Price Club Parent Suffers 1st Drop in Quarterly Income : * Profits: Stock value plunges after firm issues sagging earnings report.
Price Co. shares lost nearly a quarter of their value Thursday after the membership warehouse chain reported the first profit decline in its 12-year history as a publicly held company.
For its second quarter ended March 15, the owner-operator of Price Club outlets said net income fell 26% to $20.6 million from $27.9 million in the year ago period. Sales increased 11.5% to $1.519 billion, from $1.362 billion last year.
The quarterly profit was below Wall Street’s expectations and contributed to a selloff of shares. Price was the most actively traded issue on the over-the-counter market, falling $10.75 to close at $35. Analysts said investors also dumped shares because the company disclosed that it is losing money in newly opened warehouse stores and that it was rethinking its previously announced high-growth strategy.
Analysts said they are concerned that Price’s once preeminent position in the membership warehouse industry is seriously threatened by competing chains including Costco Wholesale, Pace Membership and Sam’s Warehouse. Price has 77 outlets in the U.S., Canada and Mexico.
Price attributed the drop in profits to “the confluence of several short term considerations,” including the general malaise in retailing, the “cannibalization” of some Price Club sales by new Price Club stores in the same area and a judicial ruling that means Price Clubs in Ontario and Quebec must close on Sundays.
But what made Wall Street most jittery were the problems Price is having in new markets including Colorado, Connecticut, British Columbia and New Jersey. The losses cast serious doubt on Price’s ability to grow in markets where it faces entrenched opposition, said Robert (Bo) Cheadle, a partner and retail analyst with Montgomery Securities in San Francisco.
“Price reacted late to the expansion of the rest of the industry and so instead of opening up new markets they went to markets where there was existing competition. They thought by virtue of their excellence they would prevail. Problem is, when there is an entrenched operator for a number of years, the new guy finds it difficult to build membership up to a profitable volume.”
While the company said it is evaluating some its under-performing outlets, it has no plans “at this time” to close stores or lay off employees. Last year, the company closed an outlet in the Buffalo, N.Y. area, its first ever closure.
On Thursday, Price indicated it is reconsidering the high-growth strategy that it had embraced over the last two years after a decade of cautious growth. The plan called for Price to grow from 69 outlets as August, 1991, to as many as 100 by the close of calendar 1992.
“It is apparent that we must be more selective in opening locations in new markets, and the criteria we use should be influenced more by potential volume and profits than by increasing the number of locations,” Price Co. Chairman Robert Price said in a statement.
In an interview, President Mitchell Lynn said the company is going through with the 10 additional location openings scheduled through August, including new stores in Dallas and Philadelphia. The company was also encouraged by the performance of its new location in Mexico, where it plans additional openings. Overall, the company said in a statement that it still has plans to add as many as 32 new locations by August, 1993.
But some planned openings, particularly new locations for Chicago and Houston, could be delayed, Lynn said.
For the first two quarters of fiscal 1992, Price Co.’s profit totaled $71 million, up 5.2% from $74.9 million last year. Sales were $3.973 billion, up 12.7% from last year’s $3.524 billion.
Second quarter sales in Price Club warehouses that have been in operation a year or longer increased 3.59% over the same period last year. For the year to date, comparable sales were up by 3.58%.
