Earnings down for clothier Merry-Go-Round school sales lag

September 03, 1992|By Michael Dresser | Michael Dresser,Staff Writer

Merry-Go-Round Enterprises Inc., a Joppa-based clothing store chain, got off to a slow start in its critical back-to-school season as a weak economy and Hurricane Andrew battered the company's August sales, the company reported yesterday.

The 3 percent drop in last month's comparable-store sales was an ominous sign for the company's third quarter, which many analysts have been eagerly awaiting in hope of seeing a return to the healthy earnings gains the company reported until its business slumped late last year.

Merry-Go-Round's report yesterday showed that earnings per share had declined from the previous year for the fourth straight quarter. Second-quarter earnings were $6.38 million, or 12 cents a share, compared with $6.93 million, or 13 cents a share, in 1991. Net sales grew 16 percent, to $181.6 million as the company continued a vigorous expansion.

Company executives could not be reached for comment, but analysts who follow the company said second-quarter earnings were in line with expectations. Michael D. Sullivan, the company's president and chief executive, noted in a statement that last year's period was the best second quarter the company had ever posted.

Of greater concern to Wall Street was the decline in comparable-store sales, which came in below expectations. The company told analysts that a late Labor Day had delayed back-to-school shopping and that Hurricane Andrew, which temporarily closed about 40 of its stores, accounted for 0.6 percentage points of its 3 percent decline.

Most of all, analysts agreed, the problem was the economy.

Robert F. Buchanan, an analyst at Alex. Brown & Sons, lowered his rating on Merry-Go-Round stock from "buy" to "hold" earlier this week. One of the factors he cited was high unemployment in VTC the 16-to-25-year-old age group that makes up the core of Merry-Go-Round's customer base.

"Back-to-school is a little soft and it is for all retailers," said Steven M. Ashley, an analyst with Cleary Gull Reiland & McDevitt in Milwaukee. He said he is assuming that sales would remain slow through November.

"I just don't see a robust season," said Paul Bienstock, an analyst with Moran & Associates in Greenwich, Conn.

Mr. Bienstock said there were some positive signs for Merry-Go-Round. With the help of an improved inventory control system, inventory per store was down 19 percent, he said. And late back-to-school shopping and a weak September last year should help sales comparisons in coming weeks.

In addition, he noted that Merry-Go-Round's June acquisition of the 88-store Networks sportswear chain leaves it ample room for future sales growth. The average store volume at those stores is 55 percent of levels at other Merry-Go-Round stores, Mr. Bienstock said, noting that the company has a strong reputation for acquiring lagging stores and improving their performance.

Nevertheless, Merry-Go-Round is still groping for the next hot trend that will play to its strengths as a fashion-forward retailer. "At this point, the styles aren't identified and the economy isn't decent," said Sam Talbot of Growth Stock Services in Boston.

In spite of the slow sales, most retail analysts believe the stock is a good value, and some are considering moving it to their "buy" lists.

After Mr. Buchanan's downgrade sent Merry-Go-Round stock reeling Tuesday, Mr. Ashley in Milwaukee seized on the drop as an opportunity. "We bought stock all day," he said.

He said many people were getting too caught up in monthly sales comparisons and were not taking into account the long-term benefits of Merry-Go-Round's expansion.

"All the square footage they've added is putting pressure on the business now only to benefit down the road," Mr. Ashley said.

Merry-Go-Round's stock closed at $13, up $1 on the New York Stock Exchange, amid a general rally in the retail sector yesterday.

Mr. Talbot said that was a reasonable price and that the stock could go higher if Merry-Go-Round's managers make the right moves.

"If these guys do what they should do, it'll be a 20-buck company," he said.

Three months ended 8/1/92

0 ........Revenue.... .... Net.... .... Share

'92.... 181,630,000.. ..6,380,000 .... 0.12

'91.... 156,884,000.. ..6,928,000 .... 0.13

% change ..... +15.8..... .... -7.9 ..... -7.6

Six months ended 8/1/92

=1 .........Revenue.... .... Net.... .... Share

'92..... 353,023,000... 13,467,000..... 0.25

'91..... 314,120,000... 15,623,000..... 0.30

% change....... +12.4... ..... -13.8..... -16.6

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