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Kmart, Gap results down
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November 9, 2000: 11:24 a.m. ET
Kmart loss wider than forecast; Gap meets lower target, Lands' End misses
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NEW YORK (CNNfn) - Kmart Corp. and Gap Inc., two of the nation's best-known retailers, reported lower fiscal third-quarter results Thursday as sales gains continued to disappoint.
And catalog retailer Lands' End missed third-quarter estimates but expects improvement in the holiday season.
Kmart said it lost 14 cents a share in the period versus Wall Street forecasts for a loss of 10 cents a share, while Gap reported a profit of 21 cents a share, well below the 35 cents earned a year earlier. Lands' End said it earned 15 cents a share compared with 20 cents a share forecast.
Most retailers have posted weaker sales than a year ago due primarily to high oil and fuel costs and higher interest rates that have dampened consumer spending, analysts have said. Apparel retailers especially have been hit a by a slower economy combined with a lack of fashion variety.
Blue light flickers
Troy, Mich.-based Kmart, the nation's No. 3 retailer, reported a third- quarter net loss of $67 million, or 14 cents a share, compared with net income of $27 million, or 5 cents a share, a year ago. That's well below analysts' forecast of 10 cents a share, according to First Call/Thomson Financial, which tracks estimates on Wall Street.
Sales rose 3 percent to $8.2 billion while sales at stores open at least a year, known as same-store sales, edged up 1.4 percent. The sales growth reflects better store management as well as increased promotional activity to reduce inventory.
 The gross margin rate was 20.5 percent of sales compared with 21.5 percent a year ago. Selling, general and administrative expenses for the quarter increased $1.7 billion for the quarter compared with $1.6 billion a year earlier.
The company is in the midst of a major restructuring under new CEO Chuck Conaway that includes reducing inventory and upgrading checkout equipment at stores. The company said in July it would close more than 70 underperforming stores.
The company's stock has been halved from its 52-week high of $12.25 as it continues to experience sales troubles.
"Our overall performance fell short in the third quarter primarily due to soft sales as our liquidation of inventory cannibalized our regular sales," Conaway, the former CVS drugstore chief, said in a statement Thursday. "We are committed to dramatically improving our working capital productivity to achieve our world-class execution strategic imperative."
Conaway updated analysts during a conference call Thursday on his three point plan to significantly reduce inventory, step up customer service and improve the supply chain. He said he expects to reduce inventory by $1 billion by the end of fiscal 2000 and to have more than $250 million in operating cash.
He also said the company is on track to reduce costs by half a billion dollars.
While encouraged by his enthusiasm and long-term plan, analysts remain skeptical given increasingly softer consumer spending and fierce competition from the likes of Wal Mart (WMT: Research, Estimates), the nation's No. 1 retailer and Target (TGT: Research, Estimates).
"With the stock trading below $6, you have to take a long-term view of the company," said Jeff Stinson, an analyst with Midwest Research. "If he's able to execute on the initiatives he laid out, this is going to be a tremendous story.
Conaway acknowledged he doesn't expect an "incredibly robust Christmas."
"It's pretty clear the environment is weakineing on all of us," Conaway said. "But obviously our discipline around working capital bodes pretty well for us."
"I think the major message out of the call is that Chuck has examined every aspect of the things that needed to be changed from the big issues of customer service, and in stock to the logistical items that really make a difference," said Bruce Missett, a retail analyst with Morgan Stanley/Dean Witter. "He he has an enourmous sense of urgency pushing these things through, but at what point do we have enough data points to say we're comfortable with Kmart? We need more data points."
Kmart (KM: Research, Estimates) stock fell 6 cents to $5.87 in trading Thursday.
Gap widens
For the fiscal quarter ended Oct. 28, Gap (GPS: Research, Estimates), which operates Gap, Banana Republic and Old Navy stores, reported net earnings of $186 million, or 21 cents a share, down from $315 million, or 35 cents a share, a year earlier.
Gap's results met analysts' lowered forecasts, according to First Call. The clothing retailer warned earlier this month that results would be below forecast, mainly because of higher promotional costs in October.
San Francisco-based Gap said sales rose 12 percent to $3.4 billion from $3.1 billion, but sales at stores open at least a year fell 8 percent.
Although strong internally, fashion and distribution problems at the company's Old Navy division have hurt the company's earnings and comparable-store sales over the last few quarters, the company said.
"Third quarter was very challenging," CEO Millard Drexler said. "We're moving quickly to fix our problems and make sure we execute more consistently. We also are continuing to make appropriate management changes to ensure we have the best talent to lead our business forward."
Gap shares slipped $1.31 to $24.94 Thursday.
Lands' End
Catalog retailer Lands' End Thursday also reported disappointing third- quarter results, missing Wall Street estimates by 5 cents a share, reflecting weak European currencies and higher costs.
For the quarter ended Oct. 27, Dodgeville, Wis.-based Lands' End (LE: Research, Estimates) reported net income of $4.4 million, or 15 cents a share, compared with $8.8 million, or 28 cents a share, a year earlier. Analysts had expected 20 cents, according to First Call Corp.
Net sales increased 3 percent to $336.4 million from $326 million.
The company lowered its expectations for gross profit margin improvement to between 115 and 135 basis points for the full year compared with 200 points previously forecast.
 However, Lands' End said it expects substantion sales and earnings improvement in the fourth quarter and somewhat positive growth for the full year.
Nevertheless, the company added that the holiday season will be "critically important" to achieving success for the year, and that weak sales and higher costs would put its business plans at risk.
Shares of Lands' End shed $2.99 to $23.22 in trading Thursday. 
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