LNT's Internal Demons

Specialty retailer Linens ’n Things is deep in its mission to obtain new financial backing and in the words of chairman and ceo Robert DiNicola, “exploring several alternatives in our efforts to recapitalize the company.”

DiNicola told the Wall Street Journal yesterday, “Our capital structure was never designed to withstand this kind of pummeling from the outside world.”

But there is some fierce pummeling going on from the inside of this retailer.

Here’s a look at two essential retail metrics inside the $2.8 billion LNT. Let’s compare the metrics from 2005 – the final year prior to the takeover by Apollo Management – to 2007, the most recent full year of operation by Apollo.

Gross profit as % of net sales:

2005: 40.8%     2007: 37.5%

SG&A as % of net sales:

2005: 38.5%     2007: 43.7%

The gap between gross profit and overhead has switched in two years, from positive 330 basis points, to negative 520 basis points – a swing of 850 basis points.

That is one nasty swing.

Linens ’n Things was not exactly an expanding, profit-gushing retail machine in 2005 to begin with. But it did turn a net profit of $36 million that year, after a net profit of $60 million in 2004 and $73 million in 2003.

How about another kind of comparison: Bed Bath & Beyond has been squeezed by exactly the same “pummeling from the outside world” as LNT. In 2005, BBB recorded a net profit of $573 million. BBB’s net profit in the harsh environment of 2007: $563 million.

More to the point, BBB in 2007 had a healthy gap between its 41.5% gross profit and its 29.6% overhead rate, a positive gap of 1,190 basis points. That gap had shrunk from 1,510 basis points in 2005 – a drop of 320 basis points. The LNT 850-point shrinkage has been more than twice as deep.

If Linens ’n Things is going to make a convincing run for daylight, its internal retail fundamentals need some major overhauling.