Markdowns hurt Delia's in Q1

Susan Andrews, Don Hogsett, June 9, 2003

With margins under heavy markdown pressure as it moved out left-over holiday goods, Delia's Inc., a specialty retailer that targets apparel and home fashions to teenage girls and young women, recorded a widening first-quarter loss before one-time items of $7.3 million, compared with a prior-year deficit of $4.3 million.

On paper, at least, during the same period a year ago, Delia's put up a profit of $11.1 million — but the bottom line was inflated by a $15.4 million one-time credit stemming from a change in accounting.

Sales at the Gen-X retailer improved by 2.4 percent, to $29.5 million from $28.8 million. But breaking the business out by segment, results were mixed. Retail sales, the company said, shot up by 21 percent, driven by continued expansion. However, catalog sales fell by 12 percent, as the company culled its circulation by 22 percent.

Pressured by post-holiday promoting to clear out excess inventory, average gross margin thinned by 460 basis points, or 4.6 percentage points, to 41.7 percent from 46.3 percent a year ago. Gross margin dollars declined by 7.6 percent, to $12.3 million from $13.3 million, with the up tick in sales ballasting some of the margin erosion.

While the company's loss was wider than in the year-ago period, it was down sharply from an even greater $12 million loss during the fourth quarter. Steven Kahn, ceo, said, "The first quarter showed a positive reversal in performance in all channels of business as compared to the preceding two quarters."

Most of this quarter's loss, said Kahn, stemmed from markdown pressure "as we completed our liquidation of under-performing holiday goods." And, based on current sales trends and a well-managed inventory position," Kahn said the retailer hopes to cut its operating loss during the second quarter. "Looking to the back half of 2003, we now believe that we are well positioned from an overhead, brand and product perspective to record an operating profit," he stated.

During the past nine months, Kahn reported, Delia's has reshuffled its management team, reoriented its product, restored its brand positioning and stabilized its balance sheet. "We believe that our turnaround is well on track. While the environment remains challenging, Delia's fundamentals are improving."

Delia's Corp.

Qtr. 5/4 (x000) 2003 2002 % chg
( ): Denotes loss
a: First-quarter results include finance charges and transaction fees of $1.2 million. The same period a year ago included a $15.4 million credit stemming from a change in accounting. Excluding the credit, the retailer posted a loss of $4.3 million in the 2002 first quarter.
Sales $29,453 $28,770 2.4
Oper. income (EBIT) (7,169) (4,257)
Net income (7,307)a 11,114a
Per share (diluted) (0.16) 0.25
Average gross margin 41.7% 46.3%
SG&A expenses 61.8% 61.0%

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