Bon-Ton Stores Inc. (BONT) reported a loss of $1.21 per share in the third quarter of 2011, much wider than the Zacks Consensus Estimate of break-even results and the year-ago quarter loss of 36 cents. The lower-than-expected results were due to sluggish traffic, resulting in a 5.9% drop in the same-store sales.
Total revenue of the departmental store chain plummeted 6.3% year over year to $656.1 million in the reported quarter, attributable to poor sales of traditional merchandise apparel or moderate apparel. Moreover, the company’s decision to implement price rise on some women and men’s clothing due to higher costs further hurt revenues, as tough economic environment prevent consumers from spending higher.
However, to attract customers and boost sales in the upcoming holiday season, the company has recently deployed several strategic initiatives like pilot stores, expanded shoe departments and assortments, customer-first program and the increased market share of updated ladies merchandise.
The eCommerce business of the company continues to perform well with sales increasing 28% during the quarter.
Gross margin in the quarter contracted 80 basis points (bps) to 37.4%, attributed to increased net markdown rate. EBITDA of the company also decreased $23.7 million to $25.0 million in the reported quarter.
Selling, general and administrative (SG&A) expenses fell 0.3% to $234.9 million in the reported quarter as the company continues to focus on cost control and lower employee incentives. However, SG&A, as a percentage of revenue, surged 220 bps to 35.8% in the quarter due to higher spending in private brand marketing and eCommerce and lower sales volume.
Financial Position
Bon-Ton ended the quarter with cash and cash equivalents of $12.8 million, shareholders’ equity of $90.5 million and long-term debt, excluding current maturities of $984.9 million. During the quarter, total debt reduced 5% year over year based on the company’s continuous efforts to reduce debt.
Outlook
Bon-Ton, headquartered in York, Pennsylvania and Milwaukee, Wisconsin trimmed its financial outlook for 2011. The earnings guidance has been drastically cut down to the range of a loss of 65 cents to a gain of 25 cents versus the previous guidance of earnings of 70 cents to $1.00. EBITDA is expected between $190 million and $210 million, down from the previous guidance of $225 million-$235 million. Comparable store sales are estimated in the range of negative 3.3% to negative 1.6% versus the previous expectation of flat to up 1.0% for 2011. Gross margin for 2011 is expected to plunge 80 bps year over year versus the earlier forecast of down 70 bps to 80 bps year over year.
Our Take
Bon-Ton continues to make efforts to drive traffic in the upcoming holiday season and improve margins by controlling cost and closing underperforming stores. The company plans to close 5 stores, out of which four will shut down in 2012 and one in 2014. The company also foresees growth opportunities driven by renovation of 17 stores completed in the previous quarter and 2 new stores opened in the reported quarter. The company expects categories like cosmetics, cold-weather merchandise, ladies updated sportswear and shoe categories to perform solid in the upcoming quarter.
However, Bon-Ton continues to face cost inflation due to higher cotton prices and wages of Chinese labor and expects commodity pressure to persist till mid 2012. The retirement of the company’s CEO, Bud Bergen, is expected to further add to the uncertainty going forward.
The company reported disappointing results and also reduced its fiscal outlook. Hence, we expect a downward movement in estimates over the coming days. The Zacks Consensus Estimate is currently pegged at a loss of 20 cents per share for 2011 and earnings of 51 cents per share for 2012.
One of Bon-Ton’s primary competitors, Dillard’s Inc. (DDS),a leading fashion apparel, cosmetics and home furnishings retailer, posted strong third quarter 2011 earnings of 48 cents per share, outpacing the Zacks Consensus Estimate of 38 cents per share and prior-year quarter earnings of 22 cents per share.
