Capital Investments Put Kibosh On Retailers' Profits - Twice

Capital Investments Put Kibosh On Retailers' Profits

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NEW YORK – Three major CE retailers, each with radically different business models, said their earnings performances were punctured last quarter by capital investments in their businesses.

At Amazon.com, expenditures for technology, content, marketing and fulfillment contributed to a thirdquarter net loss of $437 million, compared with a $41 million loss for the year-ago period. Net sales for the three months, ended Sept. 30, rose 20 percent to $20.6 billion, while operating expenses increased 23.4 percent to $21.1 billion, reflecting investments in distribution centers, product development, pricing, and free and original content to keep Prime membership customers in the loop.

In North America, sales rose 25 percent to $12.9 billion and the company’s core “electronics and other general merchandise” segment saw a 31-percent spike in sales, to $8.8 billion, while revenue from media rose a more moderate 5 percent to $2.7 billion.

In a statement, Amazon founder/CEO Jeff Bezos ticked off a list of his company’s value-added features, like original video and gaming content, an expansive catalog of free music and movies for Prime customers, expanded same-day and Sunday delivery, and a bevy of new CE devices, which, among other investments, took a toll on profits and tried investors’ patience.

Latest additions to the e-tailer’s lineup of proprietary products include updates to the Kindle e-reader and Fire tablet series, including the top-of-the-line Kindle Voyage and Fire HDX 8.9, and a new Fire TV dongle.

The offers and services, Bezos said, are designed to make “the customer experience easier and more stress-free than ever” for the upcoming holiday season.

Looking ahead, the company projected sales growth of between 7 percent and 18 percent for the fourth quarter, and operating income that could come in anywhere between a gain of $430 million and a loss of $570 million, compared with last year’s $510 million increase.

Meanwhile, multiregional majap, CE, and furniture chain hhgregg posted another disappointing quarter as it too continued to invest in infrastructure. The retailer reported a net loss of $10.4 million for its fiscal second quarter, ended Sept. 30, compared with a year-ago profit of $3.7 million, while net sales slid 11 percent to $506 million, and comp-store sales declined 11.4 percent, reflecting market share losses in computers/tablets, TVs and major appliances.

President/CEO Dennis May attributed the results to “the challenges and volatility inherent to our business and the consumer electronics category,” and promised to “continue to make investments in our infrastructure and merchandising initiatives in future quarters.” Capital expenditures have gone towards improvements in the company’s website and m-commerce capabilities and an expansion of its furniture and home products assortment as it looks to lessen its dependence on CE.

Indeed, computer and tablet comps fell nearly 34 percent during the quarter, followed by CE, down 16 percent, and majaps, down nearly 6 percent.

The retailer attributed the decline in computer/tablet comps to decreased demand, lower average selling prices (ASPs) and its exit from the post-paid mobile business. CE comps were impacted by a double-digit decline in TV unit volume, which was slightly offset by higher ASPs as the chain sold more larger-screen and premium-featured models. The majap comp hit stemmed mainly from a decline in unit volume, the company said. The comp declines were partially offset by an increase in the home products category, which was lifted by sales of mattresses, sofas and dinette sets.

In contrast, e-commerce comps rose 59 percent during the quarter.

Elsewhere, a heap of one-time charges led by a pricy acquisition sent third-quarter earnings sharply lower for Aaron’s, the leading lease-to-own furniture, CE and majap chain.

Net income fell 56 percent to $9.3 million for the period, ended Sept. 30 as special charges, costs and expenses piled up. These included $9.1 million for the retirements of Aaron’s CEO and COO; $6.9 million in restructuring charges for 44 store closings and the downsizing of its home office and field support operations; and $11.3 million in amortization expenses for last spring’s $700 million acquisition of Progressive Finance Holdings, which provides lease-to-own financing programs to other retailers.

Net revenues for the quarter rose 32 percent to $707.6 million for company-owned stores, while samestore revenues slipped 2.8 percent on a 3.9 percent comp decline in customer traffic.

“While our core business continues to experience challenges in the current economic environment, we believe consumers still need and want the household furnishings we offer,” said Gilbert Danielson, interim CEO and chief financial officer. “With our strengthened omnichannel platform, we are removing obstacles to doing business by meeting our customers where they want to do business with us, which we expect will increase demand and customer satisfaction.”

He added that the restructuring will save the company $50 million annually by the end of 2015, and that the new Progressive subsidiary “once again exceeded expectations and is rapidly growing its business.”

Broken out by division, revenues at the core Aaron’s Sales & Lease Ownership unit declined 3 percent to $501.7 million; revenues at HomeSmart, an acquired lease-to-own chain that accepts payments on a weekly, rather than monthly basis, rose 5 percent to $15.6 million; and Progressive generated $189.8 million in revenues and a pre-tax profit of $1.7 million.

Weakness within Aaron’s lease-to-own retail operations followed word last month that Conn’s was considering spinning off its in-house credit business amid stubbornly high delinquency and default rates for its core lower-income customers.

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