By  on August 5, 2010

 


Soft comparable-store sales in June and July have many retailers priming their promotional pumps in a trend that could put margins and profits at risk during the back half of the retail year.

Despite their best efforts to drive sales with steep promotions, many retailers last month heard the sound of crickets chirping rather than sales being rung up, according to July sales results reported Thursday.

In advance of the back-to-school season, apparel retailers slashed prices and ran a variety of crafty promos to clear out inventory before new shipments arrived in stores. Retailers that abstained from the promo-mania saw their rivals lure in customers while they remained flat-footed.

While last month’s results “continued a trend” of soft comp results, they suggested “retailers are getting nervous,” according to Sherif Mityas, partner in the retail practice of A.T. Kearney, a global management consulting firm.

“There was a level of activity and depth of discounting that is more reactionary,” he said, explaining that it’s likely this trend will run through b-t-s into the back half of the year. “Clearly there will be some earnings pressure. A lot of retailers got overconfident and increased their buys.”

The second half of the retail year began this month.

Mityas, who said it is prudent to wait for August results for clarity on b-t-s, advocated retailers “hold the line” instead of pulling the promotional trigger. But that’s a hard thing to do.

Abercrombie & Fitch Co., which earned a 7 percent comp gain, and American Eagle Outfitters Inc., which posted a flat comp, “blind-sided” teenagers’ perennial value destination, Aéropostale Inc., with “offensive” promotions, according to Weeden & Co. analyst Amy Noblin. Aéropostale’s 1 percent gain missed estimates.

Abercrombie began offering 40 percent off all jeans and leggings in the final days of July. Its lower-price concept, Hollister Co., which posted a 4 percent comp rise, is discounting denim between 20 and 30 percent.

American Eagle also rolled out several promotions, including one that offered 20 percent off to any consumer who purchased two pairs of jeans.

With its modest 1 percent comp increase, “Aéropostale is going to have to get more aggressive for August,” Noblin said. “But the question is: Is it going to matter?” Now that A&F and American Eagle have “more palatable” price points, the analyst wondered if the consumer, who traded down to Aéropostale during the recession, will go back.

Aéropostale surprised most analysts and experts when it narrowed second-quarter guidance to a range of 45 cents a share to 46 cents, from between 45 cents to 48 cents, “due primarily to the challenging retail environment, in addition to a change in consumer shopping behaviors,” the company said early Thursday.

The company’s stock fell 5.7 percent to $25.88 by the end of the day as the S&P Retail Index managed a 0.6 percent gain to 416.80. The Dow Jones Industrial Average declined less than 0.1 percent to 10,674.98.

The Buckle Inc., which turned in a 9.3 percent comp decline, also got stung by the competitive environment, according to Sterne Agee retail analyst Margaret Whitfield.

“While comparisons are somewhat easier in the second half, the company continues to struggle with weak denim and knit tops,” she said. “Promotional activity at other retailers has been intense, with denim a focus.”

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