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Specialty Retailers Seek Best-Selling Items in Tough Times

With women buying less, newness and differentiation may be the only saviors for retailers this season

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What’s selling for fall? Not as much as previous seasons, specialty retailers agree.

Women are shopping less and evaluating more closely what they are spending money on, faced with a dim macroeconomic environment. That’s pushing comp-store sales down around 12 percent at many mainstream specialty retailers, including J. Crew, Talbot’s, Ann Taylor and White House|Black Market.

“We’ve seen it all this month — deep discounts, incremental promotions and sales, early friends and family days, repeated e-mail blasts. Specialty retailers have been pulling out their entire bag of tricks in the desperate hope of convincing the reticent shopper to spend,” said Catherine Sadler, president of the New York marketing firm Catherine Sadler Group. “But, as we all know by now, it hasn’t worked. September sales plummeted. According to recent traffic studies, traffic is down by close to 10 percent — and, I suspect, still falling. Next will come inventory cutbacks as these same retailers desperately try to preserve their eroding margins and reduce the risk of leftover merchandise. Net net — everyone is girding for what could be the worst holiday season in two decades.”

Retailers targeting Baby Boomers, like Chico’s and Talbot’s, are victim to the confidence crisis as 401(k)s wither away. Working mothers targeted by retailers such as Ann Taylor are stressed about job security, declining home values, and higher food and gas prices.

Sadler said newness and differentiation are the only saviors this season, pointing to J. Crew’s higher-end line (“accessible luxury could just be what the doctor ordered, when luxury is no longer attainable”) and Ann Taylor Loft’s washable products conceived in partnership with Procter & Gamble (“to a certain customer, not having to pay for dry cleaning bills may be just the ticket right about now”).

Based on early fall best-selling items as reported by retailers, customers still want:

• Classic items with a twist.

• Versatile pieces that transition from office to evening.

• Seasonless fabrics, with nearly year-round shelf lives.

• Tops that can move from outfit to outfit.

• Newness that surprises her and that she doesn’t already own.

• Solid price-value relationships.

At J. Crew, that means an $88 heather ruffle cami has been the apparel bestseller. “It has that element of surprise we all need these days — it has a layered ruffle and pleating detail that makes a plain old ruffle seem boring,” said creative director Jenna Lyons Mazeau. “Customers want something special — a reason to buy — a sense of quality as well as style. The more unique and special pieces are, the more sought after and talked about.”

After J. Crew’s second-quarter earnings fell 12.2 percent, mostly due to unexpected computer-system upgrades, the 212-door retailer lowered its profit guidance for the year to between $1.44 and $1.54, down from previous guidance of $1.70 to $1.75 a share.

Banana Republic eked out a slight increase in second-quarter sales to $599 million from $596 million last year, but comparable-store sales declined 6 percent. Gap Inc. improved its second-quarter earnings by 51 percent by carefully controlling costs and inventory.

As Gap Inc.’s best-performing brand celebrates its 30th anniversary, the “quintessential pieces…that have defined our heritage” — a $225 khaki trenchcoat and a $175 tie-neck black dress — have been the 594-store chain’s bestsellers this fall, according to a spokeswoman.

Recognizing their ills are as much self-induced as due to the economy, other retailers — such as Talbot’s, Coldwater Creek and Ann Taylor — are scrambling to reinvent themselves, hiring leaders and crafting restructuring plans to modernize their offerings. “Compounding the macroeconomic situation is the fact that the majority of mainstream specialty retailers have already been off their game for quite a while,” said Sadler.

In the midst of a three-year strategic turnaround, The Talbots Inc. saw second-quarter losses nearly double to $25 million, or 47 cents a share, and sales fall by 7.7 percent to $528 million. By brand, comps decreased 11.7 percent at Talbots and declined 13.2 percent at J. Jill.

Classic items with a twist, like a $68 hot pink paisley shirt, have led sales at Talbot’s. “Paisley is a great classic that we continue to evolve and reimagine every season,” said Michael Smaldone, Talbots’ new chief creative officer. “It finds its way into our collection in unexpected ways from scarves, to linings, to our tunics.”

As $1.15 billion Coldwater Creek Inc. attempts to reposition itself, the company has blamed the economy on decreasing store traffic and for forcing more promotions, which caused second-quarter earnings to plummet 65 percent to $3.1 million, or 3 cents a diluted share, and sales to dip 5 percent to $241.4 million.

“I’m proud of our accomplishments in the first half of the year as we strengthened our underlying business fundamentals, establish a more efficient expense structure and, most importantly, improved our product and store experience,” said Dan Griesemer, president and ceo of Coldwater. “However, looking towards the back half of 2008, we’re facing strong headwinds with continued deteriorations to the macroenvironment. Retail traffic is extraordinarily challenging and we see no external stimulus to improve our customers’ willingness to shop and spend in the short term.”

Coldwater’s best-selling item this fall has been the $29.50 Annabel fringe shawl.

AnnTaylor Stores Corp.’s second-quarter earnings dropped 7.7 percent to $29.3 million, or 54 cents a diluted share, as same-store sales fell 10.8 percent. Total sales were $592.3 million compared with $614.5 million a year ago. The company attributed the declines only in part to the economy, blaming the rest on merchandise misses and an outdated image. In August, the chain named a new president, Christine Beauchamp, to modernize the brand’s positioning, by adding prints, colors, new silhouettes and trend-right modern items, such as motorcycle jackets and ruffle blouses.

Chico’s FAS Inc.’s second-quarter profits fell 83 percent to $6.7 million, or 4 cents a share, and sales slid 7 percent to $405.2 million. Same-store sales fell 19 percent for Chico’s namesake brand and 12 percent at White House|Black Market. “The retail environment continues to be challenging as customers remain increasingly cautious in their spending across the entire retail sector,” said Scott A. Edmonds, Chico’s chairman, ceo and president.

For the 78-store Tommy Bahama Group Inc., second-quarter sales were off 2.1 percent to $112 million and expenses increased. There, the $198 botanical print silk jersey dress with shell embellishment around the skirt, was a top seller. “Dresses very simply add some newness to a woman’s wardrobe, without costing a lot — and they travel well,” said Lynne Koplin, president of women’s for Tommy Bahama, adding the customer “wants seasonless fabrics, like silk jersey, poly matte jersey and stretch cottons.”

While most retailers have had a tough time in this environment, others have gained share. Examples of growth include:

• Anthropologie’s 7 percent comp-store sales increases helped parent company Urban Outfitters Inc. post a 79 percent second-quarter earnings gain to $57 million, or 33 cents a diluted share, on sales which were up 30.4 percent to $454.3 million.

• Club Monaco’s 3 percent gains helped parent Polo Ralph Lauren Corp.’s earnings climb 7.8 percent.

• Eileen Fisher saw an 11 percent increase in same-store sales and a 15 percent overall retail increase when including new stores.

“The poor performers look at the troubled economy as cover, while the strong companies look at as an opportunity to gobble up market share,” said Bob Grayson, founder of consumer products consulting firm The Grayson Co. “This macroeconomic overreaction we are seeing is cover to hide poor efforts.”

At Club Monaco, a gold brocade flared miniskirt with pleats, selling for $129, has been the favorite. “The customer is responding to novelty items right now, rather than basics,” said a Club Monaco spokeswoman. “We are sensitive to the economy,” said Tina Gershoff, Club Monaco’s vice president of retail. “But we’re at a friendlier price point. I feel that’s easier on the consumer.”

Tommy Hilfiger Corp. is enjoying double-digit comps this year, with women’s outperforming men’s, thanks to both its partnership with Macy’s and elevating of the quality of product in its own stores, according to Fred Gehring, ceo of Tommy Hilfiger. Tommy Hilfiger’s U.S. retail store sales gained 16 percent in the first half, helping grow the company’s overall sales 30.5 percent to $1.13 billion.

In Tommy Hilfiger’s retail stores, a $298 silk asymmetric short-sleeve blouse has been a top seller. “The Lotti blouse has had success because, unlike a regular blouse, the feminine silhouette and fabric allow the versatility to transition from day into evening,” said Gary Sheinbaum, Tommy Hilfiger president of retail. “In this tough time we are being sensitive to our customers’ need for impeccable style that is obtainable.”

Blouses have also been a success for Tory Burch. The brand’s bestseller so far this fall has been a $295 printed blouse in purple crinkle chiffon. As Tory Burch searches for an investor, business continues to reflect the sweet spot in the bridge-contemporary market that the brand fills.

“The state of the economy is affecting everyone and we are certainly not immune,” said designer Tory Burch. “We consider ourselves lucky to have such a loyal customer and we plan to stay incredibly focused on addressing her needs and providing her with pieces that suit her lifestyle.”

At Eileen Fisher, a $148 Alpaca Net sheer cap-sleeve tunic has been a favorite item. “Customers are looking for pieces to update their wardrobe in rich textures, modern shapes and new colors,” said a spokeswoman. “They are looking for investment pieces that will work with pieces they already own, but also want to infuse some fun into their wardrobe.”

Lacoste’s fall bestseller has been a long sleeve micropoint V-neck sweater dress, selling for $165. “Customers are generally looking for classics with a twist,” said Daniela Bocresion, Lacoste senior vice president of merchandising and marketing.

“Business has softened a bit these past two weeks, but season to date we are looking good,” Bocresion added of the $320 million business, with 70 boutiques and 14 outlets.

But even for the best positioned, the retail pie is getting smaller, as consumers feel the strain of devalued stock portfolios, higher commodity prices, lower home values, tighter credit and general economic uncertainty and pessimism. And retailers that saw strong second-quarter results did so before the bottom truly fell out of global financial markets — spooking even the hardiest consumer.

“There’s nothing wrong with J. Crew, Club Monaco or Banana Republic, but they have to be on their A-game with wonderful product combined with unbelievable value,” said consultant Emanuel Weintraub. “At best, stores will meet reduced expectations, not their prior expectations.”

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