LNT looks to improve on 2Q

Don Hogsett, July 22, 2002

Helped by rising sales and deep cuts in interest expense, second-quarter pre-tax profits before one-time items shot up by 21.9 percent at home furnishings superstore Linens 'n Things, to $9.0 million from $7.4 million last year.

Net after-tax income more than doubled, rising by 164.9 percent, to $5.6 million from $2.1 million last year. But skewing the year-over-year comparison, last year's bottom line was weighed down by a $4 million one-time charge to settle a class-action lawsuit brought by some California employees seeking overtime and accrued vacation pay.

Leveling the playing field, and gauging the retailer's operating performance — unaffected by debt reduction or one-time items — operating profits climbed by 13.9 percent, to $9.8 million from $8.6 million last year, generating an operating margin of 2.1 percent, down slightly from 2.2 percent the prior year.

Sales at the big-box retailer climbed by 19.1 percent, to $461.9 million from $387.7 million last year, driven by the continued rollout of new stores. Same-store sales grew at a more modest rate of 3.6 percent. Fueling the second-quarter sales gain, Linens 'n Things opened 21 new stores during the period while closing two others, for a net 19 new stores. That's up sharply from the 11 net new stores opened during the same period a year ago.

Driving the profit improvement during the second quarter, in addition to stronger sales, was a deep cut in interest expense, as the company used proceeds from the sale of new stock to pay down long-term debt. Interest costs were reduced by more than a third, dropping 36.6 percent, to $753,000 from $1.2 million, generating a cash savings of $434,000.

Average gross margin and operating costs both were unchanged during the period. Average gross margin held steady at 41.8 percent, while gross margin dollars, boosted by stronger sales, rose by 18.9 percent, to $192.9 million from $161.2 million. Operating costs were unchanged at 39.6 percent of sales.

Inventories remained well balanced, rising slightly ahead of the rate of sales, climbing by 20.0 percent vs. a 19.8 percent sales gain.

"We are pleased with the progress we have made in the first half of the year. However, we believe there is still opportunity to further improve our operating performance," said Norman Axelrod, chairman and ceo. (See related story, p. 2)

Looking ahead to the back half of the year, the retailer expects a same-store sales rise in the low- to mid- single-digits. For all of this year, sales are targeted to grow between 18 percent and 20 percent, which would push the retailer comfortably past the $2 billion benchmark for the first time.

Linens 'n Things

Qtr. 6/29 (x000) 2002 2001 % change
a-Earnings in the year-ago quarter and 26-week period were reduced by a $4 million charge to settle a class action lawsuit filed by some California store managers seeking overtime pay, and a separate claim made by some former employees for accrued vacation pay.
Sales $461,918 $387,715 19.1
Oper. income (EBIT) 9,790 8,599 13.9
Net income 5,586 2,109a 164.9
Per share (diluted) 0.13 0.05 160.0
Average gross margin 41.8% 41.8%
SG&A expenses 39.6% 39.6%
Six months
Sales 918,829 766,960 19.8
Oper. income (EBIT) 18,785 16,766 12.0
Net income 10,726 6,803a 57.7
Per share (diluted) 0.26 0.16 62.5
Average gross margin 40.7% 40.8%
SG&A expenses 38.7% 38.6%

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