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Industry Strategies for an Unsettled Economy

Senior executives from an array of apparel manufacturers and retailers are hunkering down to weather the economic storm.

DANA POINT, Calif. — Senior executives from an array of apparel manufacturers and retailers are hunkering down to weather the economic storm.

They gathered here at a financial conference last month sponsored by ICR consultants to discuss their strategies — cutbacks as well as expansion plans — amid turbulence in the U.S. and global economies.

“It’s a shakeout time in retail,” said Millard “Mickey” Drexler, chairman and chief executive officer of J. Crew. One of Drexler’s concerns is that retailers display an abundance of products, which suggests a lack of focus. “There’s too much inventory,” he said. “Less is better for full-price selling.”

Indeed, “conservative” was the buzzword for many executives. “There are substantial headwinds out there,” VF Corp. president and ceo Eric Wiseman told investors, financial analysts and competitors at the St. Regis Monarch Beach Resort and Spa.

Zumiez Inc., the Everett, Wash.-based action sports retailer that operates some 285 stores, is taking the cautious approach. “We’re going to manage inventory conservatively,” said ceo Rick Brooks.

Wiseman said owning a portfolio of diverse brands, including Reef, Vans, John Varvatos, Lucy and Seven For All Mankind, helps Greensboro, N.C.-based VF to appeal to surfers, skateboarders, luxury shoppers, athletic women and denim aficionados. “That diversity helps us manage risks,” he said.

VF’s goal is to grow sales at least 8 percent annually to $11 billion in 2012. Of that target, international sales are expected to increase 80 percent to $3.6 billion over the next four years and revenue from retail operations is anticipated to more than double to $2.4 billion in 2012 with the opening of new stores for Seven For All Mankind, Lucy, Vans and The North Face. Acquisitions also are on the horizon for VF, which said 2 to 3 percent of its growth over the next four years will come from the addition of brands to its portfolio. It will allocate $3 billion to help pay for acquisitions through 2012.

Acquiring more lifestyle brands is also part of the growth strategy for Atlanta-based Oxford Industries, which owns Tommy Bahama and Ben Sherman, among other brands.

Despite the macroeconomic clouds, Urban Outfitters chief financial officer John Kyees said the Philadelphia-based company, which owns its namesake brand along with Anthropologie and Free People, wants to grow sales by at least 20 percent this year, opening 38 stores and increasing its wholesale business to almost $100 million from $74.2 million. New York’s Iconix Brand Group said 70 percent — or $525 million — of its revenue is guaranteed through royalties from some 220 licensees producing everything from jeans to underwear for 16 brands.

New York-based J. Crew is considering adding e-commerce to the Web site for Madewell, the casual label targeting the younger customer graduating from teen apparel chains. New York & Company hopes to increase Internet sales to $20 million in 2008 from $6.5 million in 2007, partly because selling directly to consumers on the Web allows for operating margins of 17 percent.

Some companies are cutting back on spending. Quiksilver Inc. plans to reduce the number of stores opening in 2008 to conserve capital and lower expenses by $20 million. The Wet Seal Inc., the Foothill Ranch, Calif.-based retailer that has its namesake junior brand and the Arden B. label, said it will reduce its print ad campaigns for Arden B. and focus more on promoting products with celebrities as well as grassroots marketing that taps into its customer database.

However, other firms are compelled to be aggressive with acquisitions to offset weak sales. On Jan. 16, Volcom Inc., the Costa Mesa, Calif.-based board sport company, lowered its 2007 estimates for revenue and earnings. However, the company is acquiring Electric Visual Evolution, an eyewear firm based in San Clemente, Calif., for about $25.3 million. Electric is expected to increase sales by 20 percent this year from $23.5 million last year.

Volcom plans to open five to seven branded stores in 2008 to add to its roster of six.

New stores are planned by other retailers. Drexler said J. Crew is considering opening “a few more freestanding stores” for Crewcuts, its children’s chain that operates a Web business, four stand-alone units and 31 shops-in-shops within J. Crew units.

Lululemon Athletica, based in Vancouver, said it wants to eventually expand the number of stores in North America from 81 to more than 300 with new markets in Hawaii, Texas, Florida and Washington, D.C.

Kenneth Cole Productions Inc. in New York closed six stores in 2007 and budgets six more closures in the coming months. However, it will add an unspecified number of units to its 42 outlet stores.

After shuttering its urban chain D.e.m.o. and footwear chain One Thousand Steps, Pacific Sunwear of California said by March it will unveil 138 of its namesake board sport-centric stores with a refurbished format, which includes bigger fitting rooms for women, better lighting and more table displays. The company will then redo 75 stores a year. PacSun’s goal is to increase its junior business to 50 percent from 46 percent, which is lower than the share held by competitors, including Hollister Co., Aéropostale Inc. and American Eagle Outfitters Inc. PacSun chair and ceo Sally Kasaks said the Anaheim, Calif.-based company is “certainly going beyond the tomboy image that was associated with PacSun.”

The children’s market is also a growth opportunity for American Eagle. Best known for its namesake teen chain, the Pittsburgh-based retailer is launching a children’s apparel retail concept called 77kids by American Eagle for youngsters between the ages of two and 10. The company plans to make the first sale at 77kids.com by fall with a rollout of the store next year.

Apparel is a better market than equipment. Board sport behemoth Quiksilver said its fiscal first-quarter loss will be larger than anticipated because retail business in Europe and the U.S. was softer and stores weren’t eager to reorder skis and other gear. The Huntington Beach, Calif.-based company forecasts a first-quarter loss of 9 to 12 cents a share. Revenue is expected to increase 10 percent to $2.43 billion, with apparel growing 20 percent to $2.04 billion, while equipment fell 22 percent to $379 million. Quiksilver wants to boost revenue with the launch of a young contemporary line marketed under the flagship brand for the fall selling season. The first shipment starts in July.

Another promising category is accessories. IT Holding SpA, the Italian company that owns Gianfranco Ferré and Malo and holds the licenses for Versace Jeans Couture and other brands, wants to capitalize on consumer demand by developing accessories for Malo. J. Crew plans to offer more hair accessories and jewelry. American Eagle also identified accessories, including bags and footwear, as the next area of growth.

Marshal Cohen, chief industry analyst for The NPD Group, the market research firm based in Port Washington, N.Y., predicted that the accessories market won’t grow as much in 2008. But he said accessories have trumped apparel because a consumer will pick clothes after selecting the accessory.