New York's Expansion Doesn't Sell

Retailers open new stores all the time. But when expansion plans are essentially the only means of growth, there's a problem. And fashion retailer New York & Co. (NYSE: NWY  ) has problems by the score.

Sales for the first quarter rose 6% to $284 million, but only because the retailer added 11 new stores. While those new stores performed heroically, existing stores did not pull enough of their own weight. That's not an encouraging development, reflected by the 1.2% decline in same-store sales. Sure, it's better than last year's 9% drop in comps, but that seems like a thin silver lining on a rather cloudy picture.

New York & Co. was not alone in feeling the sales pinch this quarter. Ann Taylor (NYSE: ANN  ) , for example, suffered a 12% drop in comps in April. Talbot's (NYSE: TLB  ) and bebe (Nasdaq: BEBE  ) also showed weakness. Retailers across the board suffered from unseasonably cold weather that marred the beginning of the month. Yet AnnTaylor was able to project a better second half, whereas New York is simply hoping to lure people into its stores.

There seems to be a certain despondency among management at the Motley Fool Hidden Gems recommendation. The women's fashion retailer says that store sales are dependent upon mall traffic, and management is doing whatever it can to drive people into the stores. Unfortunately, that's the problem. Shoppers haven't wanted New York's fashions, and despite increased expenses for direct marketing campaigns, the company's efforts haven't lured people in from the malls.

New York reported a 200-basis-point drop in gross margins. Virtually all of that, however, came from its troubled JasmineSola brand, which once looked like a key acquisition. Now it serves as a drag on performance, if not morale. It's currently mired in a legal mess brought on by its former founder. While certain aspects have apparently been resolved, when coupled with inventory problems arising from attempts to find the right size store for the brand, this unit's losses are expected to drag out over the rest of the year.

Apparently, when customers do come in -- whether at New York stores or JasmineSola -- the retailer hasn't had sufficient merchandise on hand. Despite a few products that have been popular with shoppers, sharp cutbacks in its inventory levels led the company to actually ran out of stock on some key items. Inventory fell 6% from last year, and was lower year over year in each month of the first quarter, hurting the company's sales effort. Management says it will renew its focus on having those popular items on hand for shoppers.

With a forward earnings multiple comparable to Talbot's, Ann Taylor, and Liz Claiborne (NYSE: LIZ  ) , New York & Co. still seems overpriced at these levels, considering management's scaled-back guidance for the year. Although the reduction is essentially the miss from the first quarter, suggesting that expectations for the rest of the year are basically the same, it's built on low-single-digit comps, which seem a bit of a threadbare hope at this point.

With 14 new stores planned for the second quarter, and 50 or 60 total anticipated for the year, New York & Co. has expansion plans aplenty. Unfortunately, that doesn't necessarily mean shoppers won't just keep walking by.

Check out the fashionable line up of related Foolish articles:

New York & Co. is a recommendation of Motley Fool Hidden Gems. bebe is a recommendation of Motley Fool Stock Advisor. A 30-day risk-free trial to either service shows you why it's fashionable to beat the pants off the market.  

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.

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