Narrowing Margins at New York & Company

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On Thursday, specialty retailer New York & Company (NYSE: NWY) reported an increase in its Q2 net sales of 11.2% on a year-over-year basis. The company also checked in with a 4.7% increase in comparable-store sales.

So what's the problem? Unfortunately for long-term shareholders, investors focused their attention on other financial metrics that New York & Company reported along with revised full-year guidance. But neither metrics nor guidance helped the stock as shares tumbled 15.8% on nearly five times its average trading volume.

The bad news for investors was a 45% slide in earnings per share and revised full-year guidance that now indicates an EPS range that's only about half the amount management anticipated. In its earnings call, CEO Richard Crystal noted that New York & Company was disappointed with its quarter but remained optimistic for the second half of 2007.

A decrease in gross profit as a percent of sales from 28.5% in the year-ago quarter to 26.8% this quarter dragged down EPS. Management attributes this drop to an 18% comparable store decline for the retailer's accessory line.

It has been a challenging stretch for some of the company's competitors as well. After yesterday's market close, Gap (NYSE: GPS) noted that despite an otherwise impressive quarter, its comparable-store sales fell by 5% in its Q2. And Ann Taylor Stores (NYSE: ANN) will report its earnings today but recently reported a 5% decline in its same-store sales for the month of July.

The silver lining for investors who have hung on to shares of New York & Company is that the retailer's apparel line remains strong and did not experience the margin decline suffered by the accessory line. Management anticipates opening 26 new stores in Q3 and the launch of its City Beauty line in November. Recently it hired a new chief marketing officer who, one hopes, can give the accessory line a slight makeover.

For more on these retailers, check out:

• New York Gets Fired
• Gap's Summer Doldrums
• QuickTake: More Change at Ann Taylor

New York & Company is a Motley Fool Hidden Gems recommendation. Gap is both an Inside Value and a Stock Advisor selection. All three market-beating newsletters are available for a free 30-day trial.

Fool contributor Billy Fisher does not own shares of any of the companies mentioned. The Fool has a citified disclosure policy.