Analysts like the look of new LNT

CLIFTON, NJ — With its fourth quarter results set to be released this Wednesday, Linens 'n Things already had several analysts piping up a positive buzz, as seen in last week's stock spike.

Analysts point to several of LNT's initiatives for the good news, including improved in-stocks and service, and the program to delegate more sku responsibility to the store level.

LNT's management now "has a fire in its belly," said Aram Rubinson, Banc of America Securities, in a research note. "We are seeing change in organizational duties, in senior management and in the vision for the company overall. LNT is in the early stages of retooling, but we think it is likely to give the investment case more legs."

Rubinson added that the retailer now has a "much more intelligent definition of in-stocks," measuring by store, category and sku, where previously it was a single national figure.

"For the first time we can recall, LNT has taken a proactive and aggressive approach toward managing its business. That alone is worth noting," said Rubinson.

LNT also stands to benefit from industry consolidation, including the closing of 326 Kmart stores, said Alan Rifkin, Lehman Brothers, in a research note. The company's momentum will continue through January and February, based on easier comparisons given its weak in-stocks last year, he added. Its gross margin will continue to gain from "higher markons stemming from a number of merchandise initiatives (including more proprietary products and a higher mix of higher margin goods), as well as reduced freight rates due to the developing distribution network."

CIBC World Markets said that increased overseas sourcing and higher penetration of private label merchandise will drive gross margins, in addition to lower markdowns. Its 1 percent comp sales increase estimate could prove conservative by 1 to 2 percent, said Peter Benedict in a research note, as in-stocks improved and the home furnishings category in general saw strength.

Others agreed that LNT has improved, but that it still has work ahead.

"They're coming off very easy comparisons," said Brian Postol, AG Edwards. In addition, "they've picked low-hanging fruit … They've pinpointed their better stores to work with, and we'll see if they see the same degree of improvement in the next level of stores."

He did say that the retailer's performance has been enhanced, however, and "it looks like they have a handle on" its in-stocks, keeping inventory content behind core product.

"But at the end of the day, they are still trailing behind their biggest rival — Bed Bath & Beyond," he said.

Michael Baker, Deutsche Bank Securities, added that LNT's "business is certainly getting better" and that its initiatives will pay dividends in the fourth quarter. Adding people to the sales floor and other initiatives should "drive better results for this quarter."

Giving store managers more responsibility over skus is also positive, though "it's still early," Baker said.

Though the same concept as Bed Bath & Beyond's program, Baker said that the two programs are structured differently. LNT's store managers still receive an inventory plan from the corporate offices, but they can make adjustments on the fast and slow sellers, he said. About one-quarter of the store base participates in the program.