ShopKo ups 2Q profits with help from Pamida

Don Hogsett, September 2, 2002

Lifted by stronger margins, lower interest expense and a profit recovery at its Pamida unit, second-quarter profits before one-time items at ShopKo Stores Inc. improved by 84.7 percent, to $7.2 million from $3.9 million last year.

Sales at the heartland retailer slipped by 1.0 percent, to $783.4 million from $791.2 million last year, with a small gain in the core ShopKo business offset by continued declines at the Pamida small-store format division. Same-store sales decreased by 0.6 percent.

Sales in the core ShopKo stores inched up by 1.1 percent, to $583.3 million from $577.1 million last year. But sales at the foundering Pamida unit fell by 6.5 percent, to $200.1 million from $214.0 million in the prior-year period.

Operating profits in the big ShopKo Stores division improved by 15.7 percent, to $28.6 million from $24.7 million a year ago. Helped by stronger margins, operating profits at the Pamida unit virtually doubled in the second quarter, rising to $3.7 million from $1.8 million last year.

In a big lift to the bottom line, average gross margin strengthened by 210 basis points, to 25.5 percent from 23.4 percent a year ago, with both the ShopKo and Pamida units showing strong margin improvement. Gross margin dollars grew by 7.9 percent, to $199.5 million from $184.9 million.

But offsetting much of the margin improvement, operating costs climbed higher by 200 basis points on the lower level of sales, rising to 20.1 percent of sales from 18.1 percent a year ago.

Despite the softer sales and higher operating costs, ShopKo leveraged the stronger margins into a jump in operating profits, up 15.1 percent to $24.7 million from $21.5 million the preceding year. The retailer's operating margin — operating profits measured as a percentage of sales — increased to 3.2 percent from 2.7 percent in the same quarter a year ago.

In a strong assist to the bottom line, ShopKo cut its interest expense by 25.5 percent, to $12.8 million from $17.2 million last year, a pre-tax cash savings of $4.4 million.

Keeping its stockpiles under control, ShopKo whittled its inventories down by 8.7 percent, or $58.1 million, to $611.1 million from $669.3 million last year.

ShopKo Stores Inc.

Qtr. 8/3 (x000) (x000) 2002 2001 % change
a-Six-month results include a $186.1 million charge stemming from a change in accounting. Excluding the accounting item, the retailer recorded a six-month profit of $7.7 million, recovering from a prior-year loss of $1.5 million. Also included in six-month results is a $5.0 million provision for income taxes, compared with a $969,000 tax credit in the prior-year period.
Sales $783,369 $791,181 -1.0
Oper. income (EBIT) 24,726 21,476 15.1
Net income 7,205 2,594 177.8
Per share (diluted) 0.25 0.09 177.8
Average gross margin 25.5% 23.4%
SG&A expenses 20.1% 18.1%
Six months
Sales 1,512,133 1,573,005 -3.9
Oper. income (EBIT) 38,592 32,694 18.0
Net income (178,375)a (1,450)a
Per share (diluted) (6.10) 0.05)
Average gross margin 25.4% 22.9%
SG&A expenses 20.5% 18.2%

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