Discount stores score big in August

Consumers flock to low-cost stores such as Wal-Mart, Costco and BJ's in back-to-school season, abandoning higher-end retailers such as Abercrombie, The Gap, Limited.

NEW YORK (CNNMoney.com) -- Consumers nervous about the weak economy abandoned higher-end clothing store chains for discount retail giants such as Wal-Mart, Costco and BJ's, which reaped back-to-school sales in August.

"Americans haven't slowed their spending," said Ken Brown, president and retail analyst with ResearchConnect.com. "They just moved their spending, from some of the retailers with bigger-ticket items to the discounters."

That was why the August same-store sales for Wal-Mart, BJ's and Costco increased and trounced analysts expectations, while sales plunged for Abercrombie & Fitch and The Gap, experts said.

"This is Wal-Mart's year to eat share," said Dean Hillier, retail expert with management consultant firm A.T. Kearney.

The discount stores
Discount stores tend to thrive in a weak economy, because many consumers perceive low-cost retailers as the best places to stretch their dollars in purchasing necessities. Some analysts had expected - incorrectly, it turned out - that discount retailers would experience a softening in sales as the government-issued stimulus payments that came out in the spring and summer dried up.

Wal-Mart (WMT, Fortune 500), the leading retailer in the world in terms of annual sales, said Thursday that sales at stores open at least one year increased 3% during the four weeks ended Aug. 29, compared to the same period last year. The figure didnot include fuel sales.

A consensus of analysts interviewed by Thomson Reuters had expected a gain of 1.6%.

"Quite honestly, I think their brand is a comfort zone for consumers during bad economic times," said Hillier. "They're the trusted brand in uncertain times."

Wal-Mart, the biggest food retailer in the world, attributed the gain to strong sales in groceries and "health and wellness" products. The company also was lifted by back-to-school sales, and said that sales in certain electronics - such as flatscreen TVs, cell phones and GPS units - continued to do well.

Wal-Mart's U.S. sales, not counting its Sam's Club division and fuel sales, rose 2.8% in August, compared to the same period last year. Analyst consensus from Thomson Reuters had expected a gain of 1.4%.

BJ's Wholesale Club (BJ, Fortune 500) said Thursday that same-store sales jumped 15.4% in August, lifted largely by rising gas sales from inflation. BJ's beat analyst expectations of a 14.1% gain, according to a consensus of projections compiled by Thomson Reuters.

But even without gas, BJ's outperformed higher-end retailers with a same-store sales gain of 8%, matching the consensus projection from analysts. The company said that food was among its biggest sellers, with an 11% gain in sales of perishable foods.

Costco Wholesale (COST, Fortune 500), another top low-income merchant, reported Wednesday that same-store sales jumped 9% in August, compared to the same period last year. But the company still fell short of a consensus of analysts pooled by Thomson Reuters, who had expected a gain of 9.9%.

Costco said that its sales gain was bolstered by the 40% surge in the price of gasoline. Without gas, Costco said same-store sales rose 6%.

Higher-end retailers
August is generally a good month for retail sales, as parents and college students stock up on clothing and supplies before the start of the school year. But these shoppers stayed away from retailers of higher-end clothes, according to analysts, who noted that many consumers are simply continuing to wear the clothes that they own.

The Gap (GPS, Fortune 500), which owns Old Navy and Banana Republic, said that same-store sales fell 8% in August. This was much worse than the 1% decline experienced in August 2007, but it wasn't quite as bad as the 9.7% decline expected by a consensus of analysts surveyed by Thomson Reuters.

The worst-performing part of its business with Banana Republic North America, with a 14% plunge.

"I don't see those guys coming back any time soon," said Brown of ResearchConnect.com, referring to The Gap and other clothing retailers.

Abercrombie & Fitch (ANF) said same-store sales fell 11% in August, which wasn't as bad as the 7.9% projected by analyst consensus from Thomson Reuters. Limited Brands (LTD, Fortune 500), owner of Victoria's Secret and Bath & Body Works, reported that same-store sales fell 7% in August, slightly worse than the 6.9% decline projected by analysts.

Global Apparel Retailers Set Their Sights on U.S. Market

America's shopping venues are getting an international makeover as moderately priced apparel retailers from Europe, Asia and Canada increasingly set up shop in the U.S.

In coming to America, these retailers are following high-end European designers, who planted their flags in recent decades, expanding first to big cities and then to smaller markets. Now, more foreign retailers are taking advantage of the weak dollar, which reduces the cost of their initial investment, and favorable terms on store leases as landlords look for new tenants to attract shoppers as midpriced U.S. chains like AnnTaylor Stores Corp. and Talbots Inc. contract.

Sweden's Hennes & Mauritz AB, with 156 U.S. stores, calls the U.S. its "largest expansion market." Since the beginning of its fiscal year in December, the "fast-fashion" chain has opened 11 stores in the U.S., including its first store in Seattle on Friday. It plans about 27 more openings this fiscal year, including a store at Westfarms Mall in Farmington, Conn., in August.

Canadian yoga-wear retailer lululemon athletica Inc. plans to open 32 U.S. stores this fiscal year, almost doubling its U.S. presence to 66 stores. South Korea's Who.A.U, which is taking aim at Abercrombie & Fitch Co.'s Hollister chain, hopes to open 450 stores in the U.S. in the next 10 years. And Canadian teen retailer Garage hopes to have 500 stores in U.S. malls in seven to 10 years.

Also expanding in the U.S. are Spain's Zara (owned by Inditex SA) and Mango chains, Germany's luxury sport brand Bogner, Russia's Kira Plastinina, Iceland's Kisan, Japan's Muji and Britain's Topshop chain and Karen Millen brand. "There aren't too many important global apparel retailers that aren't looking at the U.S. market for its potential," says Ken Nisch, chairman of JGA, a Southfield, Mich., retail-strategy and design firm.

Opening shop in the U.S., of course, isn't a slam dunk. There's no guarantee that the economy -- or apparel sales -- will recover from the current slump any time soon. Furthermore, the U.S. is a low-growth market where retailers have long had to fight for market share. But "the U.S. is still the world's largest consumer market," says Christine Day, lululemon's chief executive. "Even if it contracts, it would be a mistake not to be in it."

The retailer, which is opening both urban and suburban locations, has been able to negotiate lease terms that are more favorable across the board than a year ago. The terms, which vary by lease, include fewer built-in rent increases, the option to terminate leases after three years rather than five years and higher sales thresholds before lululemon has to pay a percentage of sales in addition to base rent.

Many international retailers are approaching U.S. expansion cautiously. Muji and Topshop, which is set to open its first U.S. location in New York in October, plan to wait and see how their stores in New York perform before opening stores elsewhere. That's the lesson of Japanese clothing chain Uniqlo, part of Fast Retailing Co., which launched its U.S. operations three years ago with stores at three New Jersey malls. Last summer, Uniqlo closed the stores in favor of building brand awareness via the flagship store it opened in New York's SoHo in late 2006. A spokeswoman says the retailer is looking at further expansion in the U.S.

Foreign midtier retailers still account for only a small percentage of U.S. retail sales overall. Twenty-two foreign chains queried by The Wall Street Journal said they will operate about 475 stores in the U.S. by year's end. The U.S. had roughly 150,000 clothing and accessory stores in 2006, according to the latest government data. But the value of foreign retailers' investments in clothing and accessory stores in the U.S. continues to grow. Between 1997 and 2007, it rose more than 60% to $4.1 billion, according to the U.S. Commerce Department's Bureau of Economic Analysis, which released the most recent data Friday.

Furthermore, foreign retailers have had an outsize impact on the U.S. market. The invasion of fast-fashion chains like H&M and Zara has prompted U.S. retailers from Gap Inc. to J.C. Penney Co. to update their selections faster or more often.

Still, it is unlikely that the influx of foreign chains will offset American store closures that have pushed U.S. mall vacancies to 6.3% in the second quarter, their highest level since 2002, according to market-research firm Reis Inc. For example, over the next few years, AnnTaylor is closing about twice the number of stores lululemon plans to open in the U.S. this year.

International retailers "will provide some incremental demand for the better properties," says Rick Sokolov, president of Simon Property Group Inc., the largest U.S. mall owner by market value and number of properties. He says those most likely to benefit are top-tier malls in high-traffic urban areas generating the highest sales per square foot.

At many malls, developers looking for new concepts to excite shoppers are giving international retailers the deals traditionally reserved for top tenants. "These terms have always been there for the hot retailer, but historically the hot retailer was an American company," says Julie Taylor, senior vice president with real-estate-brokerage firm Cornish & Carey Commercial-Oncor International. "Now, more often than not, those are foreigners."

Source: Wall Street Journal

Abercrombie Kids' Heads to 5th Ave.

NEW YORK — The kids division of Abercrombie & Fitch Co., abercrombie, plans to move into the Fifth Avenue space Brooks Brothers is vacating.

Sources close to the situation said Brooks Bros. will exit 666 Fifth Avenue, on the southwest corner of 53rd Street, around February 2009, and abercrombie will build a prototype 22,000-square-foot flagship to open in 2010.

For Abercrombie & Fitch, the project reflects a strategy of placing flagships at high-profile venues in the U.S. and abroad. Abercrombie’s Hollister division is launching a prototype at 600 Broadway in SoHo in the first half of 2009. The two-and-half-year-old Abercrombie & Fitch flagship on Fifth Avenue and 56th Street generates in excess of $100 million in annual sales.

Brooks Bros.’ decision to create a second Manhattan flagship on Fifth Avenue about eight years ago raised eyebrows because of the proximity of the 93-year-old Brooks Bros. store on Madison Avenue and 44th Street. The Fifth Avenue unit, essentially a big glass box, failed to capture the Brooks Bros. aura, which is personified by the dark-wood-paneled Madison Avenue venue that oozes tradition.

“The Fifth Avenue location has not been representative of the brand,” said Claudio Del Vecchio, chairman and chief executive officer of Brooks Bros. “The other reason for leaving is I don’t believe in a two-flagship strategy within nine blocks of each.

“We have full intention to rebuild the Madison Avenue flagship, which will celebrate its 100th anniversary on Madison Avenue in 2015,” he said. “We want to make sure that Madison Avenue is the real ambassador.”

The company bought the 120,000-square-foot building last year for that purpose. About half the space is for selling and half for the company’s headquarters.

“Both stores are doing very well, but I am sure they’ve been cannibalizing each other,” Del Vecchio said. “We really want to refurbish the Madison Avenue store to represent the brand. We realized it was a better opportunity to invest there, and a better business opportunity than signing a new long-term lease” on Fifth Avenue.

Del Vecchio stressed that Brooks Bros. wants to increase its presence in Manhattan, aiming to open four or five stores comparable to the 9,300-square-foot unit on Broadway at 65th Street near Lincoln Center for the Performing Arts. Brooks Bros.’ fourth Manhattan store is at One Liberty Plaza in lower Manhattan.

The Fifth Avenue location is comprised of ground, second floor and lower-level space, with a double-height glass storefront and 28-foot ceilings, according to the Cushman & Wakefield marketing brochure. The site also has 192 feet of frontage wrapping around the corner.

Also at 666 Fifth Avenue, additional space is being created to accommodate another retail tenant that has yet to be determined. Rents on Fifth Avenue around 53rd Street are said to be about $1,500 a square foot.

Source: Women's Wear Daily