Price Club Parent Suffers 1st Drop in Quarterly Income : * Retailing: Stock price plunges after firm says its profit dipped 26% to $20.6 million.
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 profit, below Wall Street’s expectations, prompted a selloff of shares. Price was the most actively traded issue on the over-the-counter market, falling $10.75 to $35. Analysts said investors also dumped shares because the company disclosed that it is losing money in newly opened warehouse stores and that it is rethinking its previously announced high-growth strategy.
Analysts said they are concerned that Price’s once-preeminent position in the membership warehouse industry is threatened by such competing chains as Costco Wholesale, Pace Membership and Sam’s Warehouse. Price has 77 outlets in the United States, Canada and Mexico.
Price attributed the profit drop 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 Price Clubs in Ontario and Quebec must close on Sundays.
But what appeared to make 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 places 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,” Cheadle said. “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 was evaluating some of its under-performing outlets, it has no plans “at this time” to close stores or lay off employees. Last year, it closed an outlet in the Buffalo, N.Y., area, its first such closure.
On Thursday, Price indicated that it is reconsidering the high-growth strategy that it embraced in the last two years after a decade of cautious growth. The plan called for it to grow from 69 outlets as of August, 1991, to as many as 100 by the end of 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,” Chairman Robert Price said.
President Mitchell Lynn said the company will go through with 10 planned openings between now and August, including stores in Dallas and Philadelphia. But other openings, particularly in Chicago and Houston, may be delayed, he said.
