NEW YORK — Stores are happy to have the first half behind them.

Although unseasonable weather and unrelenting markdown pressures took their toll on retailers’ profits during the second quarter, the first smattering of earnings results for the period indicated things could have been worse.

This story first appeared in the August 13, 2003 issue of WWD. Subscribe Today.

J.C. Penney Co. managed to break even after a year-ago loss despite difficulties at its Eckerd drugstore division, but write-offs for store closures at Lord & Taylor sent May Department Stores deeply into the red. The TJX Cos. was unable to match its year-ago profit performance, but Abercrombie & Fitch managed a double-digit increase in net income despite a drop in comparable-store sales.

A nearly universal theme sounded by stores Tuesday was a feeling that sales at the start of the third quarter had been markedly stronger than those that preceded them, as the dog days of summer arrived along with fall and back-to-school shipments.

Tax rebates and a careful balance between basics and fashion have J.C. Penney Co. feeling bullish about the back-to-school shopping season after the firm trimmed its second-quarter loss beyond Wall Street’s forecast.

While Penney’s department stores and catalog business more than doubled its operating profits, earnings erosion at Eckerd drugstores dragged down overall results.

For the three months ended July 26, the Plano, Tex.-based national chain said bottom-line results broke even in dollars and registered a loss of 2 cents a diluted share. That beat the Wall Street consensus estimate by 3 cents, and was an improvement over last year’s loss of $6 million, or 5 cents.

Operating income at the department stores and catalog business shot up 131.8 percent to $51 million from $22 million a year ago, but the Eckerd division took a chunk of that back, as operating profits plunged by more than a quarter, or 26 percent, to $54 million from $73 million last year.

Consolidated sales ticked up 1.6 percent to $7.31 billion from $7.2 billion a year ago. Department stores and catalog sales rose 1 percent to $3.66 billion versus $3.62 billion, which was outpaced by net sales at Eckerd where revenues grew 2.3 percent to $3.66 billion from $3.58 billion. Comparable-store sales, however, were another matter, as a 2.1 percent bump at the department stores was partially offset by a 0.8 percent drop at the drugstore chain.

Investors traded down the firm’s shares 31 cents, or 1.7 percent, to land at $17.76 in trading on the New York Stock Exchange Tuesday.

Penney’s management was happy with the department store and catalog’s second-quarter results and said an improving retail environment, tax rebates and its “fashionable, trend-right products for moderate customers” formula bodes well for b-t-s, fall, and the third quarter in general.

“We are off to a good start in August,” said Vanessa Castagna, chief executive officer of Penney’s stores, catalog and internet on a conference call. “We believe our customers benefit from the tax program. The checks that are being mailed now are well-timed for back-to-school purchases, as our target customer tends to spend this cash on their kids and families.”

Allen Questrom, chief executive of J.C. Penney Co., added that Penney’s moderate customer “is about spending what she gets, and when she has it, she’s going to spend it on her family.”

To insure those customers spend those checks in Penney’s stores, Castagna said the company needs to continue to strike a balance between basics and more fashionable trend-right products for moderate customers, with national, private and exclusive brands being the key. Penney’s sold about $1 billion in private label apparel during the quarter, she said.

“Private and exclusive brands represent 40 percent of our sales. Clearly the customer is looking for exclusive brands,” Castagna said. “We believe we’ve made progress with our assortment and we are focusing on brands that are important to the moderate customer.”

Castagna cited Bisou Bisou, Mixit and its exclusive deal with BCBG Max Azria’s Parallel line as examples.

Fleshing out the strategy, Questrom said: “The middle of America is basically J.C. Penney’s home, and so we are never going to be the most fashionable store in America and that’s not our intention. But we do believe that on the coasts and in certain markets we need more fashion to give the store a more updated feel.”

As for Eckerd, Questrom and division ceo Wayne Harris were frank about the drugstores’ lackluster results, citing uncompetitive pricing and other merchandising and marketing problems.

“It shouldn’t have happened. We screwed it up,” said Questrom. “It was a matter of execution. Issues of pricing and out-of-stock were a problem three years ago and shouldn’t have come back.”

Looking at the quarter in more detail, in addition to the 2.1 percent improvement in department store same-store sales, catalog and Internet sales comped up 3.1 percent. Castagna said all merchandise divisions generated same-store sales gains, with the best performing categories being kids, men’s and family footwear. Fine and fashion jewelry also comped up, she said.

Overall, for the first half of the year, Penney’s profits fell 23.8 percent to $61 million, or 18 cents a diluted share. By comparison, last year the company recorded net income of $80 million, or 24 cents. By segment, the department stores and catalog group saw operating earnings fall 25.1 percent to $134 million, while Eckerd’s operating income ticked down fractionally, or 0.6 percent, to $172 million.

Consolidated sales for the six months dipped 0.8 percent to $14.81 billion from $14.93 billion a year ago. Department store and catalog sales fell 3.3 percent to $7.38 billion, which was partially offset by a 1.8 percent gain at Eckerd to $7.43 billion.

In guidance, Penney said third-quarter EPS is forecast at 25 to 30 cents, and full-year earnings are expected to be $1.25 to $1.35 a share.

The May Department Stores Company swung to a loss in the second quarter as charges from the impending closure of 32 Lord & Taylor Stores, as well as two other doors, more than eradicated any earnings.

For the three months ended Aug. 2, the St. Louis-based parent of L&T, Filene’s and Kaufmann’s, among others, registered a net loss of $110 million, or 39 cents a diluted share. That compares with last year’s profits of $69 million, or 22 cents. Excluding charges accruing to $318 million, or 69 cents, for asset impairment related to the shuttering of the 34 stores, net income would have been $92 million, or 30 cents, which beat the Wall Street consensus estimate by 3 cents. Excluding charges in last year’s quarter, as well, net income fell 13.2 percent from $106 million, or 34 cents.

As reported, when the store divestitures are completed, May expects to save $50 million, or 10 cents a share, annually.

Net sales for the quarter fell 1 percent to $3 billion from $3.03 billion a year ago, as same-store sales declined 3.1 percent.

May’s stock took advantage of a late-day rally, rising 19 cents, or 0.7 percent, to close at $26.37 in Tuesday’s New York Stock Exchange session.

However, not all observers were so impressed.

“Earnings are in secular decline, brought on by weak leadership as manifest in dull merchandising and lackadaisical store-level execution,” wrote A.G. Edwards & Sons analyst Robert Buchanan in a research note to investors. “May’s private label programs are among the least defined and most poorly executed in U.S. department store retailing. Editing of branded assortments is too loose — speaking to a lack of intimate knowledge of the customer base of this or that particular store. Customer service is perfunctory and slow.”

For the first half of the fiscal year, May posted a net loss of $38 million, or 16 cents, compared with last year’s profits of $139 million, or 45 cents. Excluding special items in both periods, income decreased 18.9 percent to $163 million, or 53 cents, from $201 million, or 65 cents. Net sales for the six months dropped 4.1 percent to $5.87 billion from $6.13 billion a year ago, and comps fell 6 percent.

Growth at its “younger” divisions couldn’t quite compensate for lower profits at Marmaxx Group, leaving TJX Cos. with lower earnings during the second quarter.

In the 13 weeks ended July 26, the Framingham, Mass.-based off-price giant saw net income drop 4.9 percent to $123.3 million, or 24 cents a share, 1 cent above revised consensus estimates. In the year-ago quarter, profits hit $129.6 million, or 24 cents.

Top-line results were considerably better as net sales rose 10.2 percent to $3.05 billion from $2.77 billion in last year’s quarter, and were up 2 percent on a comparable-store basis. TJX’s sales in the quarter exceeded the $3 billion reported by May Department Stores.

On a conference call with analysts, Edmond English, president and chief executive officer, blamed much of the profit decline on “unseasonably cool and rainy weather” during the quarter.

“The summer season basically didn’t happen until after Father’s Day,” English told analysts. “The reality was that, when the weather broke, we were already in markdown mode. We hit it early, we hit it hard and it’s behind us.”

But TJX also hit it at a cost, especially at Marmaxx, the combination of T.J. Maxx and Marshalls, where segment profit dropped 9.3 percent to $191.8 million, as sales picked up 4.3 percent to $2.3 billion and comps were flat.

Marmaxx accounted for 75.6 percent of consolidated sales and 84.8 percent of consolidated segment profits, down from 79.8 percent and 90.6 percent, respectively, a year ago.

However, all other TJX business segments produced profit improvement to go with sales increases. The youth-focused A.J. Wright, budgeted for a $4 million loss, moved to a $1.8 million profit from a $3.1 million year-ago loss, partially because of a benefit from store closures. Sales at the 84-unit urban apparel chain rose 60.8 percent to $96 million and were up 11 percent on a same-store basis.

English disclosed that the A.J. Wright division, which has grown from 56 doors one year ago, will finish the year at about 99 units and keep growing from there.

“Ultimately, we believe the U.S. market can support more than 1,000 A.J. Wright stores,” he said.

Foreign operations benefited from currency fluctuation. Segment earnings at Winners and Home Sense in Canada rose 11.5 percent to $18.1 million, as sales rose 3.3 percent to $245.8 million and comps ascended 16 percent. T.K. Maxx, in the U.K. and Ireland, generated a 20.1 percent profit increase to $8.2 million, as sales rose 33.3 percent to $209.9 million and comps were up 14 percent, or 4 percent in local currencies.

U.S.-based HomeGoods more than tripled its profits, to $6.1 million from $1.9 million, as sales grew 23.1 percent, to $193 million, and comps advanced 4 percent.

English said the firm believes that Marmaxx, now with 1,376 stores, can expand to 1,800 units.

He said that, as sales momentum established in July has carried into August, comps this month are expected to finish ahead 3 to 5 percent. September comps are budgeted at 3 to 6 percent ahead while October should range from 2 percent down to 1 percent ahead. In all cases, the more mature Marmaxx is budgeted to lag corporate comp performance by 1 percent. TJX expects comps to finish 2 to 4 percent ahead during the current third quarter, when earnings per share are slated to land at between 34 and 36 cents versus 28 cents in last year’s third quarter.

English indicated that TJX is ready to seize any buying or selling opportunities that present themselves in the back half of the year. “Frankly, we have a lot of open-to-buy,” he said, “a lot of flexibility to chase wherever the trends may take us.”

So far, for back-to-school, jeans and leathers have tracked well.

Wall Street liked the results and guidance and sent TJX shares up $1.13, or 5.7 percent, to close at $21.05 in New York Stock Exchange trading Tuesday.

For the six months, net income dropped 14.4 percent to $236.8 million, or 46 cents a diluted share, from $276.7 million, or 51 cents, in the comparable 2002 period. Sales moved ahead 7.4 percent, to $5.83 billion from $5.43 billion, while comps were flat.

Abercrombie & Fitch, lately known as much for its lawsuits and racy catalog as for its preppy, all-American clothing, said late Tuesday income swelled 11.8 percent in its second quarter.

For the three months ended Aug. 2, the New Albany, Ohio-based specialty retailer, which operates a fleet of 625 stores, including 112 Hollister stores, posted earnings of $34.8 million, or 35 cents a diluted share, a penny above Wall Street’s best guess of 34 cents and 2 cents higher than forecast by the company last week. That compares favorably to year-ago income of $31.1 million, or 31 cents.

Sales for the quarter rose 8.1 percent to $355.7 million from $329.2 million, while same-store sales went in the opposite direction, falling 8 percent. Hollister continued to shine as comps rose by double digits, both in its men’s and women’s division, offset by a negative low-double-digit-comp decrease at A&F stores, as men’s results continued to be difficult.

“The sales environment has clearly been challenging,” Mike Jeffries, chairman and chief executive, acknowledged on an afternoon conference call. “I am not satisfied with the level of business and am adjusting inventory content to take advantage of classifications where I see trends.”

He noted that A&F’s nonpromotional stance, including not repeating last year’s 15-percent-off back-to-school direct mailer, has made interpretation of results difficult. He also said, although A&F’s men’s business remains difficult, he believed there is a strong fashion in women’s that could drive the business.

Still, Seth Johnson, chief operating officer, said last week that July’s sales results “reflect strong demand for spring-summer clearance and disappointing sales of full-price fall merchandise.”

For the first half, income rose 10.9 percent to $60.4 million, or 60 cents a diluted share, compared to income of $54.4 million, or 53 cents, in the comparable period last year. Sales rang in at $702.4 million, a 9.4 percent increase over year-ago sales of $641.9 million.

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