LNT's earnings slide 34%

Don Hogsett, July 23, 2001

CLIFTON, NJ — Humbled like so many of its peers, Linens 'N Things reported that second-quarter profits fell by more than a third as same-store sales declined by almost 4 percent.

Following up on an earlier warning to Wall Street and investors, the once red-hot big-box said earnings in the quarter dropped off by 34.0 percent, to $4.6 million from $6.9 million last year.

With rapid expansion still fueling the top line, sales grew by 14.1 percent, to $387.7 million from $339.7 million last year. But the crucial gauge of same-store sales fell by 3.6 percent, cooling off from the hefty gains of 5.7 percent and 6.4 percent in the 2000 and 1999.

"The slowing economy has had a direct impact on traffic and sales," Norman Axelrod, chairman and ceo, told investors in a conference call last week.

And with the retail outlook still problematic at best, the retailer lowered its sales and earnings forecasts for the balance of this year. Same-store sales are now expected to be flat to slightly down for the third quarter now underway and for all of this year, said Linens 'N Things. Earnings for all of 2001 are similarly expected to be flat to down about 7 percent or 8 percent, coming in at $1.48 to $1.60 per share, compared with a year-ago per-share profit of $1.60.

Acting as a drag on earnings, in addition to weakened same-store sales, were sharply higher costs, up by 200 basis points, to 39.6 percent from 37.6 percent a year ago. Steven Silverstein, said costs were hit by the lower level of sales and a higher level of promotional spending.

Offsetting higher costs, average gross margin widened by 70 basis points, to 41.8 percent from 41.1 percent a year ago. Margins gained strength, said Silverstein, from higher mark-up due to a shift in product mix, and from improvements in the company's distribution centers and logistics.

Weighing on the bottom line was a big jump in interest expense and short-term borrowings. Interest expense jumped up by 78.2 percent, to $1.2 million from $666,000 last year, as short-term borrowing rose almost five-fold, climbing by 383.1 percent, to $70.1 million from $14.5 million. Bill Giles, cfo, told analysts during the conference call that cash generated during the historically high-profit second half will be used to pay down short-term debt, reducing it considerably by year's end.

Linens 'N Things Inc.

Qtr. 6/30 (x000) 2001 2000 % CHG
Sales $387,715 $339,655 14.1
Oper. income (EBIT) 8,599 11,940 -28.0
Net income 4,583 6,947 -34.0
Per share (diluted) 0.11 0.17 -35.3
Average gross margin 41.8% 41.1%
SG&A expenses 39.6% 37.6%
Six months
Sales 766,960 666,631 15.1
Oper. income (EBIT) 16,766 20,014 -16.2
Net income 9,276 12,002 -22.7
Per share (diluted) 0.22 0.30 -26.7

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