By  on May 26, 2004

New York — Deflation is dead. Long live deflation.

There’s no question right now that retailers are on a high, enjoying a rare season marked by widespread and, on average, double-digit profit gains, and a good amount of wonderment of what’s driving the growth.

They’ve surprised themselves with earnings that are not simply generated by perpetual cost-cutting, but are rooted in robust sales obtained far more often at full price than ever in the last three years.

There are a number of factors that have allowed retailers to refrain from markdown madness, including increased consumer spending, must-have fashions and much more sophisticated inventory management. But the question remains: Is the current phenomenon of stable prices sustainable?

Retail and financial analysts have anticipated a growing willingness among consumers to pay full price for apparel, and at least one retailer sees consumers responding to more fashionable merchandise — for now.

“Shopping can help relieve the angst associated with what’s going on in the Middle East,” J.C. Penney ceo Allen Questrom theorized. “The aging Baby Boomer is not going to put away everything for a rainy day. When they see something they like, they’re going to buy it.

“There is much more fashion in women’s apparel and even men’s than in a couple years,’’ Questrom continued. “Women are going to work with a dressier look. Younger folks are more interested in suits, ties and shirts. They see older people dressed casually and don’t want to look like older people. The key is to keep it going. That will be the challenge into the fall. I think there is new product out there. The key to success is to always have new ideas.”

Britt Beemer, chairman at Charleston, S.C.-based America’s Research Group, feels that this may not be a lasting trend.

“What I am seeing, across the board, is consumers who are willing to buy apparel at lesser discounts than they were in recent years,” Beemer said.

“If they see something marked 20 percent off, they’re more likely to buy it now, whereas they would have waited for deeper discounts in the past,” he continued. “But if it’s at full price, they probably will pass.”Indeed, apparel prices have been in a deflationary spiral for many years, a trend the consumer researcher expects to continue. There may be a slight uptick in clothing prices, if higher gasoline prices translate into increased shipping costs, Beemer said, but he doesn’t expect it to manifest in any significant inflation of apparel prices.


Just don’t try telling that to the retailers. Stores are moving forward, as evidenced by the long list of companies reporting stellar gains in the past two weeks. Nordstrom said first-quarter profits ballooned 153.1 percent. Saks Inc. said profits rose 52.6 percent for the period, and the net at Federated Department Stores grew 108.7 percent, encouraging the retailer to up earnings forecasts and raise dividends. The Gap’s net grew 55 percent, and at J.C. Penney, excluding charges from the disposition of Eckerd, earnings jumped almost sixfold. Even the long-slumping May Department Stores posted gains, albeit smaller than most, and expressed optimism going forward.

Revenue gains are highest at luxury chains, such as Neiman Marcus and Saks Fifth Avenue, which continue to roll along since last fall; and on Monday, Barneys issued an outstanding sales and earnings report.

Part of that can be attributed to consumers having more cash in their pockets. With interest rates at a 47-year low and house prices skyrocketing, homeowners have put more than $1.6 trillion in their pockets by refinancing their mortgages over the last five years, according to government data. Then there are tax rebates, as more than two-thirds of consumers, or 68.3 percent, are receiving tax refunds, at an all-time high of $1,400, on average, up $300 from last year’s record.


Even more important to driving bottom- and top- line results has been the return of color and fashion newness to the stores this season, which has created a need to update, not just replenish, wardrobes.

Marshal Cohen, group chief industry analyst at NPD Fashionworld, put it succinctly: “Color is driving fashion business this spring.”

At Barneys, for example, the Barneys New York collection, offering private label sportswear, suits, knitwear, dresses and outerwear, was more than 20 percent ahead in the quarter. The collection represents about 15 percent of Barneys’ total apparel business.“People are buying emotional things. They’re not replenishing basics,” said chief executive officer Howard Socol. “They are buying things that make them feel good — things with more color, more unique product. Things that liven you up and make you feel positive.”


But perhaps the single greatest driver of full-price selling has been turning over inventory more rapidly.

“People are keeping much better control of inventory levels, and that is one contributor to price stabilization,” said Gary Wassner, president of factoring firm Hilldun Corp.

By synchronizing with consumers’ desires, retailers can get a better price and don’t have to worry about excess inventory that needs to be marked down to clear the goods from the sales floor, added Bernard Sand retail analyst Richard Hastings.

“That’s why you see more full-price selling and, even where comps are flat or negative, very good gross margin dollars, because costs of production are low and the gross profit is high,” Hastings said.

Some stores have even found themselves “chasing merchandise,” as Socol put it, to replenish the shelves, and now plan for anticipated increases ahead, rather than seeking to unload merchandise at discounts. “The turn has been very good,” he said.

“We are bringing in merchandise at a much faster cadence,” added Bloomingdale’s chairman and ceo, Michael Gould. “There is no question that the consumer is spending, and the better the merchandise, the more they are spending. We are really doing less price promoting and more full-price selling. The average unit ticket price is up 12 percent, and we have reduced our promotional days by 15 percent this year,” including eliminating two “super sale” weekends, in March and April.

According to an analysis by WWD of the balance sheets and sales figures of specialty apparel retailers, companies turned inventory 3.3 days faster by the end of the first quarter than they did in the same period last year.

Being nimble on inventory also adds tremendous benefits in terms of getting the most out of fashions that do find a response with consumers, as well as squeezing more profit out of an already saturated retail footprint.“Today it’s all about test and react, especially since the updated brands have been really starting to drive the business,” said Lynne Coté, group chief executive officer of women’s moderate sportswear at Jones Apparel Group, which includes the Gloria Vanderbilt and Norton McNaughton brands. “When the product is updated, you need to be able to react quickly to trends.”

In a time of sparse growth on a square-foot basis, stores wanting to become more profitable need to do so by boosting productivity, and one way to do that is for retailers to move goods through their stores quicker.

“If you’re turning your inventories faster, you need less inventory, you need less receipts to generate the same amount of dollars per square foot, and overall it just makes the store more profitable,” said Coté.

Those gains, however, tend to diminish as consumers move down the price-point ladder. Moderate-priced chains are also marking down less, but the landscape there remains intensely price- and value-oriented. “We have less clearance, but we are still promotional,” said Penney’s Questrom. “We are a value department store.”

“Markdowns are a little lower, and that’s a good thing,” observed Kenneth Lakin, chairman and ceo of the 41-unit Boscov’s Department Stores, based in Reading, Pa. “But it’s very competitive, especially around any big event like a holiday. Every day and every week you can find a deal out there.”


Still, many merchants foresee a smooth transition into fall selling, and at least another good quarter or two of strong business. They say sales have been spurred by product innovations in hard and soft goods, some pent-up demand in certain categories, such as swimwear, and an improving job market, among other factors.

However, Questrom, like other retailers, cautioned, “You’ve got to keep in mind that retailers are up against weak numbers” from the first quarter of 2003, which was among the worst in years due to bad weather, a weak economy and the beginning of the war in Iraq.

“Obviously, there is a concern over gas prices and the Iraq war,” said Gene Kahn, chairman and ceo of May Department Stores Co., after the company’s annual meeting in Richmond, Va. Friday. “I do feel some apprehension. On the other hand, consumer spending continues to be good, and we see the pendulum swinging. There is a lot of fashion newness, a lot of color, and a lot of trends the consumer seems to be seizing. The luxury sector and higher price points within the department store segment are performing the best. Thus, we will continue to see a positive momentum going forward.”But if consumers once again tighten their purse strings, be it due to higher interest rates, gas prices or a cooling economy, retailers will have no choice but to cut prices. And then, of course, there is the lifting of quotas at the start of the new year, which should flood the market with cheaper raw materials.

“There is a general feeling that during the presidential campaign, the president is going to work hard to make sure the economy is as good as possible,” Socol said. “Assuming there is no terrorist activity, [the upward sales trend] will continue, but maybe not at the level of the first quarter, but it will continue very positive in the second and third quarters. It just seems the consumer appetite is very positive.”

Asked about the Christmas season, “I don’t think anybody can guess that,” Socol said.

Specialty RetailersShine
1Q Sales, Gross Margins Improve
(Year-over-year changes)
Company Sales Change
Sales Change
Gross Margins Change
Abercrombie & Fitch Co.
Aeropostale Inc.
American Eagle Outfitters Inc.
Ann Taylor Stores Inc.
Buckle Inc.
Cache Inc.
Charming Shoppes Inc.
Claire’s Stores Inc.
Coldwater Creek
Deb Shops Inc.
Gap Inc.
Goody’s Family Clothing Inc.
Hot Topic Inc.
Limited Brands Inc.
Pacific Sunwear of California Inc.
Talbots Inc.
Too Inc.
United Retail Group Inc.
Urban Outfitters Inc.
Wet Seal Inc.
Wilsons the Leather Experts Inc.


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