Wednesday, May 27, 2009

LOFTy Fashion Changes at Ann Taylor Stores

Same-store sales in the first-quarter fell 30.7 percent at Ann Taylor Stores (ANN-$7.79), reflecting the disproportionate impact the current recession is having on the women’s apparel sector—particularly the spending pullback by professional, working women. Chief executive Kay Krill told analysts on the first-quarter earnings call, that the retailer believes it can rejuvenate flagging sales by offering shoppers more exciting fashions—starting with its fall lines. Given a history of inconsistent execution, however, will the introduction of new designs at its flagship stores and the more causal LOFT stores chain be sufficient to revive sales?

Net revenue decreased 27.9% during the quarter-ended May 2, 2009, driven by lower traffic and a 14 percent drop in average dollars per transaction. Management attributed the 42.7 percent plunge in comparable store sales at the Ann Taylor chain to a combination of the recession and a dearth of unexciting merchandise on the racks, according to the
10-Q regulatory filing:

In terms of overall performance, as expected, Ann Taylor experienced a very difficult quarter. We continued to work through assortments that were too serious and not as compelling, modern or versatile as needed to meet the more fashionable and stylish apparel needs our clients now demand.

The company had better success in reducing its cost structure, with gross margin improving 230 basis points to 55.5 percent, driven by smaller inventories (down 16 percent per square foot) and a 50 percent decline in mark-down activity. In addition, only nine new stores opened in the quarter, down from 25 in the year-ago period.

A recently hosted fall fashion preview for the fashion community—for both Ann Taylor and LOFT—was well received, said Krill. I am not convinced, however, that Ann Taylor’s reliance on “taste” will be enough to stop shoppers from looking elsewhere, especially if consumer spending trends do not improve and competitors—such as New York & Co., Nordstrom, and Saks—actively promote discounting to offset sluggish sales.

Krill also remarked on the conference call that in a continuing effort to watch its margins, the company will continue its conservative inventory control practices for fall merchandise as it “tests and learns [the] way to a more robust performance.” This strategy of investing behind success rather than ahead of it could backfire on the company, however, if customers perceive the store shelves to be empty of fashionable items. Either way, the company is betting that most women are weary of their old clothes, and unlike the late comedian Gilda Radner, do not base their fashion sense “on what doesn’t itch!”

Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Sunday, May 24, 2009

Do You Like the Way Men’s Wearhouse Looks?

Neill Davis, chief financial officer of The Men’s Wearhouse (MW-$16.16), told analysts on the fourth-quarter 2008 earnings call that “promotional posture is resonating with customers—both new and existing—and is positively impacting gross profit dollars, due in large part to effective marketing and merchandising initiatives.” Despite management’s attempt to put a positive spin on ‘buy one – get one free’ promotions and other markdown sales, Davis’ corporate-speak cannot sweeten the hit to profitability caused by the apparel retailer’s discounting practices.

Total store sales for the year-ended January 31 slumped 6.6 percent to $1.97 billion, due to declining store traffic and deteriorating average net sales per square foot (8.2% at Men’s Wearhouse locations and 16.4% at K&G locations) caused by the recession.

Gross margin declined 280 basis points to 43.1 percent, resulting from increased occupancy costs [from higher rental rates for new and renewed leases] and the failure—Neill’s remarks not withstanding—of merchandising discounts to influence buying patterns of apparel shoppers.

Expectations are that difficult economic conditions will continue into 2010. As the company cannot predict when the economy will recover, senior management plans to stimulate sales with even deeper clothing discounts and to implement additional operation cost controls, such as reductions in inventory purchases and fewer store openings.

Due primarily to the lack of forward visibility as to macro economic conditions, management will only provide
financial guidance for the first half: earnings per share in a range of $0.45 to $0.65; comparable store sales of its retail apparel business are anticipated to decline in a range of six percent to 10 percent and comparable store sales of its tuxedo rental revenues are expected to increase between seven percent and nine percent.

Several retail analysts have upgraded their ratings, too, opining that Men’s Wearhouse could deliver better-than expected 2009 operating results, driven by significant cost-savings and higher tuxedo rental bookings and clothing sales (from additional discounting). The 10Q Detective disagrees, predicting that a growing dependence on deep discounts will serve only to further pressure merchandising margins. In addition, although tuxedo rentals remain an area of growth, even a nine percent sales gain will do little to offset falling sales (as tuxedo rental sales represented only 7.5% of total apparel sales in the fourth quarter of 2008).

Because an appeal makes logical sense is no guarantee that it will work. ~ NYC ad genius William Bernbach (1911 – 1982)

Chief executive and founder, George Zimmer also serves as the face of the company in television commercials, simply extolling: “you’re gonna’ like the way you look! I guarantee it.” Unfortunately, the apparel retailer’s discounting practices might not be a comfortable fit with actual earnings results in coming quarters.

Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Thursday, May 21, 2009

Is Build-A-Bear Fad finally Over?

Faced with a slowing economy, Build-A-Bear Workshop (BBW-$4.51) has moved away from featuring its $18 and $20 stuffed toys in ad campaigns, going instead with $10 and $12 price points to attract walk-in traffic. Although management said it saw success in attracting new customers, the mall-based specialty retailer posted an $(826,000) loss in the first-quarter (compared to earnings of $6.4 million a year earlier) on a 25.5 percent decline in retail sales to $96.3 million. Can management find the right balance of merchandise across the range of price points to deliver operating profits—or has the “build-your-own” furry friends fad finally peaked? Read More….

Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Monday, May 18, 2009

Auto Dealer Closures a Negative for DealerTrack

Mark O’Neil, chairman and chief executive of DealerTrack Holdings (TRAK-$13.54), said on the first-quarter earnings call he expected the provider of sales and finance on-demand software for the automotive retail industry to post a net loss of between $(7.0) million and $(5.5) million in 2009 on revenue of between $232 million and $238 million. The reality of accelerated dealership closures in the U.S. announced by Chrysler and Generals Motors, in our opinion, will lead to a revised downward guidance in sales and corresponding income, as cost containment initiatives are unlikely to offset subscription cancellations.

Transaction services revenue fell 37 percent to $24.0 million, primarily due to a decline in auto loan applications. Subscription services revenue increased 25 percent to $27.9 million, helped by a seven percent increase in member dealers (to 14,646) and a 16 percent climb in average monthly spend per subscriber (to $635).

At the end of first quarter, DealerTrack had 736 financing sources in its network, a net gain of three members from year-end. Despite the slow pace of enrollment, O’Neil said on the call that he still believes the company could add some 100 new lenders in 2009. Stability in the credit markets and an increase in the number of lender-members should boost transaction volumes. However, alternative financing sources, such as
RouteOne and Open Dealer Exchange [a joint venture from ADP and Reynolds & Reynolds] could present competitive headwinds in the loan origination business.

The company has yet to quantify the effect Chrysler’s shut down of 25 percent of its 3,200 U.S. dealers and GM’s closure of about 2,600 of its 6,200 domestic dealerships will have on subscription sales [including the percent contribution from recurring fees]. At March 31, more than 55 percent of Chrysler dealers and 52 percent of GM dealers had subscriptions for one or more DealerTrack products.

Although the number of active dealers on the network impacts the number of lender –to- dealer relationships, O’Neil insists that transaction volume will not necessarily be impacted by a decline in the number of lenders, declaring: “Our data shows that while consumers may shop at more than one dealership for a car, they generally apply for credit at only one.”

Until a definitive picture emerges on the financial impact resulting from subscription cancellations, we prefer to avoid the purchase of DealerTrack shares.

Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Thursday, May 14, 2009

More 'Aaugh' Moments at Affymetrix

Affymetrix (AFFX-$4.44) reported a 12 percent drop in product gross margin to 47 percent of sales for the March quarter, due to costs associated with the closing of its West Sacramento plant and average selling price declines in RNA consumables. Nonetheless, chief executive Kevin King told analysts on the earnings call that the genotype instrument maker continued to make steady progress against corporate goals of expanding its GeneChip ® technology platform into new markets and improving operating leverage. The 10Q Detective is less sanguine about the company’s ability to deliver sustainable profitability and generate growth in markets that are downstream from genome-wide analysis, such as pharmacogenomics.

Expanding into new markets

Looking to expand the diversity of its customer base beyond the cytogenetics market, Affymetrix purchased Panomics in November 2008. The acquisition will complement the company’s recently acquired liquid array technology, enabling the company
to address low to mid-plex genetic analysis requirements more effectively in the future, according to Rob Lipshutz, Affymetrix’s senior VP, corporate development. Although Affymetrix now offers a scalable, cost-effective platform with applications in fields from copy number research to drug metabolism solutions (identifying chromosome abnormalities that impair metabolism), investors should remember that business depends on the research and development spending of customers, specifically in the life sciences. As companies in the pharmaceutical industry continue to cut their own costs because of the economic downturn and lost sales to generics (as blockbuster drugs lose patent protection), further reduction in demand for Affymetrix’s products is likely in coming quarters.

Another restructuring

In recent years, Affymetrix has engaged in numerous initiatives to reduce costs across its operations and generate sustainable profitability. The latest restructuring plan to “optimize production capacity and cost structure,” started in February 2008 and involves moving probe array manufacturing from Sacramento to Singapore, consolidating reagent manufacturing to the Cleveland facility, and outsourcing the instrument manufacturing operations. At December 31, the accumulated deficit stood at $416.4 million.

Relocation Assistance

On the conference call, King projected a $20 to $25 million reduction in annual operating expenses as a result of the ongoing steps, with realization of these savings beginning in the second half of 2009. Of subtle interest, King has yet to buy a home in California—two years after being hired by the company. Does this suggest a dearth of confidence in his rhetoric? In 2008, Affymetrix reimbursed $138,996 to King for his “temporary” housing expenses, according to the
2009 proxy filed on Monday.

Should I stay or should I go now?
Should I stay or should I go now?
If I go there will be trouble
An if I stay it will be double
So come on and let me know
~ The Clash

King joined the company as president in 2007 and took over the top job from Affymetrix founder Stephen Fodor on January 1, 2009. As part of the December 2006
offer letter to King, the board also agreed to absolve him of any potential loss in the sale of his primary residence in New Jersey. As a result of market conditions, the company recognized a loss of approximately $400,000 upon the resale of the house in April 2008.

In aggregate, stockholders are on the hook for more than $419,000 in relocation expenses (plus a $100,000 signing bonus). Given continued softness in customer demand and falling prices per data point for genotyping over the last two years, we remain unconvinced that Affymetrix will realize the expected benefits from recent restructurings and new hires, including that of King.

Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Tuesday, May 12, 2009

Arbitron Downplays Nielsen Threat

Arbitron Inc. (ARB-$20.34) confirmed in its first-quarter earnings report that the defection of key radio broadcasters to Nielsen for diary-based ratings services in certain small to mid-sized markets will adversely impact revenue by about $10 million per year starting in 2010. Will the country’s leading supplier of radio ratings data be able to supplant any additional contract losses in the sticker-diary business and invigorate organic growth with the national rollout of its electronic portable people meter (PPM)?

…. Read More….

Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Thursday, May 07, 2009

Share Price of BJ Services Gushes Higher – Despite Limited Rig Visibility!

Are rising energy prices an upbeat sign that demand for oil and natural gas services, from construction of rigging to actual drilling, will show a pickup in activity in coming months? Investors think so, having driven the share price of BJ Services Company (BJS-$16.80) up more than 60 percent in less than a month. However, the earnings report filed for the quarter ended March 31 by this leading provider of pressure pumping (and other oilfield services to the petroleum industry worldwide) suggests the market valuation may be getting frothy, for more doom and gloom could lay ahead for the company and its peers in the oilfield services industry... Read More…

Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.