As they head into a new year, U.S. retailers have a degree of momentum they haven’t seen since 2007.

This story first appeared in the January 5, 2015 issue of WWD. Subscribe Today.

They had a good Christmas. They’re buoyed by the record-high stock market, declining unemployment, improved real estate market and consumers returning to post-recession spending levels and encouraged by lower gas prices.

“This decline in the price of oil is much more significant than cash savings at the gas pump,” observed Jerry Storch, who becomes chief executive officer of the Hudson’s Bay Co. on Tuesday. “It’s tremendous news for the entire economy. Every product you buy has a transportation cost in it and many products contain plastic or other synthetics, which have oil as their base. Lower fuel prices should result in higher margins for retailers and potentially lower prices for consumers. There’s opportunity to add more value for the customer and for retailers to make more money.”

The prevailing sense is that the American economy is poised to break out of its slow, post-recession recovery, rather than slipping back into recession. “The outlook is better now than it’s been in awhile,” said David Zant, president and chief merchandising officer of Belk Inc.

Wal-Mart Stores Inc., Hudson’s Bay Co., J.C. Penney Co. Inc., Home Depot, Gap Inc., Target Corp., Bloomingdale’s, The Bon-Ton Stores Inc., Foot Locker Inc. — as well as Belk, where Zant became president in August — are all stacked with new leaders. “They have gone through a tough selling season and should have learned some of their companies’ strengths and weaknesses,” said retail analyst Walter Loeb. “We should expect them to now show inventiveness.”

On the negative side, profit margins will likely be squeezed by heavy promoting to get top-line gains, carrier costs are rising and compounded by continuing double-digit online growth, and Easter moves forward this year to April 5 versus April 20 last year. “That’s a little bit of a challenge,” Zant said. “A later Easter is usually better” because the weather gets warmer, making it easier to sell spring clothes.

A bigger test lies in adopting new technologies and further integrating shopping channels so each supports the other and enables consumers to easily shop 24/7. “Retailers must master the all-channel paradigm. If they have graduate degrees, they have to get Ph.D.s and become professors,” Storch said.

Digital technology has “transformed” retail marketing, according to Tony Spring, who became Bloomingdale’s chairman and ceo in February. “Retailers are increasingly communicating short-term value messages, whether that’s off-price, flash sales, clearance events or friends and family,” Spring said. “You also have a price-matching component that’s become part of the process. The dynamics of the competitive marketplace have changed where the consumer is playing a much greater role in the pricing and retailers are trying to keep pace with that.”

But the biggest challenge for 2015 is clear: finding and developing innovative products and embracing new categories and services to offset the macro weakness in apparel.

“The world is changing, and customer behavior and expectations are changing even faster,” Millard “Mickey” Drexler, J. Crew chairman and ceo, said in a recent interview. “Apparel spending is down across our industry. It’s common knowledge that store traffic has been down for the past couple of years. Customers are shopping online more than ever, and the promotional environment is like I have never seen before. Clearly, this is not business as usual.”

Some specialty and department stores will look closer at travel and home products, health, food, restaurants and electronics — areas which they either dabble in or abandoned over the years. “The most important single lever is to offer products consumers want that are different from competitors,” Storch said.

“I feel strongly that part of what makes us a more interesting shopping experience is having successful categories in all families of business,” added Spring. One area that he’s particularly keen on is gifts for the holiday season, to draw greater traffic. “We want to be the store that you come to for a diversity of gift offerings, for your loved ones or for the office,” Spring said. “We are determined to offer a better variety of gifts that meets the needs of our upscale customer base. We made progress in 2014. We will make progress this year.”

Apparel still occupies more square footage than it needs, and short-term revenue concerns and fast-fashion competitors from overseas have forced U.S. retailers to drive prices down and reduce quality. However, certain upscale stores like Saks Fifth Avenue, Neiman Marcus, Bloomingdale’s and Nordstrom stand to have a good year, given the strong stock market, and with international designer brands depending on the States for greater growth amid stagnation in Europe and slowing sales in Asia.

On the other end of the price spectrum, discounters, dollar stores, warehouse clubs and off-pricers, such as Costco, Nordstrom Rack and T.J. Maxx, should be steady. The middle class, with limited wage gains, seek the lowest prices and best values, which they find in outlet centers, power centers and on dot.coms.

For Kevin McLaughlin, cofounder and creative director of J.McLaughlin, the solution for apparel lies in providing “a freshness of product, a certain sensibility — offering fashion without taking it too far…a nod to fashion, not bowing to it.” It’s also about adapting to lifestyle changes. “We have to be able to respond to all of this pressure from athletic activewear and interpret that into sportswear,” McLaughlin said. “Women are wearing that spin capri all the time. Sweats have a place with sportswear. Going forward, I see a Harris tweed blazer with a pair of sweats.”

“The consumer is not excited anymore about buying clothes, and we are the reason for that. We are not creating clothes that are exciting,” said Claudio Del Vecchio, chairman and ceo of Brooks Brothers. “H&M and Zara have the fashion and it’s cheap. Today’s consumer is growing up with that. It’s hard for them to understand what quality is.”

Del Vecchio believes the more retailers try to beat fast-fashion retailers at their own game, the more likely they will lose. Public companies, he added, have short-term visions and needs that drive changes that are not necessarily the right ones. “They better play a different kind of game,” Del Vecchio said. “Give better quality. Make a statement. Make people feel [the clothes they sell] are good investments. Great design, great service, great value. That’s the way I see it.”

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