Heavy Costs Weigh Down Linens 'n Things

Clifton, N.J. — Hit with soaring interests costs and rising debt as its stockpiles swell at a double-digit pace in advance of the holiday season and squeezed by sharply higher costs, Linens 'n Things recorded a $27.4 million third-quarter loss, compared with a small $1.0 million profit a year ago when it began to regain its footing before being bought out by a private investor, Apollo Management.

Sales at the home fashions big-boxer rose by 4.6%, to $658.2 million from $629.3 million a year ago, helped by new store openings. In especially good news for the retailer, same-store sales began to stabilize after a long string of declines, inching up by 0.2%.

But while sales moved higher, the bottom line collapsed under the weight of higher interest costs, which soared to $23.6 million from just $1.2 million last year. At one point prior to the takeover by Apollo Management, Linens 'n Things had virtually erased its debt and interest expense, emulating its debt-free and highly profitable rival, Bed Bath & Beyond.

Now, short-term debt has increased almost eight-fold over the past 12 months, jumping by 653.1%, or $195.5 million, to a level of $225.9 million, due in part to a seasonal build-up in inventory as the retailer stocked its shelves for the all-important Christmas selling season.

Through the first nine months of the year, the retailer's loss widened by a factor of more than 15, to $132.0 million from $9.0 million last year. Nine-month sales grew by 5.0% to $1.9 billion from $1.8 billion.

As the retailer prepared for the holidays and deepened key assortments, inventories shot up by 15.8%, to $999.3 million from $863.1 million a year ago, an increase of more than $136 million, driving the higher debt and interest levels.

Acting as a further drag on the bottom line, operating costs climbed sharply higher, rising by 12.6%, $287.8 million from $255.5 million last year, an increase of more than $32 million. Measured as a percentage of sales, costs climbed higher by 310 basis points, or 3.1% percentage points, to 43.7% from 40.6% during the same period a year ago.

Average gross margin held relatively steady, slipping just 10 basis points, or one-tenth of a percentage point, to 41.0% from 41.1% the preceding year.

With operating costs surging, and margins roughly flat, the retailer generated an operating loss of $18.2 million, compared with last year's modest operating profit of $2.8 million.

Providing some relief to the bottom line was Uncle Sam, with an income-tax benefit of $14.4 million, compared with the $621,000 in federal taxes the retailer paid a year ago.

When everything was accounted for, Linens 'n Things had cash on hand of $11.4 million, down 69.7% from $37.6 million at the close of last year's third quarter; and down 92.8% from $158.2 million on Dec. 31, 2005, following the height of last year's holiday season.

"While we continue to reposition the business for longer-term success, we believe signs of improved fundamentals emerged with our third-quarter performance," said Robert DiNicola, chairman and ceo. "Comparable store sales have stabilized in a flat range for the past two quarters" after several straight quarterly declines.

"We will continue to focus our efforts to improve the depth of ownership of key products, create a cleaner and crisper store merchandise presentation, and enhance our marketing efficiencies as we head into the upcoming holiday selling season," DiNicola said.