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

Sales Decline, but Cost-Cutting Helps the Gap

SAN FRANCISCO (AP) — The apparel retailer Gap Inc. said on Thursday that despite a decline in sales, its second-quarter profit rose 51 percent, helped by cost-cutting and tight control on inventory.

Profit for the three months ended Aug. 2 rose to $229 million, or 32 cents a share, from $152 million, or 19 cents a share, a year earlier.

Analysts polled by Thomson Reuters had predicted a profit of 30 cents a share, and the company had forecast earnings of 30 or 31 cents a share.

Revenue fell 5 percent, to $3.5 billion, from $3.69 billion last year. Analysts had expected revenue of $3.52 billion.

Sales in stores open at least one year, a main measure of industry performance known as same-store sales, fell 10 percent. In North America, same-store sales fell 6 percent at both Gap and Banana Republic and fell 16 percent at Old Navy. International same-store sales also fell 6 percent.

Gap also reaffirmed earnings guidance of $1.30 to $1.35 a share; analysts expect a profit of $1.34 a share.

The company said it would open 15 fewer stores, mainly Banana Republic, than previously expected during the year. It said it now expected to open 100 stores.

Earlier on Thursday, Gap named John T. Wyatt, a 30-year retail veteran, as president of its Old Navy chain.

Mr. Wyatt, 53, had served as acting president of Old Navy since February, when Dawn Robertson stepped down after struggling for 16 months to turn the division around.

Source: NY Times

Gap to focus on smaller-scale stores

In response to slumping sales, the clothing retailer changes strategy and develops a new real estate plan.

NEW YORK (AP) -- Gap Inc. plans to use its existing real estate to create smaller-scale stores and does not plan to open new stores in the near term, Chief Executive Glenn Murphy said at a conference on Tuesday.

Murphy's comments, made at the PiperJaffray (PJC) consumer conference in New York, were webcast.

Gap (GPS, Fortune 500) has experienced slumping sales over the last several years, although the San Francisco company's profit has been improving since Murphy took the helm in July.

In May, the company said first-quarter profit rose 40%, helped by managing inventory and cutting costs, but sales fell 5% to $3.38 billion. Sales at stores open for at least a year dropped 11% - the company's worst erosion yet during a downturn that has lasted nearly four years. Gap's same-store sales have now declined in 15 consecutive quarters.

"None of us feel good about minus five in sales," Murphy said. "We want to drive bottom-line earnings growth through running a healthier margin business."

One way to do this is by retooling the company's 40 million square feet of real estate, Murphy said.

"We always viewed this as a cost, but it is an asset," Murphy said. "We need to monetize it and maximize it."

Murphy said San Francisco-based Gap has too many stores that are 12,500 square feet, which he deemed too large other than for flagship and signature locations.

"We got carried away," he said. "Stores are larger than we need."

Instead, he said the target size of stores should be 6,000 square feet to 10,000 square feet.

In addition, the company plans to combine previously separate concept stores. Some Gap body, adult, maternity, baby and kids stores will be combined in one, rather than in separate spaces as they have been previously.

Most of the changes will be evident beginning in 2009, Murphy said.

"We will think through whether our 3,100 stores will be repositioned, relocated, remodeled or right-sized," he said.

Meanwhile, company plans to reduce the number of 20,000-square-foot Old Navy stores it has, and focus on stores that are around 14,000 square feet to 15,000 square feet.

It will take about three to five years to get the right amount of stores into that "sweet spot," at Old Navy, Murphy said.

Other initiatives the company is working on include opening outlets in Canada. It also recently launched an online platform where consumers can shop across all four of its brands: Gap, Old Navy, Banana Republic and online shoe retailer Piperlime.

Source: CNN

Banana Republic to Open First Monogram Store

Banana Republic, a division of San Francisco-based Gap Inc., will open its first standalone Monogram concept store in New York on April 7, according to Dnrnews.com. The retailer will convert its Bleecker Street location in Greenwich Village to the Monogram concept store, which will serve as a test store for nine months. The Monogram concept, which has more expensive, sophisticated collections, will offer a men's line focused on tailored pieces, as well as women's merchandise. The men's collection debuted last fall, and the women's Monogram line will launch this spring, with accessories planned for fall 2008. "Monogram offers our customers the best of city style and we are eager to showcase the collection in a dedicated environment for our New York City customers," said Jack Calhoun, president of Banana Republic. Currently, there are no plans to open additional standalone Monogram stores.

Source: Display & Design Ideas