Retail Notebook: No Fireworks at Nordstrom's July Sale

Concern mounts over the event's drain on quarterly earnings. Plus, items on AnnTaylor and Media Arts.
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For most retailers, July is a month of little consequence. It's used to clear summer merchandise and test for fall. July's impact on fiscal second-quarter earnings, which most retailers will begin reporting next month, tends to be minimal.

Not so for

Nordstrom

(JWN) - Get Report

. July is when the Seattle-based retailer holds its annual sale. Unlike most other retailers, which hold price-cutting promotions throughout the year, Nordstrom tends to hold the line on prices -- save for a 10-day period in July when it discounts early fall merchandise.

For loyal Nordstrom customers, it's an event to remember. The promotion is also a big deal for the company's second-quarter earnings, since it typically accounts for about 40% of sales for the three-month period ended July 31.

This year the sale, which began July 23 and was scheduled to run through Aug. 1, got off to an anemic start, say two people who have spoken with the company but who asked not to be named.

Nordstrom typically remains mum about this promotion, since it falls so close to the quarter's end. And with

TSC

, Nordstrom maintained that stance, citing the

Securities and Exchange Commission's

quiet period ahead of its Aug. 12 earnings report. But apparently sales got off to such a sluggish start that executives figured this quarter warranted a break with tradition, at least when it came to analysts.

"The week before the sale started, the company said they wouldn't comment on it," says an analyst who talks to Nordstrom's management on a regular basis. "But apparently they felt they needed to talk about it because the results were materially different from what people were expecting." Nordstrom told this analyst that the sale's first three days were disappointing, but that is not necessarily indicative of the entire event.

Still, this means Nordstrom could miss consensus earnings estimates of 50 cents a share by a penny or two, says the analyst, who isn't recommending the stock.

The stock has traded off its 52-week-high of 44 13/16 last seen in April as Nordstrom struggles to better manage inventory while maintaining its high marks for customer service. Friday the stock closed at off 1/8 at 31 7/16.

AnnTaylor's Pure Margins

Momentum investors have shed shares of

AnnTaylor

(ANN)

in recent weeks over fears that the company's same-store sales growth is slowing.

Friday, the stock closed up 1 1/2, or 4%, at 38 1/2, still off its 52-week-high of 53 1/16, last seen in May.

While it's true that the momentum in AnnTaylor's same-store sales growth is slowing as it becomes tougher to record such big year-over-year gains, the New York-based seller of women's career clothes is one of the few retailers that has room to improve merchandise margins, argues Kindra Hix, an analyst with

Banc of America Securities

. (She rates AnnTaylor a buy, and her firm has performed underwriting services for the company.)

AnnTaylor didn't return a phone call seeking comment.

Often, merchandise margins are masked by occupancy costs, which can make margins appear to improve even if they're not. Hix says AnnTaylor is one of the few specialty retailers that reports pure product costs in its gross-margin numbers, which makes it easier to track how efficiently the company is selling merchandise.

Other retailers include rent and occupancy expenses along with product costs in their cost of goods sold. When comparable store sales increase, rent as a percent of sales decreases. This has the effect of increasing gross margins (defined as sales minus cost of goods sold), even if merchandise margins are actually decreasing.

AnnTaylor only includes product costs in its cost of goods sold. So any increase in gross margins means the company is truly gleaning a larger cut of profits from each item it sells, rather than benefiting as fixed costs like rent are spread over a larger same-store sales number.

Hix figures AnnTaylor's gross margins could expand by as much as one percentage point for the second quarter ended July 31. While that's still less of a jump than the five-percentage-point increase the company saw in the year-ago period, it should outpace improvements seen at other specialty retailers.

"A lot of retailers are seeing only marginal improvements in merchandise margins, because they've already increased so much over the past 18 months," Hix says.

A Steal?

Sometimes compensation for executives can be shamelessly high, especially when their company's stock has headed south.

Take the case of

Media Arts

(MDA)

, a company that sells artwork based on the images of painter

Thomas Kinkade

.

Former chairman Ken Raasch earned $2.7 million in salary, bonus and other compensation for the year ended March 31, according to the company's proxy statement. He also took home $1.7 million in royalty payments from the sale of studio-proof paintings for a total paycheck of $4.4 million. As of May, Raasch is no longer an employee of Media Arts, but is a consultant earning $110,000 a month.

Kinkade, for his part, earned nearly $9 million in salary, bonus, licensing and royalty payments last year.

Combining the paychecks of Raasch and Kinkade totals 73% of Media Arts earnings and 10% of sales for its most recent fiscal year.

Craig Fleming, Media Arts' new president and chief executive, points out that Kinkade actually took a pay cut of about $2 million this year when he renegotiated his licensing arrangement.

Bud Peterson, vice chairman and former CEO, says Raasch's compensation looks reasonable when compared against the $4 million in licensing deals he negotiated last year.

That may be little comfort for investors who've watched Media Arts' stock sink from a 52-week-high of 18 7/16 last seen almost a year ago to its present price of 5 5/16.