Bombay hones core operations, moves off-mall

DSN Retailing Today, May 3, 2004 by Mike Duff

FORT WORTH, TEXAS -- The Bombay Company is in the midst of a challenging turnaround effort that will determine if it can meet ambitious goals it has set for itself. With plans for 5% store growth and catalog/Internet business expansion, Bombay has set its sights on becoming a billion dollar home furnishings retailer.

Building on its knowledge of the customer is the key to Bombay's growth, Steve Farley, evp of marketing and merchandising, told DSN Retailing Today.

Keeping the core consumer firmly in mind is particularly important for Bombay because the company designs and develops the products it sells. Bombay's target customer is a relatively affluent home-oriented woman "who always is looking for inspirational ideas," Farley said. "We try to come up with new ways to furnish rooms and add interesting touches. We're about American traditional classic furniture, but we can't serve it up that way. It comes off as boring to our customers, who consider themselves eclectic. We have to try to add that exotic edge to traditional merchandise."

Bombay employs designers who scour the world for ideas to enhance the product offering. They work closely with Bombay's buyers translate those ideas into signature home furnishings that the company's overseas manufacturers can realize at the right price.

"We get tremendous credit for the uniqueness of our merchandise," Farley noted.

After a slow growth phase, Bombay is gearing up its expansion machinery, including marketing. The catalog has been the main marketing vehicle. Recently, though, Bombay began using Sunday inserts and now is looking at newspaper, radio and national magazines for new opportunities.

Also Bombay plans for expansion in its catalog/Internet division, with growth-targeted reach to build the operation from around 7% to 10% of the revenue stream, Farley said.

Stores will continue to generate the bulk of revenues, and Bombay has recently revisited its merchandising. "We've changed the stores a lot," Farley said. "We've moved merchandise more often, putting fashionable points of view in front of customers."

For the fiscal year ended Jan. 31, 2004 Bombay posted earnings of $10 million, or 28 cents per diluted share, versus $7.2 million, or 22 cents, for the year prior. Revenue increased 21% to $596.4 million while comparable-store sales gained 13% for the year. Revenue from non-store activity increased to 8% of total revenue versus 7% in the year earlier.

In announcing fiscal 2003 results, James Carreker, Bombay's chairman and ceo, said phase one of the company's multiphase turnaround, characterized by double-digit same-store sales increases, was completed during the fiscal 2003 third quarter. In phase one, reinvigorating comps, reclaiming market share and investing in the future were critical.

Phase two of the turnaround plan focuses on driving profitable sales and improving profit flow-through.

"Initially, we expect lower same-store sales as we anniversary difficult comparisons and opt not to repeat promotions that drove top-line sales but did not deliver profits at acceptable rates," Carreker said. "We expect to continue the migration of our store base from mall to off-mall, thereby reducing fixed costs and improving profitability."

In the first quarter of the current fiscal year, the company planned to close 11 and open seven stores to finish the period with 464 units. Bombay's total year-end store count should be in the range of 506 to 511 stores.

The second phase hasn't been painless. On April 22, Bombay revised first quarter guidance from a loss in the 8 cents to 11 cents per share range to a loss in the range of 13 cents to 16 cents per share. Bombay projected second quarter comps to be negative in the high single digits. Last year, comps were up 26% in second quarter after a 25% gain the first quarter.

The first quarter loss was due in part to soft Easter sales. Also, the company is trying to digest recent unit growth as it continues shifting stores off-mall as leases expire.

Wallace Epperson, an analyst with Ferris, Baker Watts, summed up Bombay's challenges in a research note: "To be fair, we understand that this specialty retailer is up against highly challenging same-store sales comparisons. Still, we remain concerned with Bombay's sales deterioration since the company reduced discounting activity last fall and attempted to enhance margins through a less promotional stance."