Linens 'n Things Chips Away at Losses

Don Hogsett, May 21, 2007

With sales still sliding, and spending far more than it's able to make selling the goods it stocks on its shelves, Linens 'n Things recorded a first-quarter loss of $58.2 million, making some headway after a prior-year loss of $65.5 million.

Sales at the big-box home fashions specialist, acquired last year and taken private by Apollo Management, slipped by 3.6%, to $571.6 million from $592.8 million last year, an improvement over even greater declines put up before the company was sold. The acid-test measure of same-store sales declined by 5.2%, again an improvement over prior results.

"While first-quarter results are disappointing, we continue to remain committed to our long-term turnaround strategy," said Robert DiNicola, chairman and ceo. "We believe that by instituting the proper merchandising and marketing strategies we will generate improved customer traffic and better product sell-through, which will result in an increase in sales productivity."

Operating costs, while improving, still sharply outpaced the money the company made selling its goods. The company spent $282.9 million on white-collar salaries, advertising and administrative costs — well in excess of the $213.5 million it recorded in gross profit, the money it made after paying for the goods, warehousing them, and getting them onto its shelves.

Operating costs, when measured as a percentage of declining sales, improved by 330 basis points, or 3.3 percentage points, to 49.5% from 52.8% during the same period a year ago. Measured in absolute dollars, costs were whittled down at an almost double-digit pace, by 9.6%, to $282.9 million from $313.0 million last year, generating a cash savings of $30.0 million.

But partially offsetting the lower costs, and taking a bite out of the bottom line, average gross margin thinned slightly, contracting by 20 basis points, or two-tenths of a percentage point, to 37.4% from 37.6%. Caught between the falling sales and narrowed margins, gross margin dollars declined by 4.3%, to $213.5 million from $223.1 million last year, a $9.6 million shortfall.

Still, with operating costs down considerably, the retailer put up a sharply narrowed operating loss of $69.5 million, more than 20% beneath a year-ago operating loss of $89.9 million.

Turning to the balance sheet, inventories were held in check, rising a modest 0.2%, to $829.6 million from $827.8 million the preceding year. But cash on hand was reduced by almost half, or 43.0%, to $8.6 million from $15.0 million during the same period last year.

Providing LNT with considerably more flexibility in the form of greater borrowing power, the retailer said it has obtained a $100 million increase in its credit facility, increasing the maximum available to $700 million from $600 million. The company said the increase should be effective before the end of the second quarter.

The retailer said it has a revolver balance of $192.6 million, cash on hand of $8.6 million, and $254 million available under its revolving credit facility.

During the opening quarter, LNT opened two stores, while shutting none, increasing square footage by about 3.8%, to 19.0 million. With store openings scaled back, the retailer slashed its capital spending virtually in half, by 47.4%, to $11.6 million from $22.0 million last year, yielding a savings $10.4 million.

Linens 'n Things (Linens Holding Co.)

Qtr. 3/31 (x000) 2007 2006 % change
a. First-quarter results include interest income of $155,000, compared with $754,000 during the same period a year ago; interest expense of $24.2 million, compared with $10.0 million last year; miscellaneous income of $873,000, compared with $1.1 million last year; and an income tax benefit of $34.4 million. vs. a year-before tax benefit of $32.6 million.
b. No longer has any shares outstanding after being taken private, but because of the level of public debt the company is still required to publicly report financial results.
Sales $571,560 592,816 -3.6%
Oper. Income (EBIT) (69,452) (89,911)
Net income (58,174)a (65,476)a
Per share (diluted) N/A b N/A b
Average gross margin 37.4% 37.6%
SG&A expenses 49.5% 52.8%

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