Strong sales, margins lift LNT earnings

Don Hogsett, Staff Staff, October 21, 2002

With U.S. consumers still buying homes and fixing them up, third-quarter profits at superstore retailer Linens 'n Things shot up by 24.3 percent, to $18.3 million from $14.7 million last year.

Earnings at the big-box specialist were buoyed by stronger sales, wider margins and deep cuts in interest expense.

Despite a widespread slowdown for most American retailers, sales at Linens 'n Things jumped up by 15.7 percent, to $542.6 million from $468.9 million last year, as same-store sales gained strength, rebounding from earlier weakness, and the chain continued to open up new stores at a rapid pace. Same-store sales grew by 1.8 percent during the third quarter, recovering from a steep drop of 4.8 percent in the same period a year ago.

"Given the challenging retail environment, we are pleased to report a net earnings increase of 24 percent for the third quarter," said Norman Axelrod, chairman and ceo. "We remain optimistic about our business and believe that the initiatives we have in place will enable us to achieve our fourth-quarter earnings target."

In a big lift to the bottom line, Linens 'n Things paid down debt and slashed its interest expense by almost two-thirds, or 60.4 percent, to $414,000 from $1.0 million last year, generating a cash savings of $631,000. Using proceeds from the sale of a new issue of stock, the retailer whittled down its short-term borrowings by 79.0 percent, to $16.1 million from $76.6 million last year.

In addition to the stronger sales and lower borrowing costs, the retailer widened its margins during the period, offsetting somewhat higher costs. Average gross margin expanded by 40 basis points, to 41.0 percent from 40.6 percent the preceding year. At the same time, costs climbed modestly higher, rising by 20 basis points, to 35.5 percent of sales from 35.3 percent a year ago.

Lifted by the stronger sales and bulked-up margins, operating profits for the home furnishings specialist rose by 20.7 percent, to $30.0 million from $24.8 million last year. The retailer's operating margin — operating profits measured as a percentage of sales — improved to 5.5 percent from 5.3 percent a year ago.

At $0.41 a share, earnings came in on target, and Wall Street rewarded the retailer by pushing up its stock by $0.15 a share, or 0.8 percent, to $19.35 in the hours after the news came out last Wednesday.

And once the earnings news and the fourth-quarter outlook had sunk in a day later, Wall Street and investors liked it even better, driving Linens 'n Things shares sharply higher, by 18.4 percent, or $3.55 a share, to $22.90 a share.

Looking ahead to the all-important Christmas quarter, the retailer said it expects same-store sales to increase "in the low single-digit range." Further cheering investors, the company said it is "currently comfortable" with a consensus Wall Street forecast of fully diluted earnings of $0.88 per share. For the full year, overall sales are "currently being targeted to grow between 18 percent and 20 percent," pushing the chain past another major milestone, to $2.2 billion.

For all of 2003, sales are forecast to grow between 13 percent and 16 percent, to about $2.5 billion. Diluted earnings per share are targeted at $1.75 to $1.87, "consistent with current analysts' consensus estimates." Same-store sales are expected to grow "in the low to mid single-digits for the year."

Laying the groundwork for future growth, capital spending is set at $80 million to $85 million, and the company expects to open 55 to 60 new stores.

Linens 'n Things

Qtr.9/28 (x000) 2002 2001 % change
a-Earnings in the year-ago period include a $4 million charge stemming from the settlement of a lawsuit.
Sales $542,565 $468,944 15.7
Oper. income (EBIT) 29,981 24,836 20.7
Net income 18,280 14,705 24.3
Per share (diluted) 0.41 0.36 13.9
Average gross margin 41.0% 40.6%
SG&A expenses 35.5% 35.3%
Nine months
Sales $1,461,394 $1,235,904 18.2
Oper. income (EBIT) 48,766 41,602 17.2
Net income 29,006 21,507a 34.9
Per share (diluted) 0.68 0.52 30.8
Average gross margin 40.8% 40.7%
SG&A expenses 37.5% 37.3%

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