Retailers slash prices, but at what cost?

Shoppers on New York's 34th Street pass a 40% off sales sign in front of a Banana Republic store, Friday afternoon Aug. 29, 2008. In a bid to pull in frugal shoppers into their stores, the nation's retailers are slashing their prices on everything from jeans to home appliances. But those 50 percent discounts on jeans and the 60 percent reductions on dinnerware will likely come at a big price for retailers.

In a bid to pull hesitant shoppers into their stores, retailers are slashing prices on everything from jeans to dinnerware. But those fat discounts will likely come at a big cost for the companies.

At teen retailer American Eagle Outfitters Inc., shoppers who buy jeans get a second pair at half off. Jewelry chain Zale Corp. is offering an extra 20 percent off on a slew of items like gold earrings that were already slashed up to 70 percent. And Pottery Barn has discounts of up to 75 percent.

"There's a fine line between aggressive promotions and panic, and we are seeing a little bit of both right now," said Dan Hess, founder and CEO of research firm Merchant Forecast.

While retailers entered the fall season with inventories well below last year, analysts say many were still a little too hopeful: August sales are turning out to be even weaker than expected, which analysts fear could lead to more piles of marked-down merchandise on the floor. That could in turn hurt third-quarter profits as the industry prepares for the critical holiday season. Major retailers, including Wal-Mart Stores Inc., J.C. Penney Co. and Gap Inc., which also operates Banana Republic and Old Navy stores, are slated to announce final August sales results on Thursday.

Hess estimated that discounts are 10 percent deeper at mall-based apparel stores than a year ago, despite a drop of anywhere from 10 percent to 15 percent in inventories.

"Even though retailers are entering the season conservatively, they still have been too optimistic about the consumer," he added.

Stifel Nicholas analyst Richard Jaffe noted that the weak sales trend suggests a downturn that more closely resembles the one of the mid-1970s than more recent difficult periods.

"It's a more prolonged consumer spending downturn," he said. "It's going to be tough. There's no quick way out of it."

Offering such deep discounts can cost high-end retailers such as Nordstrom Inc. and Saks Inc. in more ways than lower margins or falling profits. By doing so, analysts say, they risk hurting the cache of their brands. That's what happened to Saks, which operates luxury chain Saks Fifth Avenue, after the Sept. 11 attacks, when deep cuts on designer goods hurt the retailer's tony image.

Another major worry is that retailers could lose the power to raise prices once the economy improves. The longer stores are forced to offer generous discounts, the more used to them consumers will get, and resist buying regular-price items later on.

"I have always been price conscious," said Mike Hogan, 30, a publicist for technology companies. The Columbus, Ohio, resident admitted that he has cut back even more in recent months because of the higher daily costs of food and gas, which leave less money for extras. He expects to spend about $350 on clothes this fall, about half of what he spent a year ago, and he doesn't think he'll resume splurging even if the economy recovers - unless he received a big bump in pay.

"If it doesn't change for me, I can't understand why I would spend more," he added.

Hogan and other shoppers may have to wait a while: Many economists predict that the economy is unlikely to improve until at least well into next year. The latest batch of economic reports show consumers are still struggling to keep up with soaring living expenses. The Commerce Department reported Friday that personal incomes plunged in July, while consumer spending slowed significantly as the impact of billions of dollars in government rebate checks began to fade.

And despite a slight improvement in consumer confidence in August according to The Conference Board - helped in part by lower gas prices - the level is still near historic lows as shoppers worry about the job market and the housing slump.

The malaise is hurting all income levels, including more recently the affluent shoppers.

Saks told investors last month when it reported second-quarter earnings that it expects sales at established store to be anywhere from unchanged to down by low-single digit percentages for the second half of the year. Officials also noted that its high-end customers are now pulling back; previously, it was just aspirational customers retrenching.

But Saks is trying not to duplicate the mistake of slashing prices too much. Steve Sadove, chairman and CEO of the company, told investors last month, "I don't want us to repeat what happened five years ago or six years ago after 9/11 in terms of panicking and running. We feel very good about the assortments ... and we want to stay the course strategically."

That may be tough. Deborah Weinswig, an analyst at Citi Investment Research, noted in a recent note that she's worried that Saks' inventory levels at the end of the second quarter are high relative to recent sales trends and could hurt gross profit margins in the second half of the year.

Retailers overall are expected to report a 2 percent increase in same-stores sales for August on Thursday, with discounters like Wal-Mart and warehouse club operators such as Costco Wholesale Corp. expected to keep faring much better than the slumping apparel-based stores, according to the International Council of Shopping Centers-UBS index. Same-store sales are those at stores open at least a year, and are a key indicator of a retailer's health.

With no major fashion trend inspiring them to buy, shoppers are focusing on price and sticking to discounters even as mall-based clothing stores have been aggressively discounting. That's a big hurdle for the mall-based stores, Hess says. He noted that American Eagle's prices, with the deep discounts, are at least as good as those at Aeropostale Inc., a teen retailer that has benefited from the slow economy as it typically offers goods below American Eagle and other rivals. American Eagle's jeans, for example,are typically priced about 30 percent higher than those at Aeropostale.

Stores such as American Eagle, Hess said, are "struggling to get that value message."

Source: Charlotte Observer

American Eagle goes live with Web site to give its young adult brand a national presence

Forget the state-by-state deliberations. Access to Martin + Osa fashions has finally been thrown open to a national audience, and the returns should help determine if the new clothing chain can live up to its promise.

A Web store that quietly opened for business in recent weeks represents the broadest move yet by South Side teen retailer American Eagle Outfitters to expand its experiment in clothing 28- to 40-year-olds. Until now, the brand's customers were mainly those living near its 20 shops around the country.

"We're inviting people in to experience Martin + Osa," said Michael Dupuis, senior director, marketing, whose team has been polishing e-commerce images and systems that will be many shoppers first exposure to the brand.

Investors and analysts have been debating just how long American Eagle should stick with this project. Since the first prototype store opened more than a year ago, officials have tinkered with styles, real estate and even leadership of the venture.

Top management thinks changes are paying off. Susan McGalla, president and chief merchandising officer, told analysts on a recent earnings call the newest assortments fit better, use color better and generally offer more value for the price. In February, she said, more customers coming in were buying something.

"We think the product's right. It's getting better every season," said Fred Grover, executive vice president, e-commerce and AE International. Comments on some online message boards seem to indicate store customers agree.

Yet Internet shoppers can't feel the cashmere or try on the pants made with cotton/linen blend. To convince virtual visitors to give an unfamiliar brand a chance, the company is offering them a prime perk: free shipping and returns.

It's a smart move, even if it could initially be costly, said Tom Filandro, a specialty retail analyst at Susquehanna Financial Group. "This is a business about trial. You've got to get it in their hands."

Only then, officials believe, will consumers begin to understand the brand's "refined casual" message and appreciate details meant to give Martin + Osa a reputation as a higher quality clothier fussing over nuances such as better fabrics and well-constructed seams.

If customers don't send it all back, officials will know they've solved some earlier issues with fit and style. "If your returns are low, you've got it," said Mr. Filandro.

Such lessons can also be learned building a brand the old-fashioned way, one store at a time. That allows a certain amount of control over the experiment but limits customer awareness. Even in the company's hometown of Pittsburgh, there are no Martin + Osa stores.

Perhaps more importantly, there are no stores in Manhattan where trend-setting fashion editors and writers congregate. The company's marketing strategy, now that the Web store is open, calls for hosting events in New York later this month to show off the brand's clothes to groups of fashion bloggers and magazine editors.

Driving traffic to the site will also involve direct mail and e-mail efforts, starting this week, as well as buying space on search engine pages to reach Web users searching terms such as "cashmere."

Shoppers who do visit the Martin + Osa site will find a place carefully crafted by teams at American Eagle's South Side headquarters to subtly educate them on the brand as well as to be distinctly different from the company's namesake retail concept. The models here are likely to wear wedding rings, after all.

Then there's the 'shop by outfit' feature. A dark-haired model is seen posing and moving around in several different looks assembled from Martin + Osa styles. In one pose, she has on a shirt dress, long sleeve T-shirt, a braided leather belt and espadrilles. Another shows her in a more complicated outfit layering a shirt, sweater, anorak over jeans with a strappy sandal and a silver tote bag.

Since the Web store went live to let designers work out bugs, the outfit tool has been a hit. "So far, this is one of the highest trafficked pages on the site," said Mr. Dupuis.

Suggested outfits have been assembled for both male and female shoppers, but women are also being offered a 'layer your own look' feature that allows them to drag clothes onto a virtual mannequin to see how separates work together.

Fine-tuning the Martin + Osa presentation has involved more than just Web page design. The distribution center in Kansas has worked out details of wrapping the clothes in tissue paper and packing them in special boxes. A photo studio at the South Side headquarters put together detail shots to give shoppers tight views of fabrics, pockets and other hard-to-see elements.

While the company has kept merchants for its different brands separate, a certain overlap in operational support functions is seen as an efficient use of the American Eagle administrative structure. That's important as the economy slows. Retailers of all sorts are looking to cut costs and justify expenditures, such as investments in new growth concepts.

As Pali Capital analyst Stacey Widlitz noted in a February report, the division is estimated to drag down American Eagle earnings by 15 to 17 cents a share this year. "If the concept is not revived in 2008, we expect a discontinuation of operations and a corresponding bump in margins."

Mr. Filandro doesn't see top American Eagle management letting the project linger too long if it doesn't become productive but he noted the company still believes there is an underserved customer who will respond if the concept is done right. The company has announced plans to open 13 more Martin + Osa stores this year.

The new Internet launch could also offer useful lessons for the next project on American Eagle's plate. This fall, the retailer plans an online launch for a new children's clothing chain to be called 77kids by american eagle. By fall 2009, the company expects to open brick-and-mortar locations.

"You can utilize online to figure out what product sells best," said Mr. Filandro. Internet results also help identify markets where traditional stores might find customers. In hindsight, he said, going online first might have been a good strategy for Martin + Osa, too.

Source: Pittsburgh Post Gazette