LNT: Surging sales drive Q3 profits higher

Heath E. Combs, Don Hogsett, October 27, 2003

Clifton, NJ — Stretching out a recent earnings recovery and bounding back from earlier declines, Linens 'n Things parlayed a double-digit increase in sales into a 14.8 percent boost in third-quarter profits, which jumped up to $21.0 million from $18.3 million last year.

Sales at the superstore retailer advanced by 11.1 percent, to $602.8 million from $542.6 million the prior year. The acid-test gauge of same-store sales moved up by 1.8 percent.

Underlining the extent of the profit rebound, Linens 'n Things earned more than twice as much money during the third quarter as it had during the two previous quarters combined — $21.0 million vs. $7.8 million. And the boost in same-store sales during the period marks an improvement from the 1.5 percent drop recorded during the first six months of the year.

Wall Street was quick to take notice of the sharp recovery and sent the retailer's stock up more than eight percent mid-day, Oct. 22, the first trading day after the news was released. In unusually heavy trading on the New York Stock Exchange, the stock climbed 8.4 percent, to $27.90 a share from $25.75 the day before — a jump made all the more remarkable since it happened on a day when the Dow Jones Industrial Average tumbled at a triple-digit pace.

"We are encouraged by our results and believe the progress we have made on our initiatives positions us well for the fourth quarter," said Norman Axelrod, chairman and ceo.

Virtually all of the earnings gain during the third quarter derived from the increase in sales, as margins and costs both held relatively steady.

Average gross margin improved modestly, inching up by 10 basis points, to 41.1 percent from 41.0 percent a year ago. Fueled almost entirely by the gain in sales, gross margin dollars increased by 11.3 percent, to $248.0 million from $222.7 million a year ago. Operating costs were unchanged at 35.5 percent of sales.

Providing a modest lift to the bottom line, in addition to the stronger sales, the retailer whittled down its already low interest expense by 43.0 percent, to $236,000 from $414,000 the preceding year, generating a cash savings of $178,000.

With Linens 'n Things keeping a watchful eye on stockpiles, inventories rose at a slower pace than sales, moving up by 9.9 percent, to $756.3 million from $679.1 million, compared with the 11.1 percent rate of growth in sales.

During the third quarter, LNT opened 21 new stores and closed one for a net gain of 20. That's a sharply faster pace of growth than last year, when 14 stores were opened, and one closed, during the comparable quarter. Year-to-date, the chain has opened 53 stores while closing nine. That's up from 42 stores opened and five closed during the same period a year ago.

Looking ahead to the all-important Christmas quarter, the retailer said it's targeting sales growth between eight and ten percent, with same-store sales growing in the low to mid single-digits. Based on that sales plan, the retailer said it's comfortable with current Wall Street earnings forecasts that range between $0.99 and $1.04 per share on a fully diluted basis.

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