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Linens 'N Things skids to disappointing 1Q

CLIFTON, NJ — Hobbled by slowing customer traffic, a drop in same-store sales and a jump in costs and interest expense, big-box retailer Linens 'N Things snapped a long winning streak by recording a 7.2 percent drop in first-quarter profits, to $4.7 million from $5.1 million last year.

The earnings drop stands in stark contrast to the remarkably strong 40.6 percent gain in profits recorded during the year-ago period, and gains of more than 20 percent during each of the previous four quarters.

And with the outlook for consumer spending still uncertain, the number-two home fashions superstore lowered its sales and earnings forecast for the balance of the year, guiding analysts and investors to lower their expectations. The retailer said it now expects earnings per share to grow by 14 to 16 percent for all of this year, compared with an earlier guidance of 20 percent profit growth.

Mired in a sputtering retail environment, and up against liquidation sales at some of its competitors, same-store sales declined by 1.8 percent, even though overall sales advanced by 16.0 percent, fueled by continued rapid expansion. Sales in the quarter climbed to $379.2 million from $327.0 million, but grew at a slower pace than at any time in the past 12 months, following gains in the previous four quarters of 19.6 percent, 20.3 percent, 25.0 percent and 19.5 percent.

"We believe the slowing economy and the consolidation of retailers within our category had a direct impact on consumer traffic and sales during the first quarter," said Norman Axelrod, chairman and ceo.

Weighing down the bottom line, in addition to the lower same-store sales, were increases in costs, interest expense and inventories.

Operating expenses advanced by 80 basis points in the period, to 37.6 percent of sales from 36.8 percent a year ago. Measured in absolute dollars, costs increased by 18.6 percent, to $8.2 million from $8.1 million.

As the company borrowed money to fuel its expansion and build inventories, interest costs totaled $570,000 during the period, compared to the $106,000 the company made on its investments during the year-ago period, when it not only owed no money but was putting it in the bank. Short-term borrowings during the first quarter period totaled $27.3 million, up from zero the previous year.

And with store traffic and same-store sales both down, stockpiles grew sharply faster than sales, climbing by 25.8 percent, compared to the 16.0 percent growth in sales. Inventories climbed to a level of $475.5 million from $377.9 million last year.

In another squeeze on the balance sheet, the retailer's cash position eroded by 74.9 percent, to cash on hand of $3.5 million, down from $13.9 million last year.

LINENS 'N THINGS INC.

Qtr. 3/31 (x000) 2001 2000 % CHG
Sales $379,245 $326,976 16.0
Oper. income (EBIT) 8,167 8,074 1.2
Net income 4,693 5,055 -7.2
Per share (diluted) 0.11 0.13
Average gross margin 39.7% 39.2%
SG&A expenses 37.6% 36.8%

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