By  on June 5, 2007

WASHINGTON — Facing the first increase in the federal minimum wage rate in a decade, retailers are scrambling to manage the impact on payroll costs and profits. And it could be substantial.

The teen retail segment could feel the sharpest blow because many companies hire teens at minimum wage, according to equity analysts. Independent specialty chains with stores in multiple states are expected to be hit, as are mass merchants operating on thin margins. The federal minimum wage will increase in stages to $7.25 an hour from $5.15 over the next two years.

Retailers have been grappling with recent increases in minimum wages in dozens of states, which have taken hourly pay well above the current federal minimum, and the issue has been a key topic in earnings conference calls as company executives try to explain to analysts and Wall Street why their payroll costs are rising.

"It's definitely a hit to teen retailers," said Crystal Kallik, an equity analyst with D.A. Davidson & Co., who covers Abercrombie & Fitch, American Eagle Outfitters, AnnTaylor Stores and Hot Topic. "They tend to hire their customer base: teens."

Michael Kramer, A&F's executive vice president and chief financial officer, recently said on a first-quarter conference call that the company expected an increase in expenses of $3 million a quarter directly as a result of the minimum wage increases.

Kallik called A&F's $3 million quarterly increase in payroll costs "significant," noting it amounts to $12 million on an annual basis, but she said the company had shown it could manage the increases by aggressively looking for inefficiencies.

"The ones who will get caught off guard are the [retailers] who are funding infrastructure as they go and are now getting hit with additional costs and haven't been working to find…offsets," Kallik said.

Gerald M. Chaney, senior vice president and cfo of Pacific Sunwear, said on a call that certain expenses rose nearly 1 percent in the first quarter as a result of the addition of 61 net new stores and the minimum wage increase that has occurred in some states.

"That's significant for them," said Kallik. "One assumes it will mean a few pennies' impact on this year's earnings. You don't typically hear a payroll called out in a conference call."

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