Soft Earnings Numbers Expected for Retail Sector

Updated from 2:57 p.m. EDT

Setting the stage for what is poised to be a weak earnings season for many major retailers, May Department Stores(MAY Quote) reported Monday that its second-quarter profit dropped 12%, meeting Wall Street expectations but heralding more double-digit earnings declines that are likely for other retailers.

Retail analysts say a confluence of factors in the second-quarter -- including higher interest rates, a pullback in technology stocks, unseasonably warm and rainy weather and higher energy and gasoline prices -- appear to have encouraged consumers to spend less during the quarter.

"Most of the broadline department stores are looking at some degree of erosion in earnings per share in for the quarter," said Mark Picard, retailing industry analyst at Lazard Freres. "There happened to be one time events that weakened some of the retailers' performance, but there were various reasons behind the general weakness in the sector."

Consensus earnings estimates from First Call/Thomson Financial confirmed that many retail bellwethers are expected to report smaller profits compared with the second quarter of 1999. For example, Federated Department Stores'(FD Quote) profits are expected to fall 57%, to 26 cents a share; KMart's(KM Quote) profits are expected to fall 81%, to 5 cents a share and Gap(GPS Quote) profits are expected to fall 9%, to 20 cents a share.

On Monday, St. Louis-based May Department Stores was one of the first of the major retailers to report second-quarter results that declined from a year earlier. May, which operates May Company, Foley's, Lord & Taylor and Kaufmann's, reported net income of $135 million, or 41 cents a diluted share, vs. $154 million, or 43 cents a share in the second-quarter of 1999. That figure met the consensus estimate of analysts polled by First Call/Thomson Financial.

Net sales for May rose 2.6%, to $3.14 billion, vs. $3.06 billion in the second quarter of 1999. Comparable sales at store open more than a year were down 0.6% for the quarter. May Department Stores closed up 9/16, or 2.4%, at 24 3/16.

Some other retailers, such as Nordstrom(JWN Quote) and Federated, have already given warnings to Wall Street that second-quarter performance will likely slip from last year's levels.

Nordstrom said last week that disappointing sales and heavier-than-expected clearance markdowns hit its earnings in the quarter, which will likely come in 12 to 16 cents short of earlier expectations for 55 cents a share.

In addition, some one-time events for certain retailers are also expected to have held-back earnings. Federated, which runs such retailing stalwarts as Macy's and Bloomingdales, said that credit delinquency problems at its Fingerhut catalogue unit may reduce its second-quarter earnings by as much as $150 million, or 43 cents a share. That cut First Call's earlier expectation from 65 cents a share, which would have been a rise from last year's 61 cents a share, to the current forecast of 26 cents a share.

The weakness across the retailing sector was particularly hard on companies that depend on apparel sales for the bulk of their revenues, Picard of Lazard Freres said. Other stores, which focus on discount consumer goods or big-ticket goods such as tools and appliances, seemed less affected.

For example, Sears(S Quote) reported a 17% rise in second-quarter profits last week, helped by strong sales of appliances and healthy performance in its credit business. Sears' net income rose to $388 million, or $1.11 a diluted share, vs. $331 million, or 86 cents a diluted share the prior year, beating the First Call estimate for $1.05 a share.

Wal-Mart (WMT Quote) is also expected to post a 16% increase in second-quarter income, to 36 cents a share from last years' 31 cents a share.