An Express storefront.

A strategy of tight inventory control and planned markdowns is leading to better sell-throughs and improved profit margins for retailers.

NEW YORK — The summer sales aren’t expected to eat into retailers’ gross margins.

Coming off strong margin gains in the first quarter, many retailers are expected to maintain the momentum through the end of the second quarter last month as a result of selling more at full price and fewer price promotions, analysts said. The star performers are expected to be mainly in the specialty store sector.

But analysts believe some retailers may deliver mixed results because the fashion transition from spring to summer comes at a time when some shoppers are feeling more price sensitive after months of dealing with higher fuel costs.

Of the public retailers tracked by WWD, the average gross margin rate showed a 12 basis-point gain in the first quarter, with 28 companies reporting higher year-over-year gains and 20 experiencing declines.

Of those retailers that posted gains, the majority had increases of 10 to 90 basis points. Ten retailers — including Limited Brands, Dress Barn and AnnTaylor Stores Corp. — had significant gross margin rate increases of between 180 and 600 basis points. Aside from improved inventory positions, retailers said the margin improvements had to do with having “trend-right products,” which resulted in increased sell-throughs at fuller price points. Better product sourcing also was cited as a major driver of higher gross margins.

Better controlled inventories and more disciplined markdowns have been most evident at specialty retailers, analysts said. Store visits by WWD reporters and editors at several specialty retailers in early June found that, while there were clearance items on sale, the “blowout” type of markdowns held in prior years was not as prevalent. Moreover, clearance racks were positioned in the backs and corners of stores, with many retailers still selling summer, wear-now items at full price.

“The sales are starting to happen right now. On the flip side, we see new product flows coming in earlier and earlier. That means retailers have to be leaner and cleaner to sell at full price,” explained Dana Telsey, chief research officer of Telsey Advisory Group. “There’s also transitional clothing in more wear-now [fabrics and styles]. It means we’ll have the darker T-shirts in stores for a longer period of time. As for what may be marked down, Bermuda shorts have been selling well, so I don’t think we’ll see much of that on sale. You’ll probably see more of the khaki pants and T-shirts on sale.”

This story first appeared in the June 27, 2006 issue of WWD. Subscribe Today.

Telsey also doesn’t expect to see steep discounts on denim since lean inventories have helped sales at full price. “Retailers have been curtailing the inventory in denim. Some of the styles are on sale, but the retailers have mostly been scaling their inventories down because they are going up against such big comparisons from a year ago,” she added.

According to Jennifer Black, an analyst at the firm that bears her name, controlled sales will help firms boost their gross margin rates.

“It is something that will vary by company. In the case of Nordstrom, I think they will have higher gross margins because they had fewer sales. What happened was that shoppers who went into the stores looking for stuff ended up buying at full price,” she observed.

Black also believes specialty retailer Ann Taylor also will have better margins in the upcoming second quarter. “They already have better margins now than they had a year ago,” she said.

“Our gross margin rate was 56.6 percent for the quarter, up from 51 percent from last year, due to a considerably higher component of full-price selling,” said Kay Krill, president and chief executive officer of Ann Taylor, during a conference call discussing first-quarter results. “On the product side, we felt that the assortment in each division was brand appropriate, with the right balance of end use and the right color focus. Our improved inventory position contributed significantly to our higher gross margin and earnings growth.”

For Limited Brands, controlled markdowns during the first quarter bolstered gross profits. “We planned and executed a much quieter quarter clearance sale. We discounted fewer items, and our markdowns were not as deep as in previous clearance events,” explained Kenneth Stevens, chief executive officer of Express, in a Limited Brands first-quarter conference call. “Therefore, although our event sales were lower, we were able to generate a higher margin for the period.”

Indeed, this approach may help retailers maintain higher margins for the second quarter.

But amid the impact of higher fuel costs and slipping consumer confidence, which may force retailers to mark down goods more aggressively, some analysts say it is difficult to peg how second-quarter gross profits will turn out.

“Higher-end retailers and even some middle-market retailers are doing a better job year-to-year in terms of inventory, management techniques, markdown practices,” said Craig Johnson, president of Customer Growth Partners. “In the negative direction, particularly in some of the lower and more moderately priced retailers, including teen retailers, I do think you are beginning to see some price resistance.”

Some analysts say inventory levels are in good shape right now, with strong clearance activity in spring and summer sales.

“We believe there will be a rise in basis points for gross profit in the second quarter. This increase won’t be drastic, but it will be in positive territory,” predicted Thomas Filandro of Susquehanna Financial Group. “It does not appear that rising fuel prices or interest rates have had an impact on consumer spending. This could change at a drop of a dime, but right now we don’t see it.”

Better Profits
Retailers post a higher year-over-year gross margin rate in the first quarter.
Retailer
Prior-Year 1Q Gross Profit Margin Rate
1Q Gross Profit Margin Rate
Change
Limited Brands Inc.
30.82
37.97
7.15
Wet Seal Inc.
31.35
37.35
6.00
AnnTaylor Stores Corp.
51.03
56.65
5.62
Dress Barn Inc.
37.83
40.77
2.94
Cache Inc.
43.21
45.72
2.51
Mothers Work Inc.
50.14
52.55
2.41
Bon-Ton Stores Inc.
36.75
39.02
2.27
Sears Holding Corp.
25.84
27.77
1.93
Guess Inc.
38.13
40.01
1.88
United Retail Group Inc.
24.11
25.97
1.86
Cato Corp.
37.68
39.02
1.34
Children’s Place Retail Stores Inc.
38.33
39.29
0.96
Stage Stores Inc.
33.59
34.47
0.88
Dillard’s
36.35
37.23
0.88
Retail Ventures Inc.
39.46
40.27
0.81
J.C. Penney Co. Inc.
41.24
41.91
0.67
TJX Cos. Inc.
23.83
24.47
0.64
CVS Corp.
25.92
26.54
0.62
Charlotte Russe Holding Inc.
21.58
22.13
0.55
Wal-Mart Stores Inc.
23.86
24.37
0.51
Nordstrom Inc.
36.76
37.16
0.40
Aéropostale Inc.
28.23
28.61
0.38
Foot Locker Inc.
30.35
30.69
0.34
Kohl’s Corp.
35.84
36.05
0.21
The Neiman Marcus Group Inc.
41.10
41.29
0.19
Citi Trends Inc.
39.50
39.60
0.10
Bebe Stores Inc.
46.78
46.86
0.08
Abercrombie & Fitch
65.33
65.40
0.07
Deb Shops Inc.
28.13
28.09
-0.04
Ross Stores Inc.
23.54
23.44
-0.10
Chico’s FAS Inc.
61.74
61.58
-0.16
Saks Inc.
38.92
38.68
-0.24
American Eagle Outfitters Inc.
48.93
48.58
-0.35
Gottschalks Inc.
34.60
33.98
-0.62
Gap Inc.
40.84
40.16
-0.68
Talbots Inc.
40.81
39.91
-0.90
Charming Shoppes Inc.
33.05
32.06
-0.99
Zale Corp.
52.81
51.72
-1.09
Target Corp.
34.16
32.88
-1.28
Dollar General Corp.
28.48
27.15
-1.33
Federated Department Stores Inc.
40.23
38.73
-1.50
Pacific Sunwear of California Inc.
34.76
32.43
-2.33
Stein Mart Inc.
29.34
26.74
-2.60
Hot Topic Inc.
34.16
31.32
-2.84
Harold’s Stores Inc.
39.62
36.46
-3.16
Wilsons The Leather Experts Inc.
30.10
26.41
-3.69
Urban Outfitters Inc.
42.19
35.83
-6.36
New York & Company Inc.
36.41
29.61
-6.80
Average Change:
0.12
Source: EdgarPro, SEC filings and company reports. Calculations by WWD. Data is from most recent quarterly report.

With contributions from Vicki M. Young and Arthur Zaczkiewicz

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