Not So Hot Profit Ratio Growth

Poor earnings will show up in both a decline in year-over-year performance comparisons and as a low profit-to-sales ratio. Sure enough, eight of the 10 retailers in this group also show up on the Not-So Hot-Earnings chart: Casual Male, Haverty Furniture, 99 Cents Only Stores, Syms, The Bon-Ton Stores, The Pantry, Genesco and Dillard’s. The exceptions are Fred’s, an operator of small format discount stores and O’Charley’s, operator of O’Charley’s, Ninety Nine and Stoney River Legendary Steaks restaurants.

Fred’s is well aware of its profitability problems and is on the case, having embarked on an effort to improve profitability and margins, following an internal study of the previous 10 quarters. The initiative includes closing 75 under-performing locations, repositioning and reducing corporate overhead by 10 percent, generating $11 million in annualized cash savings in the second half of this year and initiating multiple merchandising programs to enhance margin and address the changing shift in sales mix.

This latter includes placing more emphasis on pharmacy sales. By the end of 2010, says CEO Michael J. Hayes, “we expect to achieve a cumulative increase of approximately $100 million in free cash flow generated directly as a result of these new strategies … which, compared with the $27 million cost of the plan, reflects substantial return for the company and its stockholders.”

O’Charley’s profits have suffered during what the company says is a turnaround initiative begun two years ago. Among other things, it has absorbed a $16.5 million write-off involving impairment charges and losses involving a number of restaurant locations as well as a commissary and other supply chain facilities. These charges came at the same time sales were suffering as a result of consumers’ cutting back on dining out in the second half of last year.

These woes have continued into 2008, with sales dropping nearly 5 percent this year and margins being squeezed across all three formats. The capital spending has been trimmed for this year, and the company is continuing its rebranding projects — “Project RevO’lution” for the O’Charley’s brand and “Dressed to the Nines” for the Ninety Nine chain.