NEW YORK — The WWD Composite Stock Index declined slightly, falling 0.2 percent last week as oil topped off at $61 a barrel on Friday.
The index fell to 1,195.58 from 1,198.53 in the prior week as the broader S&P 500 gained 0.04 percent to 1,234.18.
For most of the week, trading in the retail sector was light. But there were resonating market rumblings: Federated Department Stores Inc. dropped a bombshell, saying it would rename 330 doors of May Department Stores Co. to Macy’s while divesting 68 properties, beginning in 2006.
The closures are about 15 to 18 more than most retail analysts had expected, and the announcement also occurred much earlier than Wall Street anticipated.
About two weeks ago, when May and Federated shareholders approved the merger of the two companies, banking and investment sources had speculated that Federated would announce 45 to 50 store closures once the deal was wrapped up, which is scheduled to be sometime in the third quarter.
But in a research note from Dana E. Cohen, equity analyst at Banc of America Securities LLC, industry sources believed that management at the department store giant was looking to shutter at least 65 stores. The retailer, sources said, wanted to make an announcement sooner rather than later as a way to expedite the FTC review of the merger.
On Thursday, Federated did just that, which surprised some. In a note on Friday from Deborah Weinswig, equity analyst at Citigroup Smith Barney, the divesting of the stores was “more than the 50 we anticipated, as we had assumed [Federated] would operate more malls with duplicate locations,” Weinswig said. “Also, we were surprised by the number of Macy’s stores included in the company’s store divestiture plans.”
Weinswig said the closings represent about $2 billion in lost sales, but added that her 2006 pro forma earnings per share estimate of $6.10 “remains intact based on our belief that [Federated] will utilize aftertax proceeds of $709 billion from the divestitures for share repurchases in 2006.”
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Regarding the future of Lord & Taylor, Weinswig said “there is a possibility for the division to be sold in a single transaction, which we value to be in the range of $797 million to $937 million, aftertax.”
Shares of Federated closed down 0.49 percent on Friday to $75.87.
Meanwhile, there was increasing buzz last week that the back-to-school season is off to a strong start. Retailers had rolled out some b-t-s looks in mid-July, which is earlier than normal. The response from consumers was positive, and several analysts are now expecting second-quarter margins to be stronger as the b-t-s goods are selling at fuller price points.
Still, there are some heavy markdowns in the market right now. Mark Montagna, equity analyst at Wells Fargo Securities, said in a research note about Gap Inc. last week that there seems to be a “high level of promotional activity in stores and our belief that the new arrivals in both the women’s and the men’s divisions are subpar.”
Montagna expects Gap to post a 1 percent same-store sales gain for July. He maintains a “hold” rating on the stock.
Speaking of soft comps, Hot Topic Inc. said on Thursday that it was lowering its second-quarter earnings guidance as a result of weak comp-store sales. Same-store sales through the period ending July 27, decreased about 5 percent from the same period last year. As a result, the company currently estimates that net income for the second quarter 2005 will be approximately 2 to 4 cents per diluted share.
The City of Industry, Calif.-based retailer, which appeals to a more alternative teen crowd, has struggled to find its footing this year in the midst of strong, feminine fashion trends — such as bohemian and preppy looks — that have overshadowed its darker, more rock- and punk-inspired fashions. In June, the company that 18 months ago was red hot and reporting double-digit comp-store sales gains, announced that comp-store sales though June 20 had decreased 4 percent from the same period last year. Its strong suit, however, has always been its music-related categories, which chief executive office Betsy McLaughlin said in a statement, continue to be a ray of light in otherwise lackluster sales.
“Our Hot Topic sales trends in July have been disappointing,” said McLaughlin. “While the music-related categories have remained strong and are producing positive comps, the comp-sales trends in men’s apparel, women’s apparel and accessories have remained negative and are below our expectations.”
McLaughlin also said that even with an increase in promotional activity this year, the company was still seeing decreases in early b-t-s markets, and a more accurate gauge of b-t-s sales would not be apparent until the end of August.
“Our previous sales and earnings guidance for the second quarter assumed continued strength in music along with improvement in two of the three negative comp categories,” McLaughlin said. “Given the early results, we are revising our earnings guidance for the quarter to reflect current trends. We will not have a true understanding of our back-to-school business until late August.”
Hot Topic currently operates 628 Hot Topic stores across the U.S. and Puerto Rico and 100 Torrid stores.
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