Foolish Forecast: New York Suffers a Bear Bite

All year long, New York & Co. (NYSE: NWY  ) has done the improbable: It's reported earnings that both beat expectations and fell far short of their year-ago counterparts. (Chalk it all up to the power of lowered expectations.) The question facing investors today, as we look forward to the Q4 earnings report due Thursday, is whether expectations this time have been set low enough.

What analysts say:

  • Buy, sell, or waffle? A dozen analysts follow NYC, giving it three buy ratings and nine holds -- exactly the same as last quarter.
  • Revenue. On average, they're looking for quarterly sales to slide 6% to $367.4 million.
  • Earnings. Profits are predicted to plummet 60% to $0.16 per share.

What management says:
Uh-oh. Looks like the analysts may have overestimated New York & Co. this time around. As it turns out, the company released its Q4 sales results last month, and if the numbers hold true this week, we're in for a "miss." According to NYC, Q4 sales came to just $359.4 million on a 3.5% slide in same-store sales. This marks an acceleration in the firm's disintegration, because for the year as a whole, comps dropped only 1.3%.

Management also confirmed its previous guidance. Basically, we should expect somewhere between $0.15 and $0.19 per share in profits ... before the firm takes $0.11 to $0.14 in losses for the discontinuation of its JasmineSola business. In other words, NYC will net maybe $0.03 or $0.04 for the "strongest" quarter of the retailing year.

What management does:
So how does NYC plan to turn a 3.5% decline in comps into near obliteration of profit? Continuing deterioration in profits earned on those slipping sales explains much of the problem. At all three levels -- gross, operating, and net -- NYC's margins have slid steadily all year long. We're not yet down to the level of a Liz Claiborne (NYSE: LIZ  ) or -- heaven forbid -- Talbots (NYSE: TLB  ) , but we're not far off, either.

While NYC management argues that it's turning the corner, regaining "tight control of inventory and expenses" in 2008, we've yet to see actions married to those words. At last report, Q3 inventories were piled 15% higher than in Q3 2006.

Margins

7/06

10/06

2/07

5/07

8/07

11/07

Gross

30.0%

30.9%

31.4%

30.9%

30.6%

29.8%

Operating

5.9%

6.5%

6.8%

5.9%

5.5%

4.7%

Net

3.3%

3.7%

3.9%

3.4%

3.1%

1.0%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

One Fool says:
Perhaps the most interesting thing about NYC, though, has little to do with the business per se. If you've followed the stock since we recommended it back in May 2005, you must be aware that Bear Stearns (NYSE: BSC  ) owns a majority interest in NYC.

Yes, Bear Stearns. Yes, that Bear Stearns. And judging from recent developments, chances look good that NYC will soon be owned by JPMorgan (NYSE: JPM  ) . Anybody want to bet that JP won't unload this basket case the first chance it gets?

What did we expect out of New York & Co. last quarter, and what did we get? Find out in:


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