Earnings Show Upscale Specialty Stores, Discount Chains Are 'In'

Updated from 1:05 p.m. EDT

Major department and clothing stores appear to have suffered the worst from sagging spring sales, with shoppers deserting middle-America stores like J.C. Penney (JCP) for upscale specialty shops or discount chain stores.

The nearly century-old retail giant J.C. Penney reported Tuesday that it managed to eke out a slight second-quarter profit despite a 90% drop in operating profits. But the company warned that waning department store sales would have a negative impact on future quarterly results if they don't improve.

Meanwhile, specialty retailers like Williams-Sonoma(WSM) and discount general merchandise stores like B.J.'s Wholesale Club(BJ) and Target(TGT) fared far better, with higher sales at Target's namesake stores more than offsetting weakness at its Dayton Hudson department stores.

J.C. Penney Ekes Past Forecast

Plano, Texas-based J.C. Penney, which has seen its sales sag despite numerous efforts to reinvent and restructure itself, said its earnings excluding one-time items fell to $11 million, or 1 cent a diluted share, in the second quarter from $112 million, or 40 cents a share, in the comparable quarter a year earlier.

Analysts polled by First Call/ Thomson Financial had expected J.C. Penney to break even in the second quarter.

Investors did not respond well to the news, J.C. Penney ended Tuesday regular trading down 1 13/16, or 10%, at 16 1/8.

While the company reported total sales revenues for the quarter rose to $7.43 billion from $7.31 billion a year earlier, catalog and department store sector sales slipped slightly. J.C. Penney warned that if sales in its department stores did not improve, third and fourth quarter earnings could be lower than initially expected.

J.C. Penney is the nation's largest general merchandise catalog retailer, according to the financial Web site Hoover's Online. In addition to operating about 1,100 department stores, J.C. Penney owns more than 2,600 Eckerd drugstores.

The retailer sold its credit card unit in 1999, and announced plans in February to close nearly 50 department stores and almost 300 drugstores. On Tuesday, J.C. Penney said the initial public offering of an Eckerd tracking stock would not occur this year as previously announced, and postponed the offering indefinitely until results improve.

Williams-Sonoma Beats Estimates

Williams-Sonoma also reported lower earnings in the second quarter, but the decrease was primarily the result of a one-time after-tax gain of $2.4 million last year resulting from the sale of its Gardeners Eden catalog.

In the second quarter, the San Francisco-based retailer reported net sales increased 30% to $344.0 million vs. $264.0 million in the comparable year-earlier period, helping the company top Wall Street earnings estimates by a penny a share.

Net earnings for the second quarter were $5.1 million or 9 cents a diluted share, compared with the First Call/Thomson Financial analysts' 8-cent consensus estimate. In the second quarter of 1999, William-Sonoma earned $6.9 million, or 12 cents per share including gains from the sale of the company's Gardeners Eden catalog.

Excluding the catalog sale gain, net earnings increased 12.6% from last year, primarily because of strong sales growth in both the retail and direct sales divisions.

Retail sales for the quarter were $206.7 million, a 20% increase in total sales over the second quarter of 1999. The company also opened an additional 33 stores during the year.

Williams-Sonoma finished down 3/16 at 39 7/8.

The high-end home products retail company operates the chains Williams-Sonoma, Grand Cuisine, Pottery Barn, Design Studio and Hold Everything that sell merchandise in 39 states and Washington, D.C.

Home Depot Sales Jump 20%

Home improvement retailer Home Depot (HD) on Tuesday also reported significant increases in sales for the second quarter.

Second-quarter sales grew more than 20%, according to the Atlanta-based retailer, rising to $12.62 billion from $10.43 billion in the same year-ago period.

The nation's largest home improvement retailer also enjoyed a 23% increase in fiscal second-quarter income, in line with analysts' estimates. Second-quarter earnings rose to $838 million, or 36 cents a diluted share, compared with $679 million, or 29 cents a diluted share, in the second quarter a year earlier.

On average, analysts surveyed by First Call/Thomson Financial had expected the company to earn 36 cents a share.

After opening 41 new stores in the second quarter, Home Depot now operates 1,011 stores.

Home Depot finished down 5 7/16, or 9%, at 53 9/16.

On Target

While Target on Tuesday reported strong sales growth in its namesake stores, sales slipped at its Mervyn's and Dayton Hudson department stores.

Minneapolis-based Target reported second-quarter net earnings of $257 million, or 28 cents per share -- a 4-cent jump from the same year-ago period. Net earnings were up 13% from $228 million last year, excluding a $1 million one-time gain in the current quarter and a $4 million debt-related charge in 1999.

All earnings per-share figures refer to diluted earnings per share and reflect the company's 2-for-1 share split, effective July 19, 2000.

The retailer reported sales in its discount Target Stores unit rose nearly 10% to $6.5 billion. But sales at Mervyn's stores fell 1% to $940 million and the company's department stores sales, including its Marshall Fields and Dayton Hudson stores, fell 3.9% to $661 million.

The Target Corporation operates 1,250-plus stores.

Target finished down 3, or 105, at 26 15/16.

BJ Wholesale Has Strong Second Quarter

Regional warehouse chain BJ's Wholesale Club on Tuesday reported a similar increase in second-quarter net earnings, helping the grocery and general merchandise store beat Wall Street expectations by 2 cents.

Net income in the second quarter rose 21.1% to $31.2 million, or 42 cents a diluted share, compared with $25.8 million, or 34 cents a diluted share in the quarter a year earlier. Analysts surveyed by First Call/Thomson Financial expected a second quarter profit of 40 cents a share.

Second-quarter net sales increased to $1.2 billion from $1.0 billion last year. Comparable club sales increased by 5.5% in the second quarter compared to the same period a year ago.

The Natick, Mass.-based company is the nation's third-largest membership warehouse club (behind Costco and Sam's Club), according to Hoover's Online, with more than 5 million members and 112 locations, most of them in the Northeast.

B.J.'s Wholesale Club finished flat at 35 1/4.

>To order reprints of this article, click here: Reprints