By  on February 9, 2009

It’s never been harder to be a stepchild.

In a sequence of store closings, layoffs, huge promotions, inventory reductions and stalled expansion plans, specialty retailers hoping to survive the economic crisis may have to use more than a scalpel to cut costs. With no signs of a letup in the recession and many secondary brands failing to gain traction with consumers, some retailers may be forced to wield an ax and sever their spin-offs, analysts said.


“In this kind of economic climate, with cash being king and [inventory] liquidation being essential, each business has to pay for itself,” said Dana Telsey, president of Telsey Advisory Group.

The fate of the spin-offs is certain to come under scrutiny now that retailers have finished their fiscal years and are preparing to release fourth-quarter and full-year results.

“Anything’s up for discussion,” said retail analyst Amy Wilcox Noblin of Pali Capital. “Retailers are seriously cutting back. No one knows when demand comes back.”

Intolerance for weak offshoots was building even before the recession hit with its full fury. An example is Pacific Sunwear of California Inc.’s departed urban-inspired spin-off, D.e.m.o. The brand shed 74 stores in spring 2007, before shutting down the remaining 154 stores in January 2008.

The closures followed a string of weak financial performances. For fiscal 2007, the retailer posted a net loss of $30.4 million on $1.45 billion in sales. The company said the PacSun division had an income from continuing operations before taxes of $218.6 million, on revenue of $1.31 billion, while D.e.m.o. put up a net loss from continuing operations of $106 million on sales of $148.3 million. For the year, D.e.m.o. reported a 19.6 percent comparable-store sales decline, while PacSun specialty and outlet stores posted a 3.4 percent comp increase. PacSun also elected to abandon its fledgling One Thousand Steps concept during the fourth quarter of fiscal 2007.

Pali’s Noblin said Bebe Stores Inc.’s athletic apparel concept, Bebe Sport, is a “business that has never proven itself” and may suffer a fate similar to D.e.m.o.’s. The recent departure of corporate chief executive officer Gregory Scott makes the situation “uncertain,” she added.

“It is no secret that Bebe has struggled with product and second concepts for some time in addition to a weak consumer,” Noblin said, noting that, over time, the retailer’s apparel has seemed to target a 30-plus customer, instead of its younger, core contemporary customer, making the management change “not necessarily negative.”

Retail analyst Eric Beder of Brean Murray, Carret & Co. said Scott’s decision to double the Bebe Sport chain over the past three years hurt the retailer, and that company founder Manny Mashouf, who has returned to the ceo role, should “aggressively reduce Bebe Sport, by either closing stores or converting them to Bebe or Bebe accessory stores.”

Beder described Bebe Sport as “outdated and unfocused, at best, and not worthy of management’s limited time right now.”

No new store openings are slated for the 63-store chain, company management said, as Bebe focuses on its newer outlet concept, 2b Bebe.

Although Bebe does not break down earnings by division, the company said it will continue to evaluate the marketing dollars for Sport, and will “reduce the total dollar spend if sales do not show improvement.”

Abercrombie & Fitch Co.’s 26-unit “post-collegiate” Ruehl is another struggling spin-off with no plans for new stores. Instead, A&F said it intends to focus on fine-tuning the concept, which generated $39.1 million of the parent firm’s $2.54 billion in sales in the first nine months of fiscal 2008. Ruehl’s comparable-store sales declined 22 percent during the nine months. Even the once-expansive Hollister was off 12 percent during the same period.

“I remain unconvinced that there is a market for Ruehl,” said Citigroup retail analyst Kimberly Greenberger, who observed that it is “very easy to target an age group,” or to let age “define a demographic,” but once a consumer is out of college that effort becomes more difficult.

Although her complaint can be applied to any retailer trying to box in 20- to 40-somethings, she said Ruehl’s “problem” is that it feels “meaningfully younger” than its rivals.

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