I'm beginning to lose faith in women's apparel retailer Christopher & Banks (NYSE: CBK). The company reported highly disappointing first-quarter results yesterday. After a brutal fourth quarter, it's possible the wheels may be starting to come off.
By the numbers
Total sales of $149 million were up 4.8%, but comparable-store sales were down 4%, following a 7% slide in the fourth quarter. Earnings per share of $0.32 were down 20% from the prior year. Clearly, the big earnings culprit is the lack of sales growth, driving operating margins down 400 basis points, mostly on the heels of merchandise margins. Expenses were up only slightly as a percentage of sales.
As I reported last quarter, inventory levels remain a concern. The company ended the first quarter with inventories up 26% per store on a year-over-year basis. This is improved somewhat from a 38% bulge at the end of the fourth quarter, but is still way too high for a retailer running negative comparable-store sales. Management explained on the earnings call that about half the higher inventory is due to early receipts, but this is the same explanation we heard three months ago, and it's starting to wear a little thin.
Warning for the second quarter
As a result of soft sales and high inventories, the company warned that second-quarter earnings will be roughly half of last year's level. The stores will have to take higher-than-average markdowns to clear the excess inventory. Christopher & Banks is on a slightly shifted calendar from most retailers, as its second quarter is the months of June through August. These are typically the months an apparel retailer clears out spring merchandise in preparation for the fall season, so we can figure the second quarter is pretty well shot at this point.
Back half of the year stronger?
We heard revised full-year guidance of $0.80-$0.83 per share, down from $0.89 last year. Putting a pencil to this makes me wonder whether the guidance is realistic. At the end of the second quarter, the company expects EPS to be $0.44, down $0.17 from last year. To get to the $0.80-$0.83 guidance, the company will need to run more than 20% up from last year in the back half -- certainly not where the numbers are currently trending. The only encouraging sign I see is that comparable-store sales are trending slightly higher the first three weeks of June.
Getting back on track
I've been positive on Christopher & Banks in recent years. The company hasn't been a highflier, but it's been a steady performer, avoiding some of the miscues that have plagued Gap (NYSE: GPS) and Limited (NYSE: LTD).
There's nothing wrong with Christopher & Banks that a positive sales trend won't cure. But after the most recent six months, I'm firmly in the wait-and-see camp on this stock. Some might view the stock as a bargain, down nearly 50% compared to last year. I recommend that Foolish investors wait for some evidence that the company is hitting the right fashion note, particularly when companies like Kohl's (NYSE: KSS) and J.C. Penney's (NYSE: JCP) appear to be right on target with apparel consumers.
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Fool contributor Timothy M. Otte surveys the retail scene from Dallas. He welcomes comments on his articles, but doesn't own shares of any companies mentioned in this article.
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