2Q weak - 2nd half better? - discount store industry finances in 1995

Discount Store News, Sept 4, 1995

NATIONWIDE DSN REPORT -- Fierce competition, stifling Summer heat, a sluggish economy, weak apparel sales, and a lack of inflation to bolster dollar gains all bore the blame for a second quarter that left many discounters struggling for profits, while still others managed to prosper despite adversity. Many analysts expect the second half of the year to be better.

Out of the largest six chains reporting results in mid-August, four logged steep declines in operating income on fairly decent sales gains.

Out of the 25 most recent chains to report, 12 reported sharply lower operating profits or losses, although the remaining 13 reported earnings gains, some substantial. See Earnings Digest, page 9),

Where chains saw their earnings plunge while sales increased, 'they were buying the business," said Walter Loeb, retail consultant, New York. When both sales and earnings were poor, that resulted in higher selling costs, which hurt profits.

And retailers didn't enjoy any good selling weather this spring, especially for horticultural products, which have a narrow selling window. Extremely hot weather followed extremely cold weather, and consumers just weren't interested in going shopping in oppressive heat, Loeb said.

The second half will look better, he added, because of lackluster results in the same half of '94. In addition, some fashion interest is developing that is trickling down from department stores to discounters, Loeb said.

Kmart, despite a recent resurgence in comp store sales, led the litany of gloomy earnings reports, coming in with operating profits off 74.4% on a 6.1% sales gain.

Even a strong performer like Target parent Dayton Hudson reported a 41.9% Profit decline on a 9% sales increase. Target, which contributes about 60% of both sales and operating profits, came in essentially flat on earnings, although its sales rose 14% for the quarter (DH declines to break out exact operating income by division).

"Target's results were in line with expectations," said Bob Ulrich, chairman of both Target and DH. But the second quarter results reflect continued weak earnings and sales at Mervyn's, Ulrich said, as well as below-plan results from the department stores.

As previously reported, Caldor logged a 31.1% decline in operating earnings on a sales gain of 3.5%. And Venture reported a net loss of $28 million on a sales gain of 3.9%.

In addition, Jamesway continued to report trouble--an 8.2% sales decline, with a worsening net loss of $4.3 million. Bradlees declared Chapter 11 with a huge net loss.

Hills reported an operating loss of $50.2 million on a sales gain of 3.7% following its bruising takeover by Dickstein Partners. Much of that loss was attributed, though, to severance payments to ousted executives.

Ames reported a sales gain of 2.5% and shaved its operating loss to $528,000 from $3.9 million in '94.

Toys "R" Us' operating profits plunged by 58.3%. TRU attributed a 1% decline in same store sales to "a weak apparel environment" as well as weak sales in consumables and video game products.

TJX Cos. saw operating profits decline 38.5%, even though sales gained a respectable 10%. "The continued lack of consumer interest in apparel and the unusual weather throughout much of the quarter impacted our performance," the company said. The chain posted a net loss of $24.8 million, including costs of selling its money losing Hit or Miss division to management. (See story, page 6).

Other apparel chains shared in the second quarter earnings woes: Filene's Basement, barely profitable; Clothestime, a slight loss; and Fabri-Centers, an operating loss, although narrowed.

Exceptions: Ross Stores, up 16.2%; and Men's Wearhouse, up 45.6%.

Michaels Stores, the nation's largest arts and crafts chain, reported a $60.9 million pre-tax loss for the quarter, even though sales rose 49.2%. It is slashing 7,000 items from inventory and halving its store expansion in 96 to 40 units from about 90.

"Consumer spending hasn't kept up with the economy," said Robert Niemeyer, vice president, equity research for the PNB Asset Management Group, Philadelphia. Consumers are instead spending on such things as travel and stock investments, he said.

Because of the heat, much of the Back-to-school apparel spending will be pushed back into September, Niemeyer said. "When my kids go back to school next week, they'll be wearing T-shirts and shorts, not fall clothing."

As could be expected, air conditioners sold well, as did office supplies and personal computers--accounting for the good quarter Staples had.

Staples reported a 120% gain in operating income on a 56.8% sales increase. Office Depot also shared in the boom, logging a 34.6% gain in operating income on a 29.8% sales increase.

Despite the earnings problems of many chains, Salomon Brothers "remains relatively optimistic that 1995 will prove more profitable for most retailers than the prior year."

Reporting in its July RUSH report, the company said, "Retailers are maintaining tight controls over inventories and expenses in the still-slow economic and retailing climate."