By Neil Saunders
Given the challenging trading environment over the fourth quarter, Bon-Ton has posted a slightly better than expected set of results. Especially pleasing are the expansion in gross margin, and the $43.6 million of net income the group booked over the period. There was good news on the omnichannel front too, where revenue increased by double digits.
Some of these outcomes are the result of steps the group has taken over the past year or so. These include the cost reduction program which has saved $31 million across this fiscal year, around $7 million above what was initially projected. Better inventory control also reduced the number of markdowns which, in turn, was beneficial to profit.
The Close to Home initiative uses a shop-in-shop concept to showcase local and artisan products in stores. This concept worked well over the final quarter and helped to take the edge off sales declines. At the close of the fiscal, Close to Home operated in 45 stores, and will be expanded to 100 stores by the end of this year.
That noted, the fact remains that most of the metrics are still in negative territory. Moreover, Bon-Ton posted a full-year net loss of $65 million. Most of this is down to the $66.8 million of interest payments the group made over the fiscal year. When this is considered, it is clear that the group has a lot more work to do — either in growing sales or cutting costs further — to create a sustainable business.
We believe that further cost savings can be extracted over the next year and that there more margin gains are possible. However, we question whether these will be sufficient to enable Bon-Ton to move into net profitability, especially against the backdrop of falling sales. The transfer of sales from stores to omnichannel will also dilute profitability.
On the sales front, we anticipate that comparable revenue will fall by around 2.7% across the new fiscal. This is a slower pace of decline than this year, although it comes off the back of softer comparatives. However, at total level, this will be partly offset by an additional week of trading which will boost sales.
Much of the sales decline is down to changing dynamics in where and how people shop. However, against this backdrop, we applaud Bon-Ton for some of the steps it is taking to stem the tide of decline. These include the Close to Home initiative, which uses a shop-in-shop concept to showcase local and artisan products in stores. We believe that this concept worked well over the final quarter and helped to take the edge off sales declines. At the close of the fiscal, Close to Home operated in 45 stores, and will be expanded to 100 stores by the end of this year.
Bon-Ton will also expand its sourcing of Close to Home products by allowing designers and artisans to apply online to have their products featured in stores near to where they work or live. This should, in our view, be a cost-effective way of finding new and interesting products to put into shops.
We believe that Bon-Ton has a lot more to do to put the business on a comfortable financial footing. However, we applaud the management team for its proactivity in taking corrective actions and innovative thinking in trying to rebuild the business.
Neil Saunders is managing director of GlobalData Retail.