Carter Hawley Income Drops 42% in Quarter; Operating Net Off 8.5%

Carter Hawley Hale Stores, the Los Angeles-based parent of the Broadway and Neiman-Marcus, reported Tuesday that net income declined by 42% during the fourth quarter.

The earnings drop, however, mostly reflected inventory accounting adjustments and a charge from the planned sale of a Canadian division. Before allowing for those factors and interest payments, the company’s earnings from day-to-day operations declined by only 8.5%.

On a full-year basis, the company reported that earnings from continuing operations rose 77% to $48 million. Sales increased about 7% to $3.98 billion.

Analysts Glum

Net income was $48 million, down 46.5% from the previous year. However, the previous year included a $62.5-million gain from the sale of the company’s Waldenbooks division and $7.1 million in costs relating to its successful battle against a hostile takeover bid by the Limited.

Analysts expressed disappointment at the fourth-quarter performance, which the company blamed on a poor holiday retailing climate, particularly in California. Operations in the state account for slightly more than half of Carter Hawley Hale’s volume.

“Yes, it was a disappointing fourth quarter,” said Stanley H. Iverson, an analyst with Duff & Phelps in Chicago. He added that the new fiscal year has gotten off to a lackluster start, with February’s sluggish pace continuing in March.

Despite his disappointment over the fourth quarter, Chairman and Chief Executive Philip M. Hawley said the company is moving ahead with programs “to substantially reduce administrative and support service expenses that are not related to customer service” and thereby bolster the bottom line.

Customer Service Drive

“Department stores generally--and we would include our own in that in full measure--have not done a very good job of taking care of customers for quite some time,” he said in a telephone interview from New York. “We’ve begun a major implementation of an improved sales program beginning in February.

“We’re reallocating expense dollars and trying to be leaner and more compact at the headquarters level and divert those dollars onto the sales floor.”

The customer service orientation is one facet of a long-term strategy, implemented in 1980, to make the company more efficient and improve profitability.

Over the next fiscal year, plans include a 2% to 3% reduction in back-office staffing and an 8% to 9% increase in selling staff at department stores, spokesman Bill Dombrowski said.

In addition, by November, Carter Hawley expects to be paying essentially all sales personnel on a commission basis in an effort to “reward productive efforts,” Hawley said.

Many reductions will result from retirements and other departures, Dombrowski said. In some cases, division employees whose jobs were considered to be redundant were offered other posts but chose to resign instead, he added.

“We do not lay people off in this program,” Dombrowski said.

He added that operating budgets are to be held at 1985 levels. As a result, to cover the costs of hiring new sales people and paying them commissions, divisions will be cutting expenses in other areas, Dombrowski said. Those will include sales promotion and marketing, travel and use of outside firms for such tasks as managing the payroll.

At the Broadway, Chairman Michael Hecht said the sales force will increase by 10%, with a 2% to 3% reduction in support staffing. Already, two general merchandise managers have departed, reducing the number to four.

Analyst Iverson noted that “it behooves Carter to hold (down) expenses.” Although he considers the customer service plan to be realistic, he added that “we’ve had a couple of years of disappointments in earning power.”

Charges and Adjustments

During the fourth quarter, the various charges and adjustments caused large distortions in the retailer’s earnings. On an after-tax or net income basis, Carter Hawley showed a 42% drop in fourth-quarter earnings to $18.9 million from $32.6 million a year ago.

Pretax earnings from day-to-day operations fell 53% to $21.5 million from $45.9 million in the year-ago period. However, earnings before interest payments, inventory adjustments and non-operating items fell 8.5% to $54.9 million from $60 million.

Sales in the quarter remained flat at $1.32 billion.

In the most recent quarter, inventory accounting adjustments produced a gain of $4.4 million, down from $17.9 million during the comparable period last year. Those adjustments, which are based on a government index, are designed to account for the effect of inflation.

In addition, Carter Hawley assigned a loss of $2.5 million from the pending sale of its Canadian Holt, Renfrew & Co. subsidiary.

Federated Department Stores also reported earnings Tuesday.

The Cincinnati-based parent of Bullock’s and Ralphs had net fourth-quarter earnings of $178 million, excluding unusual items, up 2.5% from the same period last year. Sales in the quarter, which had 13 weeks, declined 1.3% to $3.3 billion from the same period last year, which was a 14-week period.

Including unusual items, fourth-quarter net income was $154 million, a 24% decline.

For the full year, net income was $303.9 million, excluding unusual items--a 6% increase. Sales rose 3.2% to $9.98 million. The most recent year had 52 weeks, whereas the previous year included 53 weeks. Including unusual items, net income for fiscal 1985 was $286.6 million, a 13% decline.

Among the unusual items were one-time expenses relating to the consolidation of some operations, the establishment of a data-processing facility and the restructuring of Federated’s corporate office.

Like Carter Hawley, Federated said inventory accounting adjustments negatively affected results.