The quarter started strong for fashion retailer Christopher & Banks (NYSE:CBK). Unfortunately, things did not end as well as they started, and it appears that the company is coming down with a bad merchandising-miscue cold.
You can check out a summary of the company's performance by checking out our Fool by Numbers piece. That way, I can get right into the things that caused the problems.
According to CEO Joe Pennington, the biggest problem was a merchandising miscue. When you don't have the things that people want to buy, prices have to come down so you can still move products. As a result, gross margins declined 90 basis points and operating income actually declined. The only reason net income did not decline was that the company earned more interest than it did last year.
But this is not a bank. This is a retailer.
On the conference call, Chief Marketing Officer Matt Dillon focused on sweaters and knit products and commented that Christopher & Banks was too dressy for the more casual lifestyle of its core customers. That was an admission that the merchandising-miscue bug had caught up with the company. Earlier this year, that virus infected Chico's (NYSE:CHS), Urban Outfitters (NASDAQ:URBN), and New York & Co. (NYSE:NWY), which saw their stock prices fall in response.
Like moms who keep their eyes on fevers, investors need to monitor how this problem affected inventory. The company made that a little easier by highlighting inventory in the release, something it has not done in the past. On an absolute basis, inventory rose 46% over last year's quarter. But that alone does not tell us whether the fever is high. Let's keep looking.
The company opened 72 more stores during the past 12 months, so there will be more inventory in the system. That's why management made its comparison on a per-store level. Inventory is not as high as it was two years ago, but it's still 17% higher on a per-store level. That's not good, especially when the miscue occurred during the holiday season.
Sure enough, it appears that this cold is going to linger for a bit. As a result, the company expects its December same-store sales to decline 6% to 7% and its fourth-quarter earnings to come in between $0.13 and $0.14 per share, down from the previous average analyst estimate of $0.19, according to Capital IQ.
The remedy for a cold is chicken soup and plenty of rest. The remedy for a merchandising miscue is to move the old inventory as quickly as possible and replace it with stuff customers want to buy. That means no rest for management, or for me; miscues mean lower stock prices, and lower stock prices mean potential bargains.
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Retail editor David Meier is ranked 694 out of 17,896 participants in Motley Fool CAPS and does not own shares in any of the companies mentioned. You can view his TMF profile here. The Fool takes its disclosure policy very seriously.
