NEW YORK — It’s as if retailers have taken a lesson from Dr. Phil: Don’t sweat what you can’t control, but control what you can.

A hard, cold fact of retailing is that sales are volatile. No matter how enticing the shopping experience, or how “must-have” a line of apparel is, the best-laid plans of Marshall’s or May can be buried under a holiday-weekend blizzard.

That’s why retailers have focused on keeping inventories lean and turning them over quicker. Judicious oversight of the merchandise flowing through stores is something tangible retailers can take hold of to boost gross margins. Working more closely with vendors, buying closer to need and taking full advantage of real-time integrated information networks means more full-price selling, and that, in turn, means more cash finding its way to the bottom line.

“Retailers are learning how to budget their business better to enhance profitability,” noted Bear Stearns analyst Dana Telsey. “Companies have renegotiated agreements with vendors and improved their cost structure on imports. The volatility of sales has caused them to look below the top line to better manage what they can control.”

Standing now at the midpoint of the year-end reporting period, a sample of results compiled by WWD indicates the rumors were true: Retailers did enjoy much more full-price selling during the holidays. On average, retailers thus far expanded their fourth-quarter gross margin rate by more than 90 basis points. Full-year inventory turnover, for its part, improved 39 basis points. By far, the majority of companies reporting operating and balance-sheet data for the standard retail fiscal year posted margin and inventory turnover increases.

“We saw great inventory management during the quarter by not overloading the store, by delivering incremental newness and giving consumers a reason to shop,” said Elizabeth Pierce, a specialty retail analyst with Sanders Morris Harris. “We noticed at Magic that retailers and manufacturing companies are finally on the same page on how to manage inventory, and that relates to consumers buying closer to need.”

The correlation between margin and inventory was most pronounced in the nimble specialty store channel. American Eagle Outfitters Inc. proved to be supremely dexterous, turning over its entire inventory 7.87 times last year, or once every 46 days, for an impressive 37 basis-point improvement over fiscal 2002. Gap Inc. likewise showed strong cost and inventory control, as did specialty stalwarts Abercrombie & Fitch Inc., Chico’s FAS Inc. and Pacific Sunwear of California Inc. It’s no surprise then that together, those four companies registered average margin growth of more than 150 basis points.In the mass channel, ever-efficient Wal-Mart Stores Inc., as usual, turned its inventory rapidly. It should be noted, however, that that figure is somewhat inflated by the sale of fresh produce, meat and dairy products — things that spoil quickly — in the company’s supercenter formats. Of course, by the same token, the high turnover of food at Wal-Mart, and also at Target Corp., is partially offset by the much lower turnover of home goods, such as furniture. Still, both companies benefited from higher turns and margins.

Among the national department stores, J.C. Penney Co. Inc., May Department Stores Co. and Federated Department Stores Inc. actually saw inventory turns dip slightly. That’s partially due to the sheer size and makeup of the merchandise mix. After all, it takes miles to turn an ocean liner. Happily for them, though, higher margins on private brands and differentiated assortments offset those slightly lower turnovers to propel robust gross margin gains.

Looking across all retail channels, the most important contribution of keeping inventories moving has been in retraining consumers who have learned to wait for markdowns, sales and other margin-killing promotions. The new lesson? Buy it now at full price before it’s gone.

“Being lean on inventory has taught customers that if you wait, it may not be there,” Telsey said.

— With contributions from Jennifer Weitzman

Better Turns, Better Margins
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4Q GROSS MARGIN RATE
FISCAL YEAR INVENTORY TURNS
RETAILER
2002
2003
CHANGE
(in basis points)
2002
2003
CHANGE
(in basis points)
1.American Eagle Outfitters Inc.
35.90%
37.70%
177
7.51
7.87
37
2.Wal-Mart Stores Inc.
21.70%
21.80%
14
6.99
7.79
80
3.Hot Topic Inc.
41.90%
41.30%
(57)
6.05
7.78
174
4.Too Inc.
41.70%
37.70%
(400)
6.73
6.67
(7)
5.Abercrombie & Fitch Co.
45.50%
46.60%
111
5.99
6.31
32
6.Target Corp.
30.30%
31.60%
136
5.79
6.29
50
7.Chico's FAS Inc.
59.30%
60.20%
91
4.2
5.96
176
8.TJX Cos. Inc.
22.40%
24.30%
193
5.18
5.75
57
9.United Retail Group Inc.
18.10%
20.60%
243
6.21
5.67
(54)
10.Gap Inc.
35.00%
37.60%
259
5.09
5.26
17
11.Sears, Roebuck & Co.
30.00%
29.40%
(59)
4.91
5.02
11
12.Pacific Sunwear of California Inc.
35.80%
36.50%
70
4.15
4.99
84
13.Cache Inc.
43.40%
47.00%
359
4.78
4.95
17
14.The Buckle Inc.
36.00%
38.60%
264
4.45
4.62
17
15.Kohl's Corp.
33.00%
30.90%
(207)
3.7
4.26
56
16.J.C. Penney Co. Inc.
34.00%
35.90%
193
3.63
3.59
(4)
17.May Department Stores Co.
32.60%
33.10%
50
3.38
3.35
(2)
18.Federated Department Stores Inc.
39.90%
41.00%
108
2.82
2.77
(5)
19.Saks Inc.
36.10%
38.00%
193
2.69
2.73
3
?
Average
35.40%
36.30%
92
4.96
5.35
39
Ranked by inventory turn in 2003. SOURCE: Company reports as of March 3, 2004, for retailers reporting full fourth-quarter and year-end results on the common retail fiscal calendar. Calculations by WWD. parentheses indicate declines.

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