No Turn On Red

Not very suprisingly, Gap Inc. did not post good Q2 results and has lowered their year-end projections:

SAN FRANCISCO, Aug. 17 /PRNewswire-FirstCall/ — Gap Inc. (NYSE: GPS - News) today reported net earnings for the second quarter which ended July 29, 2006 of $128 million, or $0.15 per share on a diluted basis, compared with $272 million, or $0.30 per share, for the same period last year.

Second quarter net sales were $3.7 billion, compared with $3.7 billion for the same period last year. Comparable store sales decreased 5 percent, compared with a prior year decrease of 3 percent.

“The second quarter continued to be challenging, as we aggressively cleared inventory to prepare for fall merchandise, and we invested in marketing and stores to improve second half performance,” said Gap Inc. president and CEO Paul Pressler.

“Each brand is at a different stage in its turnaround,” continued Pressler. “We are encouraged by improved performance at Banana Republic and our online division. And while we are making progress at Gap and Old Navy, we know it will take several seasons of consistent product, marketing, and store improvements to win back our customers. We remain committed to the strategies at each of our brands and to our growth initiatives.”

(The rest of the press release is here.)

The huge markdowns they took towards the end of the season to make way for the new Fall re-launch really hit them hard. This shouldn’t be suprising. A long time ago, everyone should have realized that Q2 was going to be nasty for them.

The turnaround of the Gap brand is going to be hard, as I’ve talked about in the past (here and here). The hardest part now is going to be in remaking their image and getting customers back into the store. And so far, this has been a challenge:

That said, our sales results month-to-date are trending below our expectations. Although we are disappointed with this initial performance, we are not discouraged and are seeing some successes. Our body business is building momentum, and our kids, baby, and maternity division is tracking well.

In adult, customers are responding well to several of our key items. Most notably, our women’s clean pants, clean sweaters, casual bottoms and knits. In men’s, our new khaki pants, fashion cargos, graphic and short-sleeve knits are all performing well.

Denim across the board continues to be challenging, particularly our five pocket jean. Compared to last year, our fall denim buys are lower and we skewed our assortment for trend-right fashion styles in darker washes.

But they are also noting that they are very pleased with the execution in the stores (though, would they really say that they weren’t?) and that their customer service survey scores have increased at Old Navy and Gap. That is a positive sign. The key is going to be getting to each customer, one by one, winning them back, and hoping that they tell their friends about it. Increased customer service scores is a great first step and early indicator of that.

Look for the Fall 2 Update in Mens & Womens to happen at Old Navy on August 28. I am interested to see where they plan on going, fashion wise, post BTS.

Look for 100 adult Gap stores to be remodeled by the end of the year. I guess I am in an area of higher performing Gap stores, since I have three of the new concepts out of the four closest stores.

This will be an intriguing quarter to watch Gap and all of their brands. Except Old Navy and Gap proper to be the most fun to watch, while Banana Republic should continue to build on the moderate momentum that they’ve seen in the first half of 2006.

Will the young adults come back to Gap? Will the increased marketing effort pay off? How will they look in three months, as we go into the Holiday season? I wouldn’t expect a big turnaround this quarter, but I hope for their sake that they are announcing some positive sparks of light come October.

More coverage from Marketwatch and The Street.

Transcript of the conference call provided by Seeking Alpha.

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What a quarter these guys had:

American Eagle Outfitters, Inc. (NASDAQ:AEOS) today announced that earnings for the second quarter ended July 29, 2006 increased 27% to $0.47 per diluted share from $0.37 per diluted share for the quarter ended July 30, 2005. Included in the second quarter 2006 earnings per diluted share of $0.47 is $0.01 per share of stock option expense, which was not included last year. Net income for the fiscal 2006 second quarter increased to $72.1 million from $58.0 million for the same period last year.

“American Eagle delivered solid top-line growth, outstanding profitability and strong cash flow for the second quarter of 2006,” said CEO Jim O’Donnell. “I am very pleased with this performance, especially in light of the investments we are making in our future growth initiatives, such as our real estate strategy, aerie intimates sub-brand and our new MARTIN + OSA concept. These results are clearly the by-product of a strong and successful team effort across our organization.”

(See full press release here.)

A record earnings quarter for American Eagle and this doesn’t look like a blip - it looks like they are poised for a great second half of 2006.

The key to their success this quarter has really been their mixture of trend-right and basic fashion. They adknowledge that not everyone is ready to go after the latest trends, and their assortment has reflected this. They refer to their denim assortment as over “90% new” in style and washes. The AMC Movie Ticket promotion was a great opportunity to get people in the door and into the dressing room. They seem to be very pleased with how that worked out.

Growth in sales, growth in profit, growth in bottom line performance, growth in transactions per store. They are nailing almost everything that they need to nail. This store is going to be a power house going into the rest of the year.

Some more coverage from The Street and the Motley Fool.

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You know, yesterday I went down to my local mall and I took a walk around JC Penney. I have to say, I think they’ve really pulled things together. From the merchandise to the in-store experience, the store looked better than I have seen it in a long time.

Missy and Juniors looks great. I was really impressed by how nice the apparel looked. Lines like a.n.a., Bisou Bisou and Miss Bisou looked really sharp. The euro sizing on the Miss Bisou jeans is a very nice touch. However, I don’t think they are offering the same sort of excitement on the male side of the ball.

With how nice the stores are looking, it’s no suprise that their second quarter results were so strong.

J. C. Penney Company, Inc. (NYSE:JCP) reported record second quarter operating profit and earnings. Operating profit increased 27.2 percent to $271 million from $213 million last year and improved 100 basis points to 6.4 percent of sales. Operating profit improvement was driven by strong sales performance, coupled with improved gross margin and leverage of selling, general and administrative expenses. Second quarter 2006 earnings per share from continuing operations increased 63.0 percent to $0.75 from $0.46 last year. Earnings per share in both years include the benefits of one-time tax credits as well as the effects of the Company’s ongoing share repurchase program.

“The Company had an excellent second quarter, with good customer response to fine jewelry, children’s and women’s accessories, as well as a solid rebound in apparel categories, particularly women’s,” said Myron E. (Mike) Ullman, III, chairman and chief executive officer. “We have broad-based momentum entering the back half of the year and are confident in our competitive positioning. While we are cautiously optimistic about the opportunities that lie ahead, we believe that it is prudent to plan conservatively in the current environment.”

Ullman added, “We continue to improve the fundamentals of our existing businesses and are poised for the acceleration of our new store growth. In the third quarter, we will open 25 stores, with 17 in the new and successful off-mall format. Twenty of these stores will open on October 6th, the most store openings in a single day in the Company’s recent history, and beginning in 2007, we plan to open 50 stores per year.”

(The full press release is here.)

Some notes from the conference call:

Seems that they are aggressively targeting former May shoppers who may feel lost in the Federated/Macy’s rebranding.

Aggressively targeting teens through sponsorship of the MTV Video Music Awards and the Teen Choice Awards. Also exploring and utilizing better opportunities in integrated marketing.

Still looking towards 50 door expansion in 2007 with the majority of the sites being in the off the mall format.

Sephora will be rolled out in 5 new stores this year with a small rollout in FY2007 (half new and half exisiting stores) with the majority of the rollout in FY2008. This is due to many levels of integration that need to happen between Sephora and JC Penney. This is also due, in part, to their desire to not overwhelm the smaller distributors and providers of Sephora product.

Early response to BTS season is positive, as well as early response to new denim offerings (like increased offerings of skinny leg and straight leg jeans).

Like I said, I think that they can continue to improve their Men’s offerings, but they’ve got a good solid base to build from. Other areas of the store are improving and customers are responding well. With economic worries looming, I think they can have a solid second half.

Move coverage from Bloomberg, MSN.com, and Reuters.

See also: Retail roundup - Q1 results, JC Penney.

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It’s quarterly earning season again, time to take a look back at how the retailers did in the previous three months and learn a few details about where they are going in the next three months.

First up, the numbers from Kohl’s:

Kohl’s Corporation second quarter earnings per diluted share increased 27.8 percent to $0.69 per diluted share from $0.54 per diluted share in last year’s period. Net income increased 24.1 percent to $232.4 million from $187.2 million. Net sales for the quarter increased 14.0 percent to $3.3 billion from $2.9 billion a year ago while comparable store sales increased 5.5 percent.

For the six months ended July 29, 2006, net income increased 28.1 percent to $399.6 million or $1.17 per diluted share, compared to $311.9 million or $0.90 per diluted share for the six months ended July 30, 2005. Net sales increased 15.0 percent to $6.5 billion from $5.6 billion a year ago. Comparable store sales increased 6.2 percent for the same period.

(The full press release is here.)

Another good quarter from Kohl’s.

Some interesting notes from the conference call:

The company saw the strongest comps in Home. This is due to new lifestyle classification/merchandising and new private/exclusive label merchandise (noting positive response to Candies and apt. 9 Home). They noted a slightly higher penetration of private label merchandise, in all merchandise categories, but noted sales were strong on the back of it’s exclusive to Kohl’s brands.

They see the most growth in updated and contemporary brands, noting that response is great due to improved merchandise presentation and expect to show off some further new and bright ideas with it’s new stores opening in October.

Missy brand launches of Chaps, West End, AB Studio, and Stamp 10 have been very strong with Stamp 10 expanding into an additional 110 doors in Missy and Chaps expanding into the Girl’s department this Fall.

The key idea that was repeated over and over again was newness and excitement in the store experience. They say that their customers desire it and they are continually looking for ways to better this experience.

Look for an analyst conference at a new store in Tampa on October 4, which will allow them to show off their newest ideas and innovation in merchandise and merchandise presentation. Should be a very interesting date to watch.

Seems that Kohl’s kept on rolling this quarter. Very good for them. Stock is up over 3% in after hours trading.

Amazing to me that both Kohl’s and JC Penney can apparently go after the same market segment but both have had two great quarters in a row to start off Fiscal 2006. Can their trends continue into the second half of the year, with fears of terrorism, higher energy prices, and a soft housing market? I think both retailers have a few tricks still tucked away in their sleeves before we get to Christmas.

More coverage from Marketwatch.com, TheStreet.com, and MSN.com.

See also: Retail roundup - Q1 results, Kohl’s.

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The numbers from Abercrombie & Fitch: revenue up 20%, comp sales up 6% and net profit up 39%, beating Wall Street Estimates.

When digging into the numbers, some very interesting trends within the different brands: A&F comps were down 6%, abercrombie comps were up 30% and Hollister comps were up 13%. A&F menswear comps decreased by low single digits while womens apparel comp decrease was in the mid single digits. They didn’t talk specifics about RUEHL, except to say that it is performing well in comp and net sales perspective.

Some quick key points from the call that I found interested are that they seem to be that they are reducing the amount of promotional events, reducing the amount of clearance cycles, reducing floor space devoted to clearance, putting $50 million back into the stores in capital improvements this year. These are all geared towards improving the gross margin, which came in at an astounding 65.4%.

The thing that is amazing me about A&F is that they are able to get away with all of this. In such a tight retail market, they are now in their twentieth month of overall comp store gains (minus a slight hiccup this March). They have created the ultimate lifestyle destination brand and they are able to get away with charging top dollar for it. They have played with pricing, tweaking the price points at RUEHL and Hollister to be more competitive (they say they are pricing Hollister to be more competitive with American Eagle and they have brought the price points of RUEHL to an average of 12% more than A&F, down from the original 30% increase over the average A&F price point).

I do like their honesty when talking about the decline in A&F womens comps they said “I think we simply could have done better in that business. I don’t think that we flowed units and fashion as aggressively as we might have.” The decline, they say, is out of line with the womens business at the other brands. It’s good to see a retailer own up to a mistake like that and look for ways to improve.

Another good quarter for company as a whole. Going into the Back to School season, the company has some very impressive comp numbers to contend with (May, June, July & August of 2005 had comps of 29%, 38%, 22% and 24% companywide) which will make the numbers look flat or soft. Their challenge for the rest of 2006 is to improve upon inventory management and pricing to drive the gross margin. However, if Abercrombie & Fitch is able to reasonably build on these comp numbers, look for this to continue to be one of the hottest retailers going into the second half of the year.

More coverage of the Q1 results from Businessweek and Bizjournals.

Transcript of the conference call from Retail Stock Blog.

Full SEC form 8-k filing from Yahoo.

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After fantastic 2005, teen retailer American Eagle is off to a great start to 2006, continuing it’s upward trend, beating Wall Street estimates and putting up some solid numbers for Q1: net sales increase of 14%, comp sales up 9% and net profits up 16%.

CEO Jim O’Donnell attributes the success of the quarter to “successful merchandising and design, as well as the solid execution across our company.” Initiatives undertaken in 2005, such as the AE “All Access Pass” customer loyalty/reward program seem to be paying off in 2006 with AE President Susan McGalla saying that the “new enrollments are exceeding our expectations and the first two redemption periods were encouraging.”

As far as the merchandise itself, McGall goes on to say that for the Women’s end of the spectrum, “comps were best in graphic tees, tanks, shorts, capris, jeans, flip-flops and intimates, while women’s skirts, wovens and accessories were below our expectations.” Adding, “Men’s produced a positive low double digit comp with the strongest results in graphic tees, jeans, shorts, polos, flip-flops and boxers. Within men’s, we continued to see a planned downtrend in woven shirts.”

Accessories will be helped by the future launch of the AE sub-brand, aerie. aerie is the new intimates sub-brand from AE, with all stores having a full aerie store-in-a-store concept, launching in September. Results from the initial “bra test” in 100 stores have been encouraging, with a lot of positive feedback regarding merchandise assortment and trends in this area. McGalla says, “the number one bra that we thought was going to be number one wasn’t number one.”

As a male in his mid-twenties, I do not know much about an intimates department geared towards girls age 15-25. But I do know that AE seems to be swinging for the fences lately and I have no doubt that this launch will prove successful, turning into a gold mine for AE.

More about the aerie brand from this February article in WWD: American Eagle’s Strategy for ‘aerie’ intimates.

The other concept that they are excited about is the Martin + Osa store concept, debuting in four cities this Fall. CEO O’Donell describes it as “a unique, specialty lifestyle brand, targeting 25-40 year olds.” With merchandise that is geared towards an older demographic in style, design and price, I think that this store will wind up doing extremely well for AE. You have an entire generation of shoppers who are growing up and outgrowing AE, now get them to stick with you through the years. At the same time that AE is building/developing a lifestyle brand, they are also branding these customers for life. Smart move and I am excited to see this shop concept.

More information on the Martin + Osa concept from WWD, “Martin + Osa Mall Bound: Signs First Four Leases“.

The last area that AE repeatedly touched on is the improvement in sales in remodel stores. Remodel stores are gaining square footage through re-design and expansion, in some cases they are relocating within the same mall. In this area, AE did this remodel last year and the payoff is huge. The new store layout is larger, spacious, inviting, and fun to shop - it is a complete turnaround from the cramp quarters they once occupied.

To this regard, AE says that the average store profitability jumps 70% in the first year after remodel - 70% ! This is fantastic news for investors, as AE looks to remodel 68 stores this year alone. Retail Design Diva had a fantastic article on this a few months ago: You Know Improved Store Design Helps Increase Sales, But Would You Believe 46%? As the trend over the past few years was to reduce visual merchandising and the importance of store design, it is nice to see a company spend so aggressively in this area and be so vocal about their success. AE has even upped their 2006 capital improvement estimates from $175m to over $215m.

It is a good time to be American Eagle. They are poised for a very good year and will be a mall retailer to look out for going through the rest of 2006. Look for them to lead the way through the mall with their commitments to good design, value and aggressively seeking out opportunities to develop itself as a lifestyle brand.

More information on Q1 results here and here

Full transcript of the conference call here from Seeking Alpha.

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Target released their Q1 numbers, showing positive sales trend, positive comp store sales and a rise in net profit, but didn’t hit the marks set for them by Wall Street and their stock took a quick hit in an active day of trading.

The numbers: overall revenue up 12.1%, comp sales up 5.1% (compared to 6.2% Q1 LY), net profit up 12%, but selling, general and administrative expenses were up 15.3%. CFO Doug Scovanner said that the rise in expenses was due to the construction of three distribution centers and the rise in the number of stores they remodeled this quarter. He maintains that the yearly expenses for this capital improvement will be flat from last year, explaining: “As you know, as well, we remodel and expand a very substantial number of stores each year. We don’t even remotely try to time that by quarter for any particular purpose other than doing it when it makes the most sense. That drove a bit more expense in the quarter than we would expect for the balance of the year. That line item, per sae, should end up being flat year-over-year, but ended up putting some pressure on this quarter’s expenses.”

Scovanner talked about the positive response to the new apparel collections, including those by Luella Bartley and Tara Jarmon and growth in areas such as outdoor, electronics, and food. He also cites the growth in the average amount of items per transaction vs. the growth of the price per item.

Food seems to be an area in which they are making a bigger push. They are in the process of bringing all of their stores up to a newer food prototype layout, with about 650 of their 1418 stores having this new layout today, as many as 950 having an expanded food layout by year’s end and between 50 and 75 stores which will have an even larger food offering than the prototype.. Responding to a question, President Glegg Steinhafel said that although they do not have plans to offer fresh food (produce / meats) in the stores with the largest layouts, they will be focusing on offering a larger selection of their current assortment.

Steinhafel also commented on soft sales in home, the Global Bazaar shop concept from this past winter and tweaks that they are planning for the next year. They are looking to cut down the average unit price of the products in this area in order to spur more impulse buys, rather than having the customer wait for the items to go on sale.

To me, this last part actually makes a lot of sense. Target did get a lot of positive press for their global bazaar shop, but better merchandise mix between full scale furniture and smaller decorative/useful items will allow for more impulse buys, as they say. I will be very interested to see what tweaks they implement as the area was very beautiful, well designed, but didn’t seem to hit the pricing mark for a lot of their consumers.

Target posted very good numbers but Wall Street went into a little panic. Things wil llevel out and I think Targets yearly prospects look fantastic, as always.

Stephen Simpson at the Motley Fool feels that soon may a good time to buy TGT:

OK, so I’ve been positive on Big 2 discount retailer Target (NYSE: TGT) for a little while now and it’s gone all of nowhere. But the closer this one gets to its 52-week low, the more interested I get. I don’t often like to buy huge companies in highly competitive businesses, but at the right price I’ll consider just about anything.

…

I can understand the idea of staying away from Target because of overall fears about the health of the U.S. consumer. That’s not to say that I agree, but I at least can see the point there. In any case, these shares are getting more than a little interesting. A few more points on the downside and I just might add these to my own shopping cart.

More coverage from BusinessWeek.

Full transcript of the conference call here.

Full SEC form 8-k filing here, via Yahoo.

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Like Kohl’s, JC Penney also released some very solid numbers for the quarter: overall sales up 2.5%, comp store sales up 1.3% for the 12th consecutive quarter of positive same store sales, and profits up 22.1%. The company cites strong sales in fine jewelry, mens, childrens, and footwear while they say sales were soft in womens apparel, unlike rival Kohl’s.

According to president Ken Hicks on the conference call, “gross margin continues to benefit from the performance of our private brands, as well as continuing improvement in seasonal transition and merchandise flow.” This follows up his earlier remarks on womens apparel, when he said “In our women’s apparel business, we are taking aggressive action with markdowns to keep our inventory fresh, as well as building or key brands and adding new brands such as a.n.a. In addition, we continue to develop brands such as [E. Spiff], which we will introduce this fall in traditional careerwear.”

This call also gave us the first real look at the partnership between JC Penney and Sephora. Outlining the future rollout, Ken Hicks said “Beginning this fall, we will bring Sephora into a handful of JCPenney stores, and next year, our plans are to add Sephora, primarily in new stores, with some additional existing stores also having the concept. A more extensive Sephora rollout is planned for 2008.”

Walking into any JC Penney these days, one can see that there is opportunities to develop their womens apparel business further. Hicks blames this on general negative trends in fashion, (”.. the lack of really exciting things in fashion aren’t helping the business”) which completely suprises me. It’s clear that JC Penney may not be offering really exciting things in fashion, but don’t blame it on fashion in general.

Back to the numbers: direct sales via catalog were up 3.9%, but Internet sales were up over 22%. The modest gains in diret mail, which have been continuing to slip, lead me into the news that they have announced that they are de-emphasizing the catalog (via marketingblurb).

JC Penney is not suspending their print catalog, but at the annual ACCM Catalog Conference, a company official announced that the retail giant would focus on online rather than catalog sales. It seems that their online sales are growing at 23% per year, while print sales are at 10% growth and falling every year.

DMNews has more on the story. In fact, they are critical of the move, saying:

Former Lands’ End president/CEO Mindy Meads at the Philadelphia eTail 2005 conference cited a study claiming that customers who get catalogs generate a 15 percent increase in transactions and a 16 percent jump in overall spend.

Retailers like J.C. Penney don’t want to lose the chance to train the next generation of shoppers — kids watching Mom and Dad open the catalogs, then call in an order or go online. No catalog, no brand recall. Too much reliance on one channel of sales is not good, either. What if there is more stringent regulation down the road for e-mail and e-commerce?

Again, more here via DMNews.com

Like I’ve talked about before, JC Penney is at a stage where they can recapture what they are missing - through initiatives like the Sephora deal, building the private brands and even sponsoring the MTV Video Music Awards. As a consumer, I think their key to winning us back is through developing brands that we want to shop and making their buildings more exciting and fun to shop. I can’t tell you the last time I’ve gone into a JC Penny that hasn’t felt dated and stale.

JC Penney had a good quarter - higher profits on only slightly higher sales - and this could set them up for a very solid year.

More information via marketwatch.com’s coverage of the results. Retailstockblog has a complete transcript of the call, as well.

The full SEC form 8-k is here, via Yahoo.

Full transcript of the conference call from Seeking Alpha.

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The first batch of retail Q1 results are in and I’m going to start touching on some of them.

Kohl’s came out swinging with some extremely strong numbers for the quarter: 16% increase in sales, 6.9% increase in comp store sales, and quarterly profits up 34%. President Kevin Mansell says that there were strong sales in the contemporary and updated lifestyle classifications of women’s apparel, with strong response to the introduction of Chaps brand for Women, by Polo Ralph Lauren Corp, and the private AB Studio brand. Across the store, Chaps for Boys and Tony Hawk for Young Mens & Boys also saw positive response.

From marketwatch.com’s coverage of the conference call:

In response to an analyst’s question, Chairman and Chief Executive Larry Montgomery said Kohl’s has had only limited experience competing against a new, off-mall store format that J.C. Penney is beginning to roll out more rapidly this year. While Kohl’s stores have typically taken a short-term sales hit when a new Penney store opens nearby, they soon recover to normal levels, he said.

“I would suggest that probably when we open up, we probably hit them harder than when they open up,” Montgomery said.

Jeremy MacNealy at the motleyfool thinks very highly of Kohl’s stock right now, noting:

As a result of new brand and marketing initiatives to draw first-time customers to the stores, transactions for the quarter were up 4.8% compared to the same period a year ago. On top of this, transaction value rose 2.1% year over year, leading to overall comparable same-store growth of 6.9%.

He goes on to say:

Prospective investors will want to inspect the company’s free cash flow generation once the figures are made available in its 10-Q filing. But from just an earnings perspective, at roughly 18 times projected current-year earnings, this stock is reasonably priced, given the kind of growth rates we are currently witnessing. The market may be soaking sweat with concern, but Kohl’s shareholders have good reason to keep smiling.

More in his article, Kohl’s is Cruising.

Full SEC Form 8-k filing here, via Yahoo.

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