NEW YORK — Consumers apparently are watching their wallets even more closely than retailers are minding their inventories.

Wal-Mart Stores Inc. was among the retailers kicking off the first-quarter earnings season Tuesday, as were J.C. Penney Co., The May Department Stores Co. and TJX Cos. While the world’s largest company, unlike its competitors, was able to boast of double-digit earnings growth and a high-single-digit sales increase, it sent a cautionary chill through the apparel markets with its discussion of rising stock levels and the potential for increased promotional pressures going forward.

This story first appeared in the May 14, 2003 issue of WWD. Subscribe Today.

With sales somewhat slower than expected, the firm’s total inventories were up 13.4 percent at the end of the quarter, while comp-store inventories in the U.S. were up by a percentage in the mid-single digits. On a morning conference call to discuss the results, vice chairman Thomas Coughlin said the majority of the increase related to summer seasonal items and apparel.

“This performance in inventory is not acceptable and we are taking all the steps that we feel are appropriate to bring inventory back in line,” he said. “The increase resulted from lower-than-anticipated sales for the total company during the quarter combined with the high inventory levels that we brought into the current fiscal year.”

Qualifying these observations, he pointed out, “The quality of the merchandise is good, it’s just that the quantity that we have right now is high. Much may depend on achieving more seasonal weather over the next several weeks. Further, industry-wide promotions aimed at apparel clearance in particular may impact our margins. We do have some exposures to markdowns.”

The war in Iraq, a late Easter and cool weather hardly whetted shoppers’ appetites for apparel, but neither have the end of hostilities and, at least according to the calendar, the arrival of spring. Apparently, stocks nudged upward at Wal-Mart and other stores despite their enhanced ability, through technology, to monitor and manage inventories and spot accumulations of excess or dated goods faster than ever.

U.S. Bancorp Piper Jaffray analyst Jeffrey Klinefelter said Wal-Mart’s own need to clear inventory “will probably put pressure on the value chains.” He added, though, that “the damage will probably be mitigated somewhat because Wal-Mart is still not a true destination for fashion.

“What we need is a boost of psychology for the country. The potential is there if the consumers get out and move through the mass and the discount stores.”

Describing the quarter as “interesting,” Wal-Mart grew earnings 14.1 percent to $1.86 billion, or 42 cents a share. Sales rose 9.8 percent. Penney’s, which had a “difficult” quarter, saw overall earnings plummet 29.1 percent to $61 million, or 20 cents a diluted share, while the topline shrunk by 3 percent. May Co.’s profits inched up 2.9 percent to $72 million, or 23 cents a diluted share, while sales retreated 7.2 percent.

Of May Co.’s 1 percent increase in inventory despite a sales decline, Goldman Sachs analyst George Strachan wrote in a research note, “We believe that inventory is well controlled and that hard markdowns have been taken to shield future quarter results. As a result, May is well positioned to benefit from an eventual topline recovery.”

However, UBS Warburg’s Linda Kristiansen took an opposing view, saying that May Co.“was not particularly proactive in taking early markdowns” and that further promotion will be necessary to bring comp-store stocks in line with planned same-store sales declines of between 2 and 4 percent in the second quarter.

The lagging sales aren’t necessarily a bad sign for everyone, though. Off-pricer TJX Cos. said the inventory glut allowed it to pump up merchandise margins by taking advantage of in-season buying opportunities. However, the firm posted a 22.8 percent drop in first-quarter net income to $113.5 million, or 22 cents a diluted share, on a 4.6 percent upswing in sales.

For the most part, investors didn’t look favorably on the results, with the notable exception of Penney’s, which received a 5.4 percent boost in its share price to $18.85. Wal-Mart’s stock fell 2.1 percent to $55.49 while May Co.’s was off 1.9 percent to $22.17, while shares of TJX fell 1 percent to $19.80. All four issues trade on the New York Stock Exchange.


Even the mighty Wal-Mart endured “disappointing” sales in the first quarter.

Still, president and chief executive Lee Scott, on a recorded conference call, was comfortable enough with the results to declare, “We had a heck of a good quarter from an operating perspective.”

Net income for the first quarter advanced 14.1 percent to $1.86 billion, or 42 cents a share, for the quarter ended April 30. Results were reduced by $101 million, or 2 cents, on an aftertax basis for a change in accounting related to money received from suppliers. Year-ago profits totaled $1.63 billion, or 37 cents, a result that was restated to reflect Wal-Mart’s decision to expense stock options.

Revenues for the three months climbed 9.8 percent to $57.22 billion from $52.13 billion a year ago. Comparable-store sales inched up 2.2 percent, below the Bentonvillian standard of seasons past.

Sales from the firm’s McLane unit, which distributes groceries and nonfood items to convenience stores, drugstores and others, were not included in the revenue figure since the business is slated to be sold to Berkshire Hathaway Inc. this quarter.

At the flagship Wal-Mart division, operating profits, which are before interest, unallocated corporate expenses and income taxes, increased 8.1 percent to $2.75 billion from $2.55 billion. Before the change in accounting, operating profits shot up 10.1 percent to $2.8 billion. Sales at the division expanded by 9 percent to $38.62 billion from $35.42 billion a year ago.

Scott said the rest of the first half will resemble the quarter just ended. “Sales growth will improve in the second half of the year, but I believe that it’s largely going to be based on the fact that, at Wal-Mart stores, we had easier comparisons.”

For the second quarter, the firm is looking for earnings of 49 to 51 cents a share. Wall Street had 51 cents penciled in for the period. Wal-Mart stood by its full-year earnings guidance of $2 to $2.05 a share.


J.C. Penney on Tuesday posted a double-digit drop in income for the first quarter ended April 26.

For the three months, income fell 29.1 percent to $61 million, or 20 cents a diluted share, compared with $86 million, or 29 cents, in the same year-ago quarter. The consensus estimate among Wall Street analysts was 18 cents a share, according to Thomson/First Call. The quarter’s results included a $7 million credit reflecting $21 million in real estate gains on the sale of several closed locations that more than offset the $14 million of charges associated with the previously announced catalog restructuring.

Total sales declined by 3 percent to $7.49 billion from $7.73 billion, which includes a 7.1 percent sales drop to $3.72 billion from $4.01 billion in the department store and catalog business. The Eckerd drugstores operation rose slightly by 1.3 percent to $3.78 billion from $3.72 billion.

Allen Questrom, chairman and chief executive officer, said in a statement: “The past three months have represented one of the most difficult retailing environments in recent memory. Although I am disappointed with the company’s execution, results for the first quarter should not detract from the significant progress that we have made in improving the fundamentals of our business over the past two years.”

He added that he saw signs of improvement: “If the retail environment does improve, we believe that we could still achieve our previously communicated full-year earnings guidance.”

The company in February projected earnings per share of between $1.50 and $1.70 for the year.

Vanessa Castagna, chairman and ceo of Penney’s stores, catalog and Internet, told Wall Street analysts during a conference call, “We had a difficult first quarter. We know why and we have made and continue to make changes where we needed to.”

She explained the company was inconsistent in execution and in some of its merchandising. “We continue to focus on long-term goals [providing] fashionable, trend-right product with superior quality.”

She said there are initial signs that the second quarter is looking better. Comparable-store sales were down 4.9 percent in the first quarter, versus an increase of 7.9 percent in last year’s quarter. Seasonal apparel was weak in March, but fine jewelry sales were up with diamonds, gemstones and watches particularly strong in the quarter.

Castagna also said the company was “very pleased” with the customer response to its recent launch of moderate sportswear anchored by the Bisou Bisou label.

The catalog business, she said, was down 11.1 percent in the quarter and came in better than planned. Sales of the Internet component of the business, part of the catalog operation, exceeded a 25 percent increase and is expected to become a $1 billion business within the next four to five years.


A tax credit allowed May Department Stores Co. to post a nominal earnings increase in the first quarter as sales declined on both a net and comparable-store basis.

In the 13 weeks ended May 3, the St. Louis-based parent of Lord & Taylor, Hecht’s and David’s Bridal registered net income of $72 million, or 23 cents a diluted share. That’s 3 cents above consensus estimates and 2.9 percent above year-ago earnings of $70 million, also 23 cents.

The most recent quarter’s earnings per share figures were lifted 10 cents by a tax credit connected to the resolution of “various federal and state income tax issues,” and the year-ago number was depressed 8 cents by divisional consolidation costs. Excluding these extraordinary items, EPS fell to 13 cents from 31 cents in last year’s reporting period.

Net sales pulled back 7.2 percent to $2.87 billion from $3.1 billion in last year’s quarter, despite the openings of two department stores and two bridal stores during the period. Comparable-store sales were down 8.8 percent as the firm’s comps, as reported, declined all three months of the quarter: 8.9 percent in February, 11.4 percent in March and 5.6 percent in April.

The firm reported cost of sales increased 1.5 percent, “principally due to a 1.1 percent increase in occupancy costs and a 0.3 percent increase in the cost of merchandise.” Selling, general and administrative costs rose to 22.3 percent of sales from 21.2 percent in the first quarter of 2002.

May plans to open another nine department stores and 45 specialty stores during the remainder of the year.

The firm, which doesn’t conduct earnings conference calls or generally offer executive comments in its earnings releases, did offer a breakdown of sales and earnings for the past 12 months covering the second quarter of fiscal 2002 through the most recent quarter. For the 52 weeks ended May 3, net income exclusive of divisional combination costs dropped 13.6 percent to $595 million, or $1.92 a share, versus $689 million, or $2.18 a share, in the prior-year period, as sales fell 4.6 percent to $13.27 billion from $13.91 billion.


Cold weather, weak comps and higher costs drove down The TJX Companies Inc.’s first-quarter profits but earnings did meet the retailer’s forecast.

For the three months ended April 26, the Framingham, Mass.-based off-price chain said net income dropped 22.8 percent to $113.5 million, or 22 cents a diluted share. By comparison, last year the company posted earnings of $147.1 million, or 27 cents. Earnings per share were within the company’s plan and matched the Wall Street consensus estimate.

Net sales for the period rose 4.6 percent to $2.79 billion from $2.67 billion a year ago, but cold weather and unfavorably strong year-ago comparisons pushed comparable-store sales down 2 percent versus last year’s 7 percent same-store sales gain.

“We planned the first quarter conservatively against the very strong results of last year and earnings came in near the upper end of our range, while comp-store sales came in slightly below our expectations,” said chief executive officer Edmond English on a conference call with analysts. “The cold weather throughout the quarter was such an overriding issue that it is difficult to draw any other conclusion about the trend of our first-quarter performance. Unseasonable weather this season is never just about the current year. It’s about the year-over-year comparison, and last year the weather in the first quarter couldn’t have been more favorable.”

Consolidated costs — selling, general and administrative expenses plus cost of goods sold — also hurt the bottom line, expanding 220 basis points to 93.1 percent of net sales from 90.9 percent a year ago. TJX attributed the higher cost ratio to a conservative sales plan and increases in insurance and distribution expense.

At the Marmaxx segment, the firm’s combined entity of T.J. Maxx and Marshalls and its largest division by far, income plunged 22.5 percent to $193.9 million on a 1 percent sales decrease to $2.15 billion. Segment comps fell 5 percent during the quarter versus a year-ago 7 percent gain. TJX said the cool weather was responsible and that the segment failed to meet the firm’s plan.

In guidance, TJX said second-quarter earnings are anticipated at 25 to 28 cents a share, with full-year earnings of $1.20 to $1.32 a share. The Wall Street consensus estimates are currently 26 cents and $1.24, respectively.

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