First quarter environment deflates LNT

Don Hogsett, April 28, 2003

Hammered by weak sales, a war with Iraq and a late Easter — and on top of that paying a $1.3 million severance package to departed president Steven Silverstein — first-quarter profits at Linens 'n Things tumbled by 59.6 percent, to $2.1 million from $5.1 million last year.

Pummeled by bad weather, the CNN effect and broadly sluggish consumer spending, sales limped ahead just 5.2 percent, despite continued expansion, to $480.5 million from $456.9 million during the same period a year ago. The crucial gauge of same-store sales fell by 3.2 percent.

Summing up a punishing first quarter, Norman Axelrod, chairman and ceo, blamed a fistful of problems over which the retailer had little or no control.

"Inclement weather significantly impacted sales in February, particularly during Presidents' Day weekend, while the economy, weak consumer confidence and the official start of war in Iraq have continued to depress consumer traffic. In addition, the timing of the Easter selling season will occur in the second quarter of 2003 compared to the first quarter of 2002."

Providing some relief to the bottom line, the superstore chain bulked up its average gross margin by 140 basis points, or 1.4 percentage points, to 41.1 percent from 39.7 percent a year ago.

But hard hit by falling sales — and then the $1.3 million severance package to Silverstein — operating costs climbed sharply higher, by 270 basis points, or 2.7 percentage points, to 40.4 percent of sales from 37.7 percent the prior year. But even without the $1.3 million severance package, costs would have amounted to 40.1 percent of sales, up from 37.7 percent last year.

Weighed down by the weak sales and sharply higher costs, operating profits fell by 61.8 percent, to $3.4 million from $9.0 million the preceding year.

With sales held in check and merchandise stuck on the shelves, inventories shot up by 24.8 percent, running sharply ahead of the 5.2 percent increase in sales.

"We are committed to those initiatives that are aimed at improving our guest shopping experience," Axelrod said. "These initiatives are on track and remain a priority for 2003."

Helping to drive overall sales higher, despite the shortfall in same-store sales, Linens 'n Things opened 16 new stores during the quarter, while closing seven others, increasing total square footage to 13.9 million. Last year, expanding at a somewhat slower pace, the chain opened seven new stores, while closing two. Linens 'n Things plans to open about 55 new stores this year in the United States and Canada.

Linens 'n Things

Qtr. 4/05 (x000) 2003 2002 % chg
a-Operating profits, net income and earnings per share include a one-time charge of about three cents per fully diluted share, or about $1.34 million, in connection with the departure of former president Steven Silverstein, who left the home furnishings chain earlier this year.
Sales $480,471 $456,911 5.2
Oper. income (EBIT) 3,440a 8,995a -61.8
Net income 2,078a 5,140a -59.6
Per share (diluted) 0.05a 0.12a
Average gross margin 41.1% 39.7%
SG&A expenses 40.4% 37.7%

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