Retailers Could Use Some Shop Therapy

From Home Improvement to Luxury, Most Stores Saw Slides in Fourth-Quarter Earnings

By Published on .

NEW YORK ( -- It's been a depressing week for retailers.

Monday kicked off a week of grim earnings reports and gloomy forecasts. The home-improvement sector, including Home Depot and Lowe's was hardest hit, with each posting double-digit slides in fourth-quarter profits. Sears Holdings also continued to struggle, as its fourth-quarter and full-year earnings plunged. Few were spared in fact, as Target, Macy's, Nordstrom and Kohl's all posted drops in net income for the quarter. Gap Inc. was the lone star, posting a double-digit increase in earnings for the fourth quarter, thanks to efforts to cut expenses and lower inventory levels.

A first for Home Depot
Home Depot reported its first annual sales decline in its 30-year history. Sales for the full year dropped 2.1% and sales at stores open at least a year declined 6.7%. Earnings for the full year decreased 23.7% to $4.4 billion. During the fourth quarter, profits dropped 27.5% to $671 million. Sales increased 1.5%, while same-store sales dropped 8.3%.

"It's going to be a tough year, there's no question, and we'll have to earn the business by being smarter, more thoughtful and more clever than ever before. But the business is out there if we go and get it," said John Ross, interim chief marketing officer at Home Depot.

The retailer is forecasting a 4% to 5% falloff in sales for fiscal 2008, and it expects sales in stores open at least a year to see declines in the mid- to high-single digits.

Similarly, Lowe's said fourth-quarter profits plunged 33% to $408 million. Sales for the quarter decreased 0.3 %, while comp-store sales were down 7.6%. For the full year, earnings dropped 9.5% to $2.8 billion. Sales for the full year increased 2.9% to $48.3 billion, while same-store sales declined 5.1%. The retailer is forecasting 2008 same-store sales to be down between 5% and 6%. Total sales, however, are forecast to increase 3% with the opening of 120 stores planned for 2008.

Discounters zero in on Target
Target's results were slightly ahead of analysts' expectations. But some are saying that the cheap-chic retailer could start to feel pressure from discounter Wal-Mart. For their part, Target execs insisted that its prices are competitive with Wal-Mart's, although it is being forced to pass along some price increases to the marketplace. The retailer said it saw strong growth in commodity categories, including food, health and wellness.

"Today's murky consumer macro backdrop is not where Target thrives as customers assume a more discerning approach with discretionary categories (Target's sweet spot) falls out of the basket," wrote Adrianne Shapira, an analyst with Goldman Sachs in a research note.

Target reported fourth-quarter earnings had declined 8.2% to $1 billion, from $1.1 billion, on top of a 0.4% increase in sales. Sales at stores open at least a year were flat, increasing just 0.2%. But for the full year, Target saw a modest 2.2% increase in earnings to $2.8 billion. Sales for the year were up 6.2%, while comp-store sales were up 3%. The retailer said it is expecting comp-store sales to increase 2% to 3% in 2008.

Execs also addressed the departure of Isaac Mizrahi, a move that had generally been viewed as a blow to the retailer. "As it relates to Isaac Mizrahi, we've enjoyed a terrific five-year relationship with Isaac, and I think you all over-representing what it means at Target," President Gregg Steinhafel told analysts. "It's approximately 3% of our apparel and accessories business, and we really view his strength as a niche contemporary collection."

Macy's won't cut ad spending
Despite the tough economy, Karen Hoguet, Macy's exec VP-chief financial officer, said during a conference call with analysts that the store will continue to balance its brand marketing with promotional efforts. In addition, she said that advertising for 2007 as a whole was up slightly, while in 2008 it will likely be flat. "We are planning a similar promotional environment this year as last year," she said. "We might have hoped a year ago to be reducing it. But we don't think this is the environment in which to do that."

At Macy's, fourth-quarter sales were down 6.2%, while income was up 2.3% to $750 million. Same-store sales were down 2% during the quarter. For the full year, earnings were down 10% to $893 million. Annual sales were down 2.4%, while comp-store sales for the year were down 1%. The company is forecasting that same-store sales will be down between 1% and 1.5% in 2008.

The retailer also appears to be preparing for a rocky patch. Macy's said it will no longer be reporting sales on a monthly basis, having already said it would not provide quarterly earnings guidance. Macy's will continue to report quarterly sales and earnings and provide annual guidance. Ms. Hoguet said that the decision is meant to avoid confusion caused by calendar and promotional shifts.

Gap Inc. was able to shine in a tough retail environment, with earnings improvements, despite declining sales. "In 2007, the company made the business decisions and changes necessary to deliver improved earnings for our shareholders," said Glenn Murphy, chairman-CEO of Gap Inc. "While we're aware of the challenging economic environment, our leadership team is committed to delivering the right product to our customers, while we bring a sharp operational discipline to our business priorities."

Earnings for the fourth quarter jumped 21% to $265 million. Sales for the period were down 4.9% and same-store sales declined 3%. For the full year, the company saw earnings rise 7% to $833 million. Sales for the full year were down 0.6% and comp-store sales declined 4%. Gap North America and Old Navy posted negative same-store sales for the fourth quarter and full year, while Banana Republic reported flat to slightly positive increases in stores open at least a year.

A plunge for Limited
The Limited, which owns Victoria's Secret and Bath & Body Works, saw income plunge 25% in the fourth quarter to $388.6 million. Sales for the period were down 19%, while comp-store sales were down 8%. For the full year, income was up 6.2% to $718 million. Sales were down 5% and same-store sales were down 2%.

"2007 has proved to be a year of challenges for Limited," wrote Richard Jaffe, an analyst with Stifel Nicolaus in a research note. "Management's efforts to focus on its intimate apparel and personal-care businesses have proven difficult as these two franchises have sorely underperformed due to uninspiring merchandise assortments and the necessary promotional efforts to drive sales as well as logistical challenges at Victoria's Secret Direct. However, we remain concerned that merchandising issues remain and that the promotional efforts used in [the second half of 2007] will prove necessary again in 2008, as the customer has become accustomed to regular discounting."

Meanwhile, Nordstrom saw earnings the fourth quarter drop 8.6% to $212 million. Sales for the period were down 4.4%, while same-stores sales were down 0.7%. For the full year, earnings increased 5.5% to $715 million. Sales increased 3.1% for the year and comp-store sales rose 4%.

"Similar to many retailers, the women's apparel business at [Nordstrom] continues to struggle," wrote Mr. Jaffe. "We believe a lack of inspiring merchandise is giving women little reason to want to buy something new and a weak economy is further complicating the issue."

Sears' full-year earnings drop 45%
Sears Holdings reported a 47% plunge in fourth-quarter earnings to $426 million. Sales for the period dropped 6.8% and comp-store sales 4.5% during the quarter. For the full year, the company saw earnings drop 45% to $826 million. Sales for the full year dropped 4% and same-store sales dropped 4.3%.

"Our fourth-quarter and full-year results continued to be negatively impacted by the worsening economic conditions faced by both our customers and competitors, as well as increased markdowns taken to clear excess inventory," W. Bruce Johnson, interim president and CEO at Sears Holdings, said in a release.

Kohl's reported that earnings were down 15% during the fourth quarter to $411.7 million. Sales for the period were up 0.7%, while comp-store sales were down 4%. During the full year, the retailer saw flat earnings of $1.1 billion. Sales rose 5.6%, while same-store sales were down 0.8%. The retailer anticipates a sales increase between 5% and 8% in 2008, while comp-store sales are expected to be flat to down 3%.
Most Popular
In this article: