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A Sunny Spring Ahead: Retailers’ Outlook Rosy After Solid Dec. Comps

Specialty stores were the stars of the Christmas retail season and the momentum is poised to continue for spring.

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NEW YORK — Specialty stores were the stars of the Christmas retail season and appear poised for a bright spring.

Despite several factors that could work against retailers, such as harder sales comparisons and a lack of concrete spring fashion “must-haves,” experts say retailers generally are working off a strong springboard for sales in the new year. Comps, or sales at stores open at least a year, are expected to maintain broad-based strength thanks to the consumer whose spending habits don’t seem to show any signs of abating.

Though not all chains were winners, several posted December numbers on Thursday revealing wide swings in  comp-store sales for the better. Executives with the best scorecards attributed the results to higher service levels, sharper editing and sharper store identities and less merchandise sameness. For spring, they’ll largely capitalize on variations of some of the biggest trends that drove the business, such as color, denim, femininity and embellishments, and greater full-price selling.

Same-store sales were stronger than anticipated for many specialty and department store retailers, including American Eagle Outfitters, Chico’s FAS, Neiman Marcus Group, Bebe Stores Inc., Abercrombie & Fitch Co., Dillard’s, Kohl’s Corp., Nordstrom, Federated Department Stores and Saks Fifth Avenue Enterprises.

Despite the strong finish to the year and the good outlook, spring won’t be easy for all chains, considering some are up against strong comparisons and others experienced weaker holiday selling, notably Gap Inc. and Limited Brands, which were only 1 and 2 percent, respectively, ahead in same-store sales. Ann Taylor drooped 1 percent, while Talbots rose 2.8 percent.

In addition, a potentially big impact on retailers in the new year could result if the Federal Reserve Board decides to raise the short-term federal funds interest rate at anything faster than the “measured” pace it has used since mid-2004. The fed funds rate currently sits at 2.25 percent, having been risen gradually five times in 2004 from a 45-year low of 1 percent.

On the other hand, consumer confidence remains buoyant. The Conference Board reported in late December that consumer confidence for the month rose to 102.3 from 92.6 in November, its highest level since July when the reading reached 105.7.

As a result, for chains such as American Eagle, Abercrombie & Fitch and Urban Outfitters, all with healthy double-digit gains, there’s confidence in the future and a willingness to concentrate on the long-term agenda, not just those short-term demands of Wall Street.

For example, at A&F, which posted a 10 percent comp gain in December, the focus is on building the store brand and in-store experience. “We are going to continue to invest in stores to clearly distinguish from the pack,” said Mike Jeffries, chairman and chief executive. “We are not up against promotional activity [from a year ago] and we are not going to promote. We’ve got a good trend going. I am optimistic about the positioning of the brands.”

In December, Jeffries noted: “We held the line in terms of price. There were no markdowns till Christmas Eve, in any of our brands,” which includes A&F, abercrombie, Hollister and Ruehl. “We had great full-price selling. The week after Christmas was a combination of spring and marked-down fall merchandise, and we did really well with both. We did a lot of work during the month to strengthen our position as an aspirational full-price brand.”

American Eagle Outfitters posted an incredible 32.8 percent gain. “This does give us optimism as well as some clear reads into the first half of the year” on what’s likely to sell, said Laura Weil, executive vice president and chief financial officer.

From current transition goods, “we’ve got very good direction on color and style.”

Weil said that, for spring, there’s a continued emphasis on color in both men’s and women’s, the knit business in women’s has been amplified and there’s a lot of new fashion in denim, particularly “destroyed” denim looks. “We’ve increased in market share dramatically in denim in men’s and women’s….I think there is a lot of newness. The store really pops with color, and there are some things in the stores this year that we didn’t have last year, including spring blazers and back walls with coordinated assortments of ‘spring break’ merchandise.” Those walls feature swimsuits, with related accessories and bags.

Weil credited the stellar December to “having the right merchandise, the brand really coming into its own, better and better locations, strong marketing, really thinking through our inventory positions and fewer promotions and coupons.”

The chain introduced a new floor set on Christmas Eve on spring product, and during the post-Christmas week, saw sales soar 90 percent, off a positive 20 percent a year ago. Also, gift cards were up 33 percent for the month, helping the post-Christmas week. “When customers came back to the stores [after Christmas], they saw a full inventory of spring merchandise and they loved it,” Weil said. The chain will be fully transitioned to spring on Jan. 26.

For spring, J. Crew is emphasizing lightweight Italian cashmere, tailored blazers in European fabrics, skirts with bright prints and florals, feminine jackets with details and embellishments and shoes, particularly flats, according to Tracy Gardner, executive vice president of merchandising, planning, production and distribution.

“We have just been really obsessing about quality of fabrications and our fit, and something we keep leveraging is our colors,” with plenty of pinks and greens and navy and whites ahead. In addition, “you will see more hard pieces, more jackets as well as skirts bearing femininity, and limited-edition items.”

Some companies sounded cautious, though not necessarily those with slimmer December gains. At Urban Outfitters, which posted comps for December at 15 percent ahead, “the reason we continue to stay cautious about the next few months is that we had quite a run of about eight consecutive quarters, at least seven, of very good comps,” said John Kyees, cfo. For spring, “we still think comps will be positive, in the low to midsingle digits, and they could be even better than that. But it’s not easy to comp double digits on top of 32 percent gains in the first quarter, and 26 percent for the second quarter” of 2004. Urban Outfitters’ third quarter was ahead 18 percent, and the fourth quarter is tracking in the midteens.

Urban Outfitters, which operates stores under that name as well as Anthropologie and Free People, had spring goods entering its stores through December, and by the end of January, like most specialty chains, will be fully transitioned into spring.

“Our inventories are positioned nicely going into spring,” Kyees said. “They’re more current, fresher and more of it has been delivered in the last 90 days than a year ago. We think spring will be a solid period. We are up against some tough numbers and not promising double-digit comps, but we’re also not afraid of spring. It will be a solid season.”

Talbots chairman, ceo and president Arnold Zetcher said that, for spring, “we have plans of anticipated growth. We think our product is right on and we are somewhat optimistic. But there is uncertainty for sure. As we get into the second quarter, the opportunities are stronger. For us, the first half of 2004 was a record year of sales and earnings per share. The second half was somewhat of a disappointment,” marked by higher expectations and an inventory buildup.

“I’m not sure if December is any kind of indication of what’s going to happen next year,” Zetcher said. Asked about the mood of the customer, Zetcher said: “She is waiting and seeing” what’s on the shelves. “There seems to continue to be uncertainty out there.”

For spring, Talbots has three major fashion themes: color, femininity with a slight retro feel and mixing items to create unique outfits, according to Betsy Thompson, Talbots’ fashion spokeswoman.

Key colors include shades of green, turquoise, pinks and “crisp plays” of classic navy and whites for a nautical combination. The femininity entails jackets with more shaping or cropped shorter or with a bow or a ruffle and button details. And Talbots wants customers to be able to put some more unique spins on outfits by suggesting that slightly fitted jackets be worn with softer, fuller skirts or jeans, or a dressy sweater worn with jeans.

At Retail Brand Alliance, the Brooks Brothers division was ahead 10 percent in comps, while Casual Corner rose 7 percent, according to Claudio Del Vecchio, chairman and ceo. Excluding some resort goods, the first spring shipments come in next week. For spring, Brooks Brothers will be still be Brooks Brothers, but is putting more emphasis on color. Casual Corner, on the other hand, is different for spring, with more feminine styles and more looks that a woman can wear from work into evening activities. The styles are a break from what Casual Corner has been historically, either very casual or very career.

“We are going into an unknown territory. It’s a risk, but it can be a very rewarding risk,” said Del Vecchio.

Meanwhile, 2004 was the year of specialty and luxury retail, and of a gallant turnaround effort for the traditional department stores.

“Through the year, if there was a brand the people cared about, they bought it, and they bought it at full price,” said John Pinto, managing partner at Brightleaf Partners, an investment partnership, who follows mainly specialty and department stores.

So, as the 2004 retail season ended with a bang — with best aggregate full-calendar-year comp advance in four years, according to the International Council of Shopping Centers — fourth-quarter earnings results from certain retailers stand to lack the wow factor of their December sales. That’s because deep promotions, while driving December’s sales, may have softened gross margins and could lead to lower-end earnings.

Target Corp., for example, told investors to expect earnings below Wall Street’s median estimate of 94 cents a share, despite posting a 5.1 percent increase in December comps, which beat both the company’s own and analysts’ forecasts.

Banc of America Securities analyst Dana Cohen noted the strength of December’s comps in a Thursday research report, saying they “look strong compared to our more optimistic post-Christmas estimates.”

Among the 50 retailers tracked by WWD, 34 posted positive comps in December, while 15 dropped into the red. Regional department store chain Gottschalks Inc. posted flat December results. The 3.4 percent aggregate increase by the specialty retail sector narrowly beat the department stores’ 3.3 percent December comp advance. Mass merchants came in with an overall 3 percent same-store sales rise.

The Goldman Sachs Retail Composite Index advanced 3.1 percent in December, ahead of its 1.2 percent increase in November, but below December 2003’s 4 percent rise.

And the ICSC reported a 2.7 percent rise in December comps as well as a combined November-December comp advance of 2.3 percent among the roughly 80 retailers it follows. Both numbers are down from 2003 levels, when December comps rose 4.3 percent and the two-month holiday gain was 4 percent.

In calendar-year 2004, aggregate comps rose 3.8 percent, the best increase since 2000’s rise of 4 percent, the ICSC said.

In a year filled with worries about year-over-year double-digit percentage increases in gas prices, mass merchants definitely felt the pinch on purchases from typically lower-end core consumers.

For its part, Wal-Mart Stores Inc. said the 2.6 percent rise in December comps at its Wal-Mart stores was driven not by holiday gift purchases, but, as has been the case nearly all year, by grocery store sales. Fiscal year-to-date comps for Wal-Mart are up 2.8 percent versus 3.7 percent last year.

Meanwhile, Wal-Mart rival Target and other retailers such as TJX Cos. and Kohl’s drove December sales by increased markdowns, which Banc of America’s Cohen noted “reduced margins and is therefore not translating into [fourth-quarter] earnings per share.”

Despite posting a 3.1 percent rise in December comps, Kohl’s said it expects fourth-quarter earnings at the low end of its previously forecast 93 to 97 cents-a-share estimate. And TJX, with a 6 percent rise in December comps, said earnings will come in at the low end of its prior guidance of 39 to 42 cents.

December sales standouts in the department and specialty retail sectors benefited from year-over-year increases in sales of gift cards, many of which were redeemed in the week following Christmas.

American Eagle said on a recorded call the sales of gift cards rose about 30 percent from last year. The company also boosted its fourth-quarter earnings estimate to $1.30 to $1.31 a share, from a prior estimate of $1.08 to $1.10. Shares of the company rose 5.3 percent in trading Thursday on the New York Stock Exchange to close at $50.48.

It was reports such as American Eagle’s that fed the optimism for spring.

“Right now, I don’t really see any slowing down. I don’t think you’re going to see negative comps anywhere [in 2005],” said Brightleaf’s Pinto.

“The companies that have the momentum will continue to have the momentum, and the companies that don’t have momentum will continue to lose market share,” observed Richard Keim, managing partner of Kensington Management Group.

December Same-Store Sales
 
Dec. 2004
% Change
Nov. 2004
% Change
Oct. 2004
% Change
Sept. 2004
% Change
DEPARTMENT STORES
Bon-Ton
6.6
5.4
-5.2
-0.1
Dillard’s
1
-3
-5
-3
Federated
2.3
-1.4
4
0.1
Gottschalks
0
-8.1
-1.9
6
Kohl’s
3.1
0
6
-1.3
May Co.
-3.5
-7.9
-2.2
-1.5
Neiman Marcus
10.8
8.4
13.6
6.3
Nordstrom
9.3
3.1
11.5
6.2
J.C. Penney (dept. stores)
-1.2
12
2.1
2
Saks Dept. Store Group
2.8
-0.6
5
-10.9
Saks Fifth Ave. Enterprises
12.1
6.8
3.6
5.8
Sears Roebuck (U.S. stores)
-3
2.8
1.9
-3.2
Stage Stores
3.1
6
1.8
2.5
Average:
3.3
1.8
2.7
0.7
SPECIALTY CHAINS
Abercrombie & Fitch
10
2
11
2
Aeropostale
0.5
4.1
9.1
1.9
American Eagle (U.S. stores)
32.8
24.3
31.7
23.3
Ann Taylor
-1.5
-8.3
6.2
1.4
Banana Republic
-2
-3
3
6
Bebe
28
23.2
30.6
17.6
Buckle
4.4
-0.4
8.4
0.3
Cache
7
3
1
-2
Cato
2
3
5
1
Charming Shoppes
-3
3
6
-2
Chico’s FAS
18.6
8.6
9.3
5.2
Christopher & Banks
-7
-3
7
-7
Claire’s
5
3
9
10
Deb Shops
5
-1.8
3.7
0.9
Dress Barn
2
4
-4
6
Gap (U.S. stores)
2
1
7
-1
Goody’s Family Clothing
0.7
-0.6
-1.7
-9.1
Guess
5.6
0.5
6.2
13.6
Hot Topic
-6.2
-8
-3.8
1.1
Limited Brands
2
-5
1
-5
Mothers Work
-1.9
-11.6
1
-8.9
New York & Company
-5
-0.4
4.1
4.6
Old Navy
-1
-5
4
-6
Pacific Sunwear
5.3
2.7
8.5
9.8
Talbots
2.8
-0.5
4.7
-1.3
United Retail
6
11
11
6
Walgreen
4.2
11.4
8.1
9.3
Wet Seal
-11.8
-19.5
-15.5
-8
Wilsons
-4.7
-3.1
9.4
3.7
Average:
3.4
1.2
6.2
2.5
MASS MERCHANTS
Family Dollar
4
5.2
0.9
1.5
Retail Ventures
-0.7
-5.3
-0.2
-7.3
Ross Stores
2
-2
4
-5
ShopKo
-5.3
-4.8
-3.1
-1.2
Stein Mart
10.3
2
12.3
5.2
Target (discount stores)
5.1
3.2
6
5.6
TJX
6
2
7
1
Wal-Mart (discount stores)
2.6
0.3
2.4
2
Average:
3
0.1
3.7
0.2
TALLY:
Up
34
27
40
31
Flat
1
1
0
0
Down
15
22
10
19
Total
50
50
50
50
SOURCE: COMPANY REPORTS

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