Associated Dry Goods on Tuesday reported an 80% decline in second-quarter earnings and blamed much of the lower-than-expected results on its J. W. Robinson division in Southern California.
The results looked all the worse when contrasted with record sales and earnings at Carter Hawley Hale Stores, the Los Angeles-based parent of the Broadway and Neiman-Marcus, as well as at May Department Stores, owner of May Co. California and the company that is about to buy Associated.
Meanwhile, Federated Department Stores, parent of Bullock's and Ralphs, reported a 37.9% profit rise on sluggish sales gains, and Dayton Hudson, as expected, cited poor performance at Mervyn's for an 8% earnings decline.
Bad Mix of Inventory
Associated, a New York-based retailer, said earnings for the quarter ended Aug. 2 fell to $3 million from $14.5 million. Sales rose 6% to $1.04 billion.
The company attributed 70% of the earnings decline to a bad mix of inventory and excessively large markdowns at Robinson's. Unexpected inventory shrinkage at Caldor, the company's discount chain in the Northeast, accounted for the rest.
"Sales results and merchandise margins were well below expectations at these divisions," the company said. It added that last year's second quarter included some one-time income related to favorable resolutions of tax and pension matters.
"Robinson's went from a profit to a loss in the quarter," said William N. Smith, an analyst with Smith Barney, Harris Upham in New York, who described the results as "shockingly low." Robinson's "had very soft sales with very high markdowns and a large amount of stale, bad and damaged inventory, particularly in home furnishings."
Slowdown in Consumer Spending
The slowdown in consumer spending exacerbated Robinson's situation, said Philip Bradtmiller, an Associated spokesman. "The business conditions that (Robinson's Chairman) Tom Roach inherited were much more serious than anybody anticipated, particularly on the inventory side," he said. In March, Roach replaced Michael Gould, a highly regarded merchandiser who is now president of Giorgio Inc.
The poor results afforded Associated an opportunity to revive its criticism that the stores had suffered under Gould's leadership. Industry observers have argued in the past that Gould might have been unfairly blamed for decisions that were intended to benefit Robinson's over the long term.
Despite strong indications that the inventory and other problems have been building for some time, Associated stopped just short of blaming Gould entirely. "Clearly, this is not Tom Roach's doing," Bradtmiller said. "(But) we definitely don't want to say it's all Gould's doing."
He said the company expects problems to continue at least until the fourth quarter, although "a pickup in spending would help alleviate (them) sooner."
Gould, reached at the Giorgio offices in Santa Monica, flatly rejected Associated's account. He said Robinson's had "flagrant markdowns" from April through July, after he had left.
"They say inventory was overbought, but inventory in the beginning of June was 1%" over planned levels, Gould said. "Markdowns in June were double last year. In July they were astronomical. I left in March, so I don't know how that can all be blamed on me."
On a brighter note, Associated reported that earnings at its tony Lord & Taylor division rose 25% on a 12% increase in sales.
Analyst Smith expressed severe disappointment at Associated's performance, noting that his decision earlier this year to recommend the stock has been salvaged only by the stock-swap merger with May. "It's worked out beautifully since May rescued them," he said. "I feel I should be sending May management a bouquet of roses."
For the six months, Associated reported net income of $8.4 million, down from $23.9 million in the year-ago period. Sales were $2.03 billion, up 6.7%.
Both Associated and May noted that they expect their merger to be completed in the third quarter and plan to write off related costs at that time.
Lackluster Southland Sales
At May Department Stores, second-quarter income was $45.6 million, up 20.9%, with sales rising 12% to $1.2 billion.
"All of our business segments contributed to the record quarter, and we finished the quarter with inventories in very good shape--up just 6.7%--positioning us well for the important fall season," said Chairman and Chief Executive David C. Farrell.
The St. Louis-based company does not break out results by division until year-end, but Smith said that "my last reading was that May California was not particularly strong. It's not maybe the weakest part of the chain, but sales there are still lackluster, reflecting a failure of the Southern California market to pick up significantly."
For the six months, May had net earnings of $86.1 million, compared to $71.3 million, and sales of $2.4 billion, up 11.5%.