ShopKo Recovers From Prior-Year Loss

Helped by stronger margins and tight inventory controls, which more than offset lower sales, heartland retailer ShopKo Stores Inc. bounced back with a modest first quarter profit of $636,000, recovering from a prior-year loss of $2.4 million.

But the turnaround stemmed entirely from improving operations, and sales remained weak, sliding 4.3 percent, to $703.3 million from $735 million last year. Same-store sales dropped off 4.8 percent.

Sales in the core ShopKo Stores unit fell 6.3 percent, to $517.9 million from $552.8 million during the same period a year ago.

Same-store sales tumbled 6.5 percent.

The Pamida small-store format recorded a sales gain of 1.7 percent, to $185.4 million from $182.2 million, while same-store sales edged up 0.4 percent.

In a big lift to the bottom line, average gross margin widened 170 basis points, or 1.7 percentage points, to 26.7 percent from 25 percent a year ago. And even with sales falling off, gross margin dollars rose 0.9 percent, to $188 million from $183.8 million. The retailer said the gross margin improvement stemmed from a reduction in promotional activity and better managed clearance inventory markdowns.

Providing an even bigger boost to the bottom line, stockpiles were sharply reduced, 7.3 percent, to $597.3 million from $644.2 million, yielding a savings of $46.9 million.

Generating a further savings of $1.2 million, ShopKo whittled interest expense 14.1 percent, to $7.4 million from $8.6 million, on a lower level of debt.

Debt declined $102.7 million from the year-before level.

More savings came from reduced capital spending, which was pared $7.6 million, to $2.8 million from $10.4 million during the prior-year period.

But unable to leverage expenses as sales fell off, operating costs climbed, rising 120 basis points, or 1.2 percentage points, to 23.1 percent of sales from 21.9 percent the year before.

Measured in absolute dollars, costs rose modestly, 0.9 percent, to $183.1 million from $182.2 million.

ShopKo Stores Inc.

Qtr. 4/30 (x000) 2005 2004 % change
a. First quarter results include an income tax provision of $397,000 versus a prior-year income tax benefit of $1.5 million.
Sales $703,259 $735,033 -4.3
Oper. Income (EBIT) 8,394 4,669 79.8
Net income 636a (2,379)a
Per share (diluted) 0.02 (0.08)
Average gross margin 26.7% 25.0%
SG&A expenses 23.1% 21.9%

ShopKo by Segment

2005 2004 % change
ShopKo Stores
Sales $517,851 $552,799 -6.3
Same-store sales -6.5
Average gross margin 27.0% 24.9%
SG&A expenses 21.5% 20.1%
Operating income 15,680 13,845 13.3
Pamida Stores
Sales 185,408 182,234 1.7
Same-store sales 0.4
Average gross margin 26.0% 25.4%
SG&A expenses 23.4% 23.6%
Operating income 21 (2,348)

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