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Battling the Slowdown With Tighter Inventory

Retailing has become a game of defense.

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RETAILING HAS BECOME A game of defense.

An alphabet soup of stores — from Aéropostale to Zale — posted first-quarter results Thursday that highlighted just how cautious shoppers have become. Stores are protecting themselves by slashing expenses and stringently controlling inventories, but can only do so much.

Keeping inventories down can help stores become lean and mean financially, but reduced assortments also make it harder to attract shoppers.

“We’re talking about a consumer that certainly is way too nervous to start spending a whole lot of money,” said Ken Goldstein, economist at The Conference Board. “I don’t think that’s going to change a whole lot this summer. There’s a chance that might even start to intensify.”

Employers cut a seasonally adjusted 260,000 jobs for the first four months of the year and Goldstein said the trend of job cuts could continue for another four months, further casting a pall over consumer spending for the rest of the year and perhaps into next year.

Besides the employment picture, which is of vital importance to consumer spending, gas prices are continuing to rise, topping $4 a gallon in parts of the country.

“That $135 barrel of oil is not yet on the tanker, let alone the local gas station,” said Goldstein. “That not only takes money out of consumers’ pockets, but the impact is far more psychological for most.”

All this pressure could be too much for some stores.

“You can cut inventory just like you take sales folks out of the store, but eventually there isn’t anything else to cut,” said Matt Katz, managing director at Alix Partners LLC, a restructuring and advisory firm.

Stores still have to take on some risks to differentiate themselves from their competitors.

“If everybody has the same idea of what’s on trend and what’s hot and they’re cutting [inventory] around the fringes, there’s certainly the danger of sameness,” said Katz.

Finding a sweet spot among the younger crowd, teen retailer Aéropostale Inc. was a standout, reporting a 27.2 percent surge in earnings, buoyed by strong sales of both fashion and core basics. Profits reached $17.5 million, or 26 cents a diluted share, from $13.8 million, or 18 cents in the year-ago period. Sales swelled 22 percent to $336.3 million from $275.8 million, while total same-store sales soared 10 percent. The company expects second-quarter earnings in the range of 22 cents to 24 cents a diluted share.

Not all teen retailers fared as well, though.

Pacific Sunwear of California Inc. said losses widened to $37.1 million, or 53 cents a diluted share, from $5.1 million, or 7 cents, in the same year-ago period. Sales fell by 0.5 percent to $266.9 million from $268.1 million as comparable-store sales fell by 1 percent.

The company revised earnings in light of regional exposures in the California markets. It expects earnings from continuing operations to be 3 cents to 8 cents a diluted share.

Linda Farthing, chief executive officer at Stein Mart Inc., said she was troubled by the “persistent trend of decreased sales absent promotional drivers.”

Stein Mart’s earnings fell 13.7 percent to $7 million, or 17 cents a diluted share, from $8.1 million, or 18 cents a year earlier. Sales slide 6.4 percent to $352.1 million from $376.1 million, as comparable-store sales fell 9.3 percent.

“If these sales trends persist, we will have to take steeper markdowns in the second quarter,” said Farthing. “While we were able to reduce expenditures in the first quarter, there will be less opportunity for savings in the second quarter.”

At The Bon-Ton Stores Inc., the loss widened to $34.1 million, or $2.03 a diluted share, from $29.3 million, or $1.78 a year ago. Sales for the quarter ended May 3 fell 5.1 percent to $700.2 million from $737.6 million. The regional department store lowered 2008 profit guidance to between breakeven and 30 cents a share. Previously the firm was projecting earnings of 20 to 45 cents.

Women’s apparel retailer New York & Co. Inc. said earnings soared to $6.7 million, or 11 cents a diluted share, from $802,000, or 1 cent, in the year-ago period. Year-ago results included a $4.4 million loss from discontinued operations. Sales for the quarter declined 1.5 percent to $270.1 million, from $274.2 million, while same-store sales fell 6.6 percent.

“We expect the environment for consumer spending to remain difficult this year,” said Richard Crystal, New York & Co.’s chairman and ceo.

Stage Stores Inc.’s earnings fell 75.2 percent to $2.3 million, or 6 cents a diluted share, for the three months ended May 3 from $9.1 million, or 20 cents, in the same year-ago quarter. Last year’s results included a gain related to sale of a credit card portfolio. Sales dipped by 1.3 percent to $353.5 million from $358.2 million, while same-store sales decreased 5.4 percent.

“We are projecting that our comparable-store sales will be down between 3.0 percent and 5.0 percent during the second quarter,” said Jim Scarborough, chairman and ceo, citing the impact of economic headwinds on consumers.

Zale Corp. is on a slightly different calendar, but the economic pressure is largely the same. The jewelry store’s third-quarter losses widened to $16.8 million, or 40 cents a diluted share, from $4 million, or 8 cents, in the year-ago period. Sales for the three months ended April 30 increased 6.2 percent to $476.7 million from $449 million.

— With contributions from Vicki M. Young

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