ShopKo posts small profit

GREEN BAY, WI — Whittling down its losses at Pamida Stores, its ailing small-store division, and at the same time reducing debt and slashing its borrowing costs, ShopKo Stores Inc. recorded a modest profit of $472,000, recovering from a year-before loss of $4.1 million.

Helping to fuel the break-even quarter, the long-troubled Pamida unit pared its losses by more than two-thirds, to $2.7 million from a year-ago deficit of $8.4 million. The larger ShopKo Stores business recorded an operating profit of $25.1 million, up 0.7 percent from $24.9 million last year.

Sales at the heartland discounter fell by 6.8 percent, to $728.8 million from $781.8 million, due entirely to store closings during a sweeping overhaul of operations. Excluding the shuttered units, sales were virtually flat, edging up by 0.4 percent.

Average gross margin improved substantially, to 25.4 percent from 22.4 percent a year ago. Gross margin dollars rose by 5.7 percent, to $184.9 million from $175.0 million.

But given the lower level of sales generated by fewer stores in operation, operating costs climbed higher, to 21.0 percent of sales from 18.3 percent last year.

In a strong assist to the bottom line, the retailer slashed its interest expense by more than a fourth after paying down long-term debt. Interest costs were cut by 27.1 percent, to $13.1 million from $18.0 million last year, generating a cash savings of $4.9 million. Without the deep cuts in borrowing costs, the retailer would have generated a loss during the opening quarter.

In another prop to earnings, ShopKo substantially worked down its stockpiles. Inventories were reduced by 13.3 percent from year-ago levels, to $638.3 million from $736.2 million.

During the first quarter, the core ShopKo Stores increased sales by 2.9 percent, to $552.5 million from $537.0 million last year. Same-store sales advanced by 2.9 percent. Operating profits at ShopKo Stores were roughly flat, rising by 0.7 percent, to $25.1 million from $24.9 million.

Buoying operating profits, average gross margin at ShopKo Stores widened substantially, improving by 280 basis points, to 25.9 percent from 23.1 percent. Jeff Girard, interim ceo since the sudden resignation of Bill Podany earlier this year, said the wider margins stemmed from "the elimination of markdowns related to closed-store merchandise as reflected in last year's first quarter and improved merchandise margin rates."

Inventories at ShopKo Stores were pared by 9.2 percent.

The Pamida Stores unit recorded a sharply narrowed operating loss of $2.7 million, compared with the prior-year loss of $8.4 million. Pamida sales decreased by 6.6 percent, to $176.3 million from $188.8 million, a shortfall of $12.5 million. Same-store sales for Pamida declined by 5.5 percent.

"While we are pleased to see the Pamida division's substantially improved bottom-line performance, sales results are not yet at a satisfactory level," said Girard. "First-quarter sales were affected by a decline in advertised item sales and a disappointing performance in all seasonal categories."

On the plus side at Pamida, margins grew stronger by 370 basis points, to 23.8 percent from 20.1 percent a year ago, "due to improved merchandise margin rates and reduced distribution and shrink expenses," said Girard.