Merry-Go-Round Enterprises, the Joppa-based clothing store chain, got a kick in the pants in the fourth quarter as recession and an abrupt shift in fashion sent it stumbling to a $2.5 million loss.
The loss, which equals 5 cents a share, was largely the result of a write-down of $10.5 million, or 20 cents a share, on
slow-moving inventory. Yesterday's 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 ending Feb. 1 come as stark contrast to last year's fourth quarter, when the company earned nearly $14 million, or 27 cents a share, and was one of the stars of the retail industry. The poor fourth quarter dragged annual earnings down nearly 40 percent, to $22.7 million, or 43 cents a share, from $37.5 million, or 73 cents a share, in fiscal 1991.
The company's loss in the past three months came despite overall sales of $250 million, a 13.3 percent increase from the year-ago quarter. 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 impressive comparable-store gains as 54 percent in April and 42 percent in May.
Sales gains and margins continued to be healthy until last autumn, when Merry-Go-Round's young shoppers made an alarmingly quick turn toward "basic" denim clothing and the bottom fell out of the "fashion-forward" pants market.
"Basically the casual pant died," said Isaac Kaufman, chief financial officer for Merry-Go-Round.
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.
Mr. Kaufman said Merry-Go-Round expects the first half of this year to be "very difficult," but he foresees an improvement in the second half as the economy rebounds.
Despite the fall from its previous heights, most analysts agree that Merry-Go-Round is a well-run company that has hit a rough patch. Its managers, they say, are doing the right thing by writing down inventory and moving on.
On its face, the earnings report seemed troublesome, but at least one analyst greeted it as "great news."
Budd Bugatch, research director at Ferris Baker Watts in Baltimore and a self-described contrarian, pointed to a dramatic reduction in the company's inventories -- $80 million during this year's fourth quarter compared with $40 million last year. He said it showed that while dollar volumes and margins were down, the number of units moving through the stores increased.
Mr. Bugatch, who said he is impressed with the company's "serious inventory discipline," agrees with Mr. Kaufman's prediction of a turnaround in the second half. The analyst is projecting modest comparable sales gains in this fiscal year's third quarter and almost a 10 percent increase 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. The company's shares closed up 12 1/2 cents at $10.875 yesterday, compared with a peak of $22 last summer.
In the short term, 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.
Three months ending 2/1/92
.. .. .. ..Revenue .. .. .. Net .. .. .. Share
'92 . ..250,048,000. .. (2,507,000) . (0.05)
'91 . ..220,767,000. .. 13,966,000. .. 0.27
% change .. .. +13.3 .. .. .. .. -- .. .. . --
Year ending 2/1/92
.. .. .. Revenue .. .. .. Net .. .. .. Share
'92 .761,163,000 . ..22,704,000 . ..0.43
'91 .628,127,000 . ..37,496,000 . ..0.73
% change .. +21.2 . .. .. . -39.4 . . -41.1