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LNT Soft Home Slide Yields Red Ink

Weighed down by debt and interest expense following its buyout by a private investment group, then squeezed by severely eroding margins and sharply higher costs — compounded by a falloff in higher-margin textiles sales — Linens Holding Co., the parent of Linens 'n Things, recorded a fourth-quarter loss of $22.5 million, a sharp reversal of fortune from a year-before profit of $45.0 million. For all of last year, the struggling specialty retailer rang up a daunting loss of $154.4 million, compared with a year-before profit of $36.0 million.

Sales in the quarter edged up 3.9%, to $956.8 million from $921.2 million a year ago, helped by new store openings. The same-store sales dipped slightly, by 0.2%, an improvement over a 2.3% decline during the year-before holiday season.

The sales picture was mixed during the Christmas season (Nov. 24-Dec. 30), the retailer said, as sales shifted hard toward the 'things' side of the business. Tabletop and housewares put up an impressive same-store gain of 15.3% during the holiday period — suggesting a double-digit slide in soft home comps. The 571-store chain said hardlines gains were "offset by weaker sell-through in the higher-margin textiles category, where the assortments require longer lead times and are still in the process of being repositioned."

For all of 2006, sales rose by 4.6%, to $2.8 billion from $2.7 billion, while same-store sales slipped by 0.7%.

Tilting the retailer into the loss column during the closing quarter, interest expense jumped up more than 15-fold, to $24.4 million from $1.6 million. At the same time, margins eroded as textiles sales shrank, narrowing by 320 basis points, or 3.2 percentage points, to 36.7% from 39.9% a year ago. Gross margin dollars thinned by 4.6%, or $16.9 million, to $350.8 million.

Costs also raced up by 340 basis points, or 3.4 percentage points, when measured as a percentage of sales, to 34.9% from 31.5%. In absolute dollars, the damage done by rising costs is even more obvious, with operating expenses jumping up 15.3%, to $334.3 million from $290.1 million last year, an increase of $44.2 million.

Linens Holding Co. (Linens 'n Things)

Qtr. 12/30 (x000) 2006 2005 % change
a. Fourth-quarter results include $28.0 million in fixed asset impairment charges vs. $4.1 million during the same period a year ago; $3.1 million in identifiable intangible asset impairment charges; $53,000 in interest income, down 75.5% from $216,000 last year; and an income tax benefit of $16.5 million vs. a year-ago tax provision of $27.2 million.
b. 12-month results include $28.0 million in fixed asset impairment charges vs. $4.1 million last year; $3.1 million in identifiable intangible asset impairment charges; $858,000 in interest income, -4.0% from last year; and a $66.9 million income tax benefit vs. a year-before tax provision of $21.9 million.
c. Earnings per share are not applicable since Linens Holding Co. is not a publicly held company. But because of its level of publicly held debt, it is still required to report financial results to the federal Securities and Exchange Commission.
Sales $956,782 $921,211 3.9
Oper. income (EBIT) 16,460 77,599 -78.8
Net income (22,450)a 44,964a
Per share (diluted) b b
Average gross margin 36.7% 39.9%
SG&A expenses 34.9% 31.5%
12 months
Sales $2,819,336 $2,694,742 4.6
Oper. income (EBIT) (132,511) 65,886
Net income (106,533)c 35,982c
Per share (diluted) b b
Average gross margin 38.4% 40.8%
SG&A expenses 43.1% 38.4%


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