Charge Accentuates LNT Loss

Union, N.J. — With sales stalled by slower traffic, hurricanes in the South and a soft back-to-school season, and earnings under pressure from a change in how the retailer accounts for vendor allowances, third-quarter profits at Linens 'n Things tumbled 17.9 percent, to $17.2 million from $21 million last year.

Skewing the profit picture for the superstore retailer was a $2.3 million non-cash charge stemming from its vendor allowance accounting. Excluding the effect of the non-cash accounting charge, earnings declined at a more moderate pace of 6.7 percent, to $19.6 million.

The one-time accounting charge underlines the increasingly important contribution that vendor allowances make to a retailer's bottom line, bringing in about $2.3 million during the third quarter, down considerably from $4.1 million during the second quarter.

Overall sales at Linens 'n Things improved 8.5 percent, to $654.2 million from $602.8 million last year, the growth fueled by continued rapid expansion. But the crucial gauge of same-store sales edged down 0.5 percent.

“Although the third quarter began healthy, guest traffic trends declined as the quarter progressed,” said Norman Axelrod, chairman and CEO. “Looking at the fourth quarter, we have intensified our efforts in both marketing and merchandising in an effort to drive guest traffic.” Going forward, Axelrod said in a conference call with investors, “We remain cautious with regard to the retailing environment.”

Bill Giles, chief financial officer, told analysts and investors he expects same-store sales during the all-important Christmas quarter to improve in the “low single digits.” Giles said he feels “comfortable” with current Wall Street forecasts of earnings per share in the range of 99 cents to $1.02, roughly flat with last year's performance.

Weighing in on third quarter sales results, newly named president and chief operating officer Jack Moore, who joined the retailer from Kohl's, said in the conference call that the back-to-school promotion, the quarter's big event, got off to a strong start, but then momentum flagged.

Focusing on the soft home business, Moore said basics were stronger than fashion goods. And on the other side of the fence, he said the retailer saw “strength in functional housewares.” In general terms, Moore added, the “things” part of the business has been a stronger performer than soft home so far this year.

Additionally, said Moore, the store's September clearance event was softer than last year, leading to accelerated markdowns.

The change in accounting for vendor allowances not only hurt the retailer's bottom line during the third quarter, at least on paper, it also had a skewing effect on a number of the company's operational metrics. For example, hampered by the non-cash charge, operating profits declined 18.4 percent, to $27.9 million from $34.2 million last year. But excluding the non-cash accounting item, operating profits declined at a more modest pace of 7.3 percent, to $31.7 million.

Hit by the impact of the accounting charge, operating costs jumped 220 basis points, or 2.2 percentage points, to 36.7 percent of sales from 34.5 percent a year ago. But excluding the accounting item, costs rose at a far slower pace of 50 basis points, or one half of a percentage point.

The accounting change will continue to dog Linens 'n Things results through the fourth quarter, but will expire at the end of the fiscal year, putting results in 2005 on an undistorted, apples-to-apples basis.