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By
Reuters
Published
May 20, 2010
Reading time
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Retailers disappoint with conservative outlooks

By
Reuters
Published
May 20, 2010

NEW YORK (Reuters) - Apparel retailers, from sellers of lingerie and rock-inspired looks to those catering to women over 40, disappointed investors on Wednesday 19 May after offering a dim view of 2010, sending shares of Chico's, Limited Brands and Hot Topic lower.



Cautious outlooks from retailers were contrary to recent Wall Street optimism over consumer spending that had fueled a rise in apparel stocks.

Shares of women's clothing retailer Chico's FAS(CHS.N), which had a higher, in-line first quarter profit, slid as much as 17 percent to an almost 9-month low after Chico's signaled that margins would not improve as fast as investors had hoped.

High-end apparel maker Polo Ralph Lauren (RL.N) also reported a higher quarterly profit on Wednesday 19 May but forecast full-year sales and operating margins that implied an earnings-per-share range below Wall Street estimates.

Polo shares fell as much 3.6 percent, but closed up 2.7 percent on hopes the outlook would prove conservative.

Shares of Limited Brands Inc (LTD.N) fell as much as 5 percent after hours after the operator of Victoria's Secret and Bath & Body Works gave a disappointing outlook.

The retailer beat Wall Street forecasts in its first quarter, helped by revived sales and fatter profit margins, but the midpoint of a second-quarter profit forecast fell short of estimates.

Shares of Hot Topic, which sells Goth-inspired clothing, music and accessories to teenagers, fell 9 percent after the company projected a second-quarter loss below analysts' estimates.

"LOW-HANGING FRUIT PICKED"

Chico's, whose customers are women 40 and up, is in the midst of a turnaround that has brought cost cuts and younger-looking fashions. Its efforts have yielded double-digit same-store sales gains, a large increase in gross margins and significant expense reductions.

The company beat Wall Street estimates for the past two quarters, and investors had expected it to beat them again, analysts said.

"The turnaround to date has been impressive, but challenging margin and sales comparisons starting in Q3 leave us on the sidelines," Jefferies analyst Randal Konik wrote in a note, adding that the turnaround's next phase included more complex issues like new information technology.

"While these are all favorable long-term strategies, it appears that most of the low-hanging fruit has been picked," Konik wrote.

Same-store sales at Chico's rose 14.9 percent in the first quarter. But for the current second quarter, Chico's said same-store sales would rise at a high single-digit rate.

"We expect an improved gross margin rate, but not to the extent realized in the first quarter," Chico's Chief Financial Officer Kent Kleeberger said on a conference call.

Wedbush Securities analyst Betty Chen said improved margins now looked more likely for the second half of 2010 and in 2011, instead of the first half of this year.

Chico's plans to open 20 outlet stores this year, and to eventually have as many as 125 outlets, Chico's Chief Executive David Dyer said on the call. It now has 72.

CONSERVATIVE POLO?

Polo, whose brands include Ralph Lauren, Club Monaco and Chaps, said its net income more than doubled to $114.1 million, or $1.13 per share, for its fiscal fourth quarter ended April 3, from $44.5 million, or 44 cents per share, a year earlier.

Net sales rose 9 percent to $1.29 billion as strong retail sales offset a 3 percent decline in wholesale sales.

For the first quarter of fiscal 2011, Polo said it expects consolidated revenue to rise at a low double-digit rate, including the effects of currency exchange rates, and an operating margin rate slightly above a year ago.

It expects same-store sales at its retail stores to rise by a high single-digit rate, while wholesale revenue should rise at a low double-digit rate.

For the full year, Polo forecast a mid-single-digit rise in revenue, a low double-digit operating margin and capital expenditures of $280 million.

Polo's forecast suggested that 2011 profit would range from $4.20 to $4.45 per share, below Wall Street estimates for $4.91 per share, said Thomas Weisel Partners analyst Liz Dunn.

Needham & Co analyst Christine Chen said Polo shares first fell due to analysts likely lowering their estimates, but they ended higher as Polo's history of conservatism prevailed.

"Based on their track record everyone knows that the guidance ... is likely ultimately going to end up conservative," she said.

Polo said it was "planning an aggressive acceleration of our investment in our growth initiatives" in fiscal 2011.

About half of Polo's capital spending this year would go toward opening 15 to 20 stores, including a 30,000 square foot flagship store in Manhattan showcasing women's and home collection merchandise, Polo's Chief Financial Officer Tracey Travis said.

(Additional reporting by Phil Wahba and Alexandria Sage. Editing by Michele Gershberg, Gerald E. McCormick, Robert MacMillan and Richard Chang)

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