Taking Stock: Margin Pressure… Saks’ New Strategy

MARGIN PRESSURES: Dick’s Sporting Goods Inc. may have beat analysts’ expectations with its first-quarter results, but some believe the retailer’s declining gross margins could indicate a change in tactics toward a more promotional 2009. “In a shift away from management’s previous strategy, merchandise margins decreased … mainly as a result of increased promotions in order to sustain market share,” said Susquehanna Financial Group analyst Christopher Svezia. After emphasizing an effort to maintain its premium positioning — and its merchandise margins — during its fourth-quarter conference call, Dick’s instead saw its first-quarter consolidated gross margins decline to 26 percent of sales, versus 28 percent in the year-ago period and 29 percent in the fourth quarter of 2008. “We believe the company is now more focused on preserving market share in what is proving to be a highly competitive and promotional market,” Svezia said. Athletic footwear was a bright spot at Dick’s during the first quarter, though, as CEO Edward Stack singled out strength from the Under Armour running shoe launch, as well as sneaker offerings from Nike and Asics. On May 19, Dick’s reported a profit of $10.2 million, or 9 cents a diluted share, for the first quarter, compared with a net income of $19.6 million, or 17 cents a share, for the same quarter in 2008. The company’s same-store sales fell 6 percent for the quarter, versus a drop of 4.1 percent in the same year-ago period.


SAKS’ NEW STRATEGY: The thinning wallets of wealthy shoppers took a toll on Saks Inc. in the first quarter, prompting the luxury retailer to acknowledge its financially pressed shopper with a pledge to bring in lower price points. “The consumer is looking for value,” Saks Chairman and CEO Stephen Sadove said on a conference call. “They’re looking for quality, design and, in some cases, price.” Saks last week reported a 27 percent sales decline, and a $5.1 million loss, compared with a profit of $17.3 million for the year-ago period. Although the company’s losses, at 4 cents a share, were less than the 26-cent loss expected by analysts, not all were impressed. Following Saks’ earnings release, Deutsche Bank analyst Bill Dreher cut his second-quarter earnings per share estimate to a loss of 51 cents from 37 cents. He said he expects 2009’s earnings before interest, taxes, depreciation and amortization to be $26.3 million — “well below historic levels” — and does not believe Saks will return to a more normal EBITDA level until 2012. Dreher did note that Saks reduced its selling, general and administrative expenses by $44 million in the first quarter, and the company continues to see positive results from investments and initiatives. “[But] the luxury customer is feeling the pinch in this challenging economy,” said Dreher. “Until the current environment shows some stabilization, it will be a challenge for Saks to navigate through.”

— J.P.

LUXURY LABELS SPLIT: Two major luxe players released divergent full-year earnings last week. Burberry Group Plc hit the 1 billion pound sales milestone in the year ended March 31, but revenue growth slid into the red as a result of lower gross margins, investment in a new cost-efficiency plan and extraordinary noncash charges. The company posted a loss of 5.1 million pounds, or $8.8 million, for the year, compared with a profit of 135.2 million pounds, or $232.5 million, a year earlier. However, double-digit gains in all product categories and regions, growth from emerging markets and the London stores, and favorable exchange rates, helped Burberry’s sales rise 20.7 percent to 1.2 billion pounds, or $2.06 billion. Lanvin, meanwhile, closed the books on 2008 with operating profits of 6.7 million euros, or $9.9 million, and no debt. Sales advanced 29 percent to 140.4 million euros, or $206.6 million, said EVP Thierry Andretta. The gains reflect a retooling of the supply chain, strides in leather goods and a rejuvenated menswear business. Dollar figures are converted at average exchange rates for the period.


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