Merry-Go-Round Enterprises, the Joppa-based clothing store chain, took a kick in the pants in the fourth quarter as recession and an abrupt shift in fashion sent it to a $2.5 million loss, the company said today.
The loss, which equals 5 cents a share, was largely the result of a markdown of $10.5 million, or 20 cents a share, on slow-moving inventory. The grim quarterly report came as no surprise, but it was on the low end of analysts' projections.
Merry-Go-Round's results for the quarter ended Feb. 1 mark a stark contrast with last year's fourth quarter, when the company earned $13,966,000, or $0.27 a share, and the company was one of the stars of the retail industry. The poor fourth quarter dragged annual earnings down to 43 cents a share, down 69.8 percent from the 73 cents the company earned in fiscal 1991.
The company's loss came despite overall sales of $250 million, a 13.3 percent increase from the year-ago quarter, but that gain comes entirely from the firm's aggressive expansion to more than 825 stores nationwide.
The Maryland company's fourth-quarter sales at stores that were open a year ago were down 4 percent compared with the previous year, when Merry-Go-Round was one of the few major chains to post strong gains in spite of the Persian Gulf War.
The decline stands in stark contrast to Merry-Go-Round's glory days of 1990, when it was posting such mind-boggling comparable-store gains as 54 percent in April and 42 percent in May.
Sales gains continued to be healthy until last autumn, when the bottom fell out.
"Basically the casual pant died," said Merry-Go-Round chief financial officer Isaac Kaufman.
Now the chain is dumping an estimated 200,000 of the pants, originally priced about $35 but now selling for $9.99 to $14.99.
"We got a little too aggressive in our inventory projections," Mr. Kaufman said.
He added that the impact of the market's shift away from casual pants was magnified because "pants drive our business."
That is, a shopper who buys a pair of pants is likely to buy several shirts to go with them.
As Merry-Go-Round's young shoppers made an alarmingly quick turn toward "basic" clothing last autumn, its customers in effect fell into The Gap, a denim-oriented clothier that prospered as Merry-Go-Round's sales fell.
Despite the fall from the heights, most analysts agree that Merry-Go-Round is a well-run company that has just hit a rough patch. Its managers, they say, are doing the right thing by writing down inventory and moving on.
"They don't put their heads in the sand," said Paul Bienstock, an analyst with Moran & Associates in Greenwich, Conn.
"They really faced up to the problem."
Harry Ikenson, an analyst with S.G. Warburg & Co., said the writedown was "higher than expectations."
Mr. Kaufman said Merry-Go-Round expects the first half of this year to be be "very difficult," but he foresees an improvement in the second half as the economy rebounds and year-to-year comparisons become easier.
In general, analysts agree. Budd Bugatch, research director at Ferris Baker Watts in Baltimore, is projecting a turnaround in this fiscal year's third quarter and almost a 10 percent comparable sales gain in the fourth quarter.
Mr. Bugatch believes the market has overreacted to Merry-Go-Round's recent difficulties, creating a buying opportunity in the company's stock, which closed at $10.75 yesterday, down from a peak of $22 last summer.
Mr. Bugatch, in a Feb. 13 report, said the company is inherently strong and is improving. He cited the company's "highly developed, though unorthodox, corporate culture," a highly automated distribution system and relatively light debt load.
Robert F. Buchanan, an influential retail analyst with Alex. Brown & Sons in Baltimore, is taking a more cautious view.
Mr. Buchanan has taken a "neutral" position on the company's stock, but over the long term, he wrote, "Merry-Go-Round will bounce back . . . and take advantage of its leadership position in trendy young men's apparel retailing."
In the short term, however, Merry-Go-Round's fortunes depend heavily on its ability to spot the next fashion trend and jump on it -- a challenge that plays into the company's strengths.
"The company tests new items consistently and can normally spot developing fashion trends rapidly," Mr. Bugatch wrote.
For now, said Mr. Bienstock, "there's not a lot of fashion out from the manufacturers."
But nobody believes young shoppers' devotion to plain denim will last long if an economic recovery takes hold.
"We see some promising things out there that we're testing," said Mr. Kaufman, "but it's too early to tell.