appeared in the November 12, 2003 issue of WWD. Subscribe Today.
May reported its profits nearly tripled in the third quarter ended Nov. 1, its first earnings jump for the period in four years.
Meanwhile, Penney’s earnings contracted, but the reduction was totally attributable to weakness at the Eckerd drugstore group, as operating profits at its department stores leaped ahead more than 20 percent. And it achieved that performance even without an increase in women’s apparel sales in the quarter.
While hardly constituting a wholesale revival, the pieces of good news from two of the leading moderate department store groups reinforced recent opinions from analysts and economists that the hard-hit channel is due for a rebound.
As reported, Carl Steidtmann, chief economist at Deloitte Research, told a luncheon meeting of Fashion Group International Monday: “The younger consumers between ages 18 and 24 have defined the department store as their store of choice. We used to think it was the choice of the older [consumer]. What we see is the emergence of a 9/11 generation,” more conservative than their parents and positively disposed toward department stores.
Whether or not St. Louis-based May is on the edge of a renaissance remains to be seen but, with its cost structure under control and sales trends seemingly stabilized, it could be poised for future earnings growth.
For the three months ended Nov. 1, the owner of the Lord & Taylor, Filene’s and Kaufmann’s nameplates, among others, said net income shot up 193.8 percent to $47 million, or 15 cents a diluted share, which easily eclipsed the Wall Street forecast by 4 cents. By comparison, last year the firm had profits of $16 million, or 5 cents.
Excluding aftertax charges of $6 million, or 1 cent, this year for costs related to the shuttering of 32 L&Ts and two other doors, and $9 million, or 2 cents, a year ago for store combination costs, net income would have grown a more modest but still robust 131.8 percent to $51 million, or 16 cents, from $22 million, or 7 cents.
Starting with the third quarter of fiscal 1999, May had posted ever-shrinking earnings of 38 cents, 27 cents and 17 cents, respectively.
As reported, sales for the period ticked down fractionally, 0.5 percent, to $2.98 billion and comparable-store sales dipped 2.4 percent.
“I think the key things were cost control and merchandise margin,” said FTN Midwest Research analysts Jeff Stinson. “Sales trends have stabilized for these guys in the third quarter. If they stay stabilized, I think we should see some earnings improvement going forward.”
Investors followed the news by trading up May’s shares 18 cents, or 0.6 percent, to close at $29.58 in Tuesday’s New York Stock Exchange session.
Lower overhead showed up in a 100 basis-point regression in selling, general and administrative costs to 22.1 percent of sales from 23.1 percent a year ago, and a 60 basis-point decline in interest expenses to 2.6 percent from 3.2 percent in the year-ago quarter. The lower SG&A expense was mostly attributable to a 0.8 percent decrease in payroll, a 0.5 percent drop in advertising costs and a 0.3 percent decline in credit costs, somewhat offset by a 0.4 percent rise in pension expense.
Moreover, although cost of sales remained unchanged at 72.6 percent of the top line, May greatly reduced expenses of restructuring markdowns to $3 million from $23 million last year.
May’s better cost controls also were encouraging to Banc of America analyst Dana Cohen, who wrote in a research note: “With operating margins down 400 basis points since 1999, there is significant leverage in the May model. Our more positive view of the macro environment, combined with some improved execution at May, continues to make us positive on this leverage potential.”
However, other industry observers remain somewhat more cautious if not outright skeptical.
“The central issue is a lack of favorably differentiated product,” wrote A.G. Edwards & Sons analyst Robert Buchanan. “The rising tide of consumer spending is lifting most boats these days. This is true even for a May whose poorly edited brand assortments and poorly developed private labels continue to cost it market share.”
Criticizing May’s “lack of merchandising acumen,” among other failures, Buchanan added: “This will mark the third year in a row of ‘down’ earnings for this once-venerable retailer — this following May’s prior impressive skein of 26 years of ‘up’ earnings under the prior leadership.”
Buchanan said next year’s earnings should be up slightly, but more because of factors outside May’s control, namely, continued improvement in consumer spending.
Overall, for the first nine months of the fiscal year, May saw earnings nearly evaporate, plunging 94.2 percent to $9 million, which translated to a loss of 1 cent a diluted share. That compares with last year’s profits of $155 million, or 50 cents. Net sales receded 3 percent to $8.85 billion from $9.12 billion a year ago, and comps sagged 4.8 percent.
J.C. PENNEY CO.
Eckerd drugstores continued to be an albatross around J.C. Penney Co. Inc.’s neck in the third quarter, dragging down profits by more than a third despite strength in department stores, catalogue and Internet operations.
However, the momentum at the department stores didn’t extend to women’s apparel, the only major classification that failed to generate higher sales.
For the three months ended Oct. 25, the Plano, Texas-based national retailer reported net income of $80 million, or 27 cents a diluted share. Although that beat the Wall Street forecast by 2 cents, it represented a 35 percent drop from last year’s earnings of $123 million, or 30 cents.
Consolidated sales added 1.4 percent to $7.99 billion, comprising a 0.8 percent uptick at department stores and catalogue to $4.34 billion, and a 2.2 percent increase to $3.64 billion at Eckerd.
However, while comparable-store sales improved 1.7 percent at the department stores, they fell 1 percent in the drugstore business.
“Overall, our earnings were in line with our recent guidance,” said chief financial officer Robert Cavanaugh on a conference call with analysts. “Department stores, catalogue and Internet exceeded our expectations, but Eckerd did not.”
Although the department store segment posted a 21.8 percent rise in operating profit to $207 million from $170 million last year, that was more than offset by a 57 percent plunge in Eckerd’s operating income to $34 million from $79 million. As a result, Penney’s consolidated operating profit declined 3.2 percent to $241 million.
At the department stores, a 190 basis-point expansion in gross margin and comp-store sales leverage contributed to the segment’s stronger earnings.
“The better margins reflect better execution, better assortment and more experience under our centralized business model,” said Vanessa Castagna, chief executive officer of department stores, catalogue and Internet, on the call. “All merchandise categories, except women’s apparel, had sales increases for the quarter. The best performing categories were back-to-school apparel, home, fine jewelry and family shoes.”
Castagna added that sales of women’s and men’s seasonal apparel, including outerwear and sweaters, were soft due primarily to unseasonably warm weather.
At Eckerd, however, weak net sales and declining comps, a 30 basis-point erosion in gross margin and a lack of leverage in selling, general and administrative costs doomed operating results, and Penney expects more of the same in the fourth quarter from the troubled business, with comps forecast at slightly down. The company said once again that it “is in the process of evaluating strategic alternatives” for the drugstore chain and expects to make a decision by year-end. As such, it refrained from taking any questions regarding the business on the call.
Investors traded up Penney’s shares 37 cents, or 1.6 percent, to finish at $23.65 on the New York Stock Exchange Tuesday, likely reflecting the continued turnaround at the department stores and Penney’s commitment to disentangle itself from Eckerd.
At least at its department stores, Penney is fairly bullish for the holiday shopping season and its impact on fourth-quarter results.
“As we enter the holidays, we are encouraged by the improving economic conditions that help our moderate customer,” said Castagna. “Our customers are impacted by job growth, low interest rates and energy prices. Overall, these factors are improving and we expect positive fourth-quarter results.”
On a consolidated basis, the outlook for fourth-quarter earnings per share is about 80 cents, Penney said, with comps at the department stores up in the low single digits. Full-year earnings are forecast at $1.25.
Overall, for the first nine months of the fiscal year, Penney said net income fell 30.5 percent to $141 million, or 45 cents, from $203 million, or 55 cents, a year ago. Total sales for the period remained essentially flat, down 0.03 percent, to $22.79 billion.