Retail Earnings For Q1 Exceed Expectations

By Alan Wolf -- TWICE, 6/1/2009

NEW YORK — First-quarter earnings for a diverse group of retailers ranging from Sears to Staples generally exceeded analysts' expectations last month.

The numbers, while weak compared with year-ago results, nonetheless suggested sound stewardship during the recession and the possibility that the economy may have finally turned a corner.

Among full-line chains, Sears said net earnings were $26 million for the three months, ended May 2, compared with a year-ago loss of $56 million, while net sales fell 9 percent to $10.1 billion.

Sears attributed the sales decline to a 7.4 percent drop in comp-store sales and, to a lesser extent, unfavorable currency exchange rates.

Comps declined 11.7 percent at Sears stores as the weak housing market took a toll on the chain's majap, outdoor and tools categories. At Kmart, comps slipped 2.1 percent, aided by an increase in consumer electronics sales, the company said.

In a research note, Credit Suisse retail analyst Gary Balter said the results “showed the benefits of being run by a financial wizard … We give Mr. [chairman Eddie] Lampert credit for righting the ship in a difficult environment and for driving strong gross margins through better sourcing and much better inventory management.”

Nevertheless, Balter expressed concern over Sears' industry-trailing comps and questioned whether the cited improvements were sustainable.

At Target, new store openings helped the discounter's retail sales grow 0.4 percent to $14.4 billion during its fiscal first quarter, as earnings fell 13 percent to $522 million.

Same-store sales declined 3.7 percent for the three months, ended May 2, but retail segment earnings before interest expense and income taxes (EBIT) edged up 0.3 percent to $962 million.

First-quarter gross margin rate was flat, with favorable markup and markdown performance offset by faster sales growth in lower-margin, non-discretionary categories, the company said.

Target's first-quarter earnings per share, which declined 6.8 percent but exceeded analysts' estimates, reflected “disciplined execution of our strategy in a difficult environment,” according to chairman, president and CEO Gregg Steinhafel.

Steinhafel attributed the retail earnings uptick to “outstanding gross margin and expense rate performance,” and said first-quarter results for the company's credit card segment were “stable, profitable and consistent with our expectations.”

BJ's said fiscal first-quarter sales edged up 0.2 percent to $2.3 billion while net income increased 41 percent to $24.3 million for the three months ending May 2.

Same-store sales rose 7.5 percent for the period, excluding the negative impact of lower gasoline prices.

The No. 3 warehouse club raised its earnings outlook for the full fiscal year. The company currently operates 181 stores in 15 states.

Among specialty chains reporting, GameStop enjoyed record sales and earnings for the first fiscal quarter, ended May 2, citing a 32 percent gain in used video game product sales.

Net earnings for the first quarter rose 13.4 percent to $70.4 million and included debt retirement costs of $2.9 million, vs. net earnings of $62.1 million for the year-ago period.

Total sales rose 9.2 percent to $1.98 billion, up from $1.81 billion in the prior-year period, led by a successful launch of the Nintendo DSi handheld gaming system and the releases of Resident Evil 5 and Street Fighter IV. However, the sell-through of these titles could not match the blockbuster success of Grand Theft Auto IV and Super Smash Bros. Brawl from the prior year, said the company.

First-quarter comp-store sales were lower than expected, declining slightly by 1.5 percent, due to recessionary effects in Europe and a slowdown of new console sales that occurred late in the quarter.

Daniel DeMatteo, CEO of GameStop, said, “Although new video game software sales declined by 2.8 percent, lower-priced used products grew a robust 31.9 percent, illustrating that value is becoming more important to our customers.”

The company also continues to capitalize on lower rent prices and opened 114 stores during the quarter. It also retired $50 million in senior notes and ended the quarter with $230 million in cash.

Full-year comp-store sales are now expected to range from flat to up 2 percent, said GameStop.

Among the office supply chains, channel leader Staples said net sales rose 19 percent to $5.8 billion during its first fiscal quarter, ended May 2, while net income declined 33 percent to $143 million.

“Staples associates drove solid earnings performance in a very tough sales environment,” said chairman/CEO Ron Sargent. “These results reflect our commitment to take great care of customers, tightly manage expenses and invest for future growth.”

Within Staples' North American retail division, income fell 4.6 percent to $160.5 million and sales declined 9 percent to $2.2 billion. Same-store sales slipped 8 percent, attributable to smaller average order size and weakness in business machines, office furniture and other durable categories, the company said.

Staples also opened 31 stores and closed two during the quarter, bringing the continental store count to 1,864 locations.

At Home Depot, effective management of expenses and inventory helped grow profits 44 percent last quarter despite a 10 percent decline in sales.

Net earnings were $514 million and sales totaled $16.2 billion for the three months, ended May 3, while U.S. same-store sales fell 8.6 percent.

Earnings reflect the closing of the company's Expo Design Center stores, which boosted year-over-year comparisons. On an adjusted basis, net earnings declined 18 percent to $587 million.

“Our markets, and the consumer in general, remain under pressure,” said chairman/CEO Frank Blake. “But we continue to make progress on improving our business as evidenced by stronger customer satisfaction ratings.”

Retail analysts agreed. “We believe [Home Depot's] results are actually very strong and reflect a company that is effectively managing through the challenging macro [economic environment] and maintaining a disciplined approach to SG&A [selling, general and administrative costs], inventory and capital allocation,” observed Credit Suisse's Balter in a research note.

Looking ahead, the world's largest home-improvement chain reaffirmed a projected 9 percent sales decline for the balance of its fiscal year, with negative comp-store sales in the high single digits.

Lowe's, the No. 2 home-improvement chain, said sales and earning declined during the first quarter amid “intense” economic pressures on consumers.

Sales slipped 1.5 percent to $11.8 billion and net earnings fell 21.6 percent to $476 million for the three months ending May 1. Comp-store sales dropped 6.6 percent during the period.

In a statement, Lowe's chairman/CEO Robert Niblock attributed the downturn to a “difficult external environment” marked by wary consumers who continue to postpone big-ticket projects while closely tracking the economic climate and housing market.