Heavy Costs Weigh Down Linens 'n Things
November 27, 2006,
Hit with soaring interests costs and rising debt as its stockpiles swell at a double-digit pace in advance of the holiday season and squeezed by sharply higher costs, Linens 'n Things recorded a $27.4 million third-quarter loss, compared with a small $1.0 million profit a year ago when it began to regain its footing before being bought out by a private investor, Apollo Management.
But while sales moved higher, the bottom line collapsed under the weight of higher interest costs, which soared to $23.6 million from just $1.2 million last year. At one point prior to the takeover by Apollo Management, Linens 'n Things had virtually erased its debt and interest expense, emulating its debt-free and highly profitable rival, Bed Bath & Beyond.
Now, short-term debt has increased almost eight-fold over the past 12 months, jumping by 653.1%, or $195.5 million, to a level of $225.9 million, due in part to a seasonal build-up in inventory as the retailer stocked its shelves for the all-important Christmas selling season.
Through the first nine months of the year, the retailer's loss widened by a factor of more than 15, to $132.0 million from $9.0 million last year. Nine-month sales grew by 5.0% to $1.9 billion from $1.8 billion.
As the retailer prepared for the holidays and deepened key assortments, inventories shot up by 15.8%, to $999.3 million from $863.1 million a year ago, an increase of more than $136 million, driving the higher debt and interest levels.
Acting as a further drag on the bottom line, operating costs climbed sharply higher, rising by 12.6%, $287.8 million from $255.5 million last year, an increase of more than $32 million. Measured as a percentage of sales, costs climbed higher by 310 basis points, or 3.1% percentage points, to 43.7% from 40.6% during the same period a year ago.
Average gross margin held relatively steady, slipping just 10 basis points, or one-tenth of a percentage point, to 41.0% from 41.1% the preceding year.
With operating costs surging, and margins roughly flat, the retailer generated an operating loss of $18.2 million, compared with last year's modest operating profit of $2.8 million.
Providing some relief to the bottom line was Uncle Sam, with an income-tax benefit of $14.4 million, compared with the $621,000 in federal taxes the retailer paid a year ago.
When everything was accounted for, Linens 'n Things had cash on hand of $11.4 million, down 69.7% from $37.6 million at the close of last year's third quarter; and down 92.8% from $158.2 million on Dec. 31, 2005, following the height of last year's holiday season.
"While we continue to reposition the business for longer-term success, we believe signs of improved fundamentals emerged with our third-quarter performance," said Robert DiNicola, chairman and ceo. "Comparable store sales have stabilized in a flat range for the past two quarters" after several straight quarterly declines.
"We will continue to focus our efforts to improve the depth of ownership of key products, create a cleaner and crisper store merchandise presentation, and enhance our marketing efficiencies as we head into the upcoming holiday selling season," DiNicola said.
LINENS 'N THINGS
|Qtr. 9/30 (x000)||2006||2005||% change|
a. Third-quarter results include $18,000 in interest income, down from $54,000 during the same period a year ago; and an income-tax benefit of $14.4 million, compared with a prior-year income tax payment of $621,000.
b. Since Linens 'n Things is no longer a public following its acquisition by an investment group last year, there are no share holders. However, because of the number of debt holders, it is still required to report financial results to the federal Securities and Exchange Commission.
c. Nine-month results include interest income of 137,000, down from $668,000 a year ago; and an income-tax benefit of $50.3 million, compared with $21.3 million the preceding year.
|Oper. income (EBIT)||(18,176)||2,807||—|
|Per share (diluted)||— b||— b||—|
|Average gross margin||41.0%||41.1%||—|
|Oper. income (EBIT)||(148,971)||(11,713)||—|
|Per share(diluted)||— b||— b||—|
|Average gross margin||39.2%||41.3%||—|