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Profits Plummet at May Stores

Don Hogsett, Staff Staff, February 14, 2005

St. Louis —Hurt by a punishing trifecta of weakening same-store sales, eroding margins and higher costs, and further nicked by store closing costs, fourth quarter profits at May Department Stores Co. tumbled 16.8 percent, falling to $626 million from $752 million last year.

Helped by the earlier acquisition of the Marshall Field's department store chain from Target Corp., overall sales advanced at a double-digit pace, rising 12.1 percent, to $5 billion from $4.5 billion last year. But the crucial gauge of same-store sales fell 5.2 percent.

All of the damage to the bottom line was done by the core May Department Stores business, and the retailer said the new Marshall Field's business performed well, contributing 5 cents a share to total company earnings of $1.10 per share, even after start-up and integration costs tied to the acquisition.

Putting heavy pressure on the bottom line, average gross margin thinned substantially, 210 basis points, or 2.1 percentage points, hobbled by the drop in same-store sales, rising merchandise costs, and markdowns tied to the liquidation of merchandise in stores being closed.

Acting as a further drag, costs climbed 200 basis points, or 2 percentage points, “largely driven by decreased sales leverage resulting in a 1.2 percent increase in costs such as payroll and finance,” the company said. Almost half of the increase in costs stemmed from the expense structure at Marshall Field's and start-up integration costs, the retailer added.

Taking another bite out of profits, interest expense increased 37.5 percent, due largely to the Marshall Field's acquisition, to $110 million from $80 million a year ago.

The integration of Marshall Field's remains on schedule, the retailer said, with the majority of merchandise and financial systems converted during the first week of February. Remaining system conversions relate primarily to point-of-sale equipment, and will continue through early April.

For all of last year, sales improved 8.2 percent, to $14.4 billion from $13.3 billion, getting a lift from Marshall Field's. But same-store sales declined 2.4 percent. Full-year earnings increased 20.7 percent, to $524 million from $434 million.

May Department Stores Inc.

Qtr. 1/29 (x000) 2004 2003 % change
a. Fourth quarter results include $7 million in restructuring costs stemming from the closing of 34 underperforming Lord & Taylor stores, compared with a year-before gain of $1 million stemming from the reversal of a restructuring charge.
b. 12-month results include a $19 million restructuring charge stemming from the shutdown of 34 underperforming Lord & Taylor stores.
Sales $5,039,000 $4,494,000 12.1
Oper. Income (EBIT) 626,000 752,000 -16.8
Net income 229,000a 425,000a -20.2
Per share (diluted) 1.10 1.38 -20.3
Average gross margin 31.0% 33.1% --
SG&A expenses 18.2% 16.2% --
Nine months
Sales 14,441,000 13,343,000 8.2
Oper. Income (EBIT) 1,208,000 1,279,000 -5.6
Net income 524,000b 434,000b 20.7
Per share (diluted) 1.70 1.41 20.6
Average gross margin 29.5% 29.7% --
SG&A expenses 20.9% 20.1% --

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