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NEW YORK — Fashion retailing is alive and thriving.

Well, at least during the first quarter, as Wal-Mart, Target, Kohl’s and Dillard’s, along with specialty retailers Urban Outfitters and American Eagle, all posted solid earnings that were built on robust apparel sales.

This story first appeared in the May 14, 2004 issue of WWD. Subscribe Today.

Results jibe with consumer expenditure data from the Bureau of Labor Statistics that showed spending on apparel and fashion footwear grew by $20 billion year-over-year during the first quarter.

First-quarter results were strong despite April’s cooler temperatures, which left same-store sales that, although robust, were down from March. While year-over-year comparisons were easier, earnings were still impressive. Dillard’s delivered a 121.4 percent net income gain on 2.2 percent sales growth; and Wal-Mart posted a 16.4 percent earnings increase on 14.4 percent sales growth while Target Corp. reported a 25.5 percent profit gain on 12.3 percent sales growth.

Retailers cited color and a positive response to apparel merchandise sets to explain sales, but it could be a shift from wonton spending on home goods to replacing threadbare clothes in the closet that is driving sales.

Dana Telsey, equity analyst with Bear, Stearns & Co., said in her research report, “Vital Signs: Diagnosing Retail Growth,” that apparel is going through “an impressive fashion cycle [that] is leveraging sales and promoting firming pricing power.” This explains the improved margin rates seen across all channels.

Telsey went on to say the labor market recovery “bodes well for careerwear and the lower-to-middle income demographic,” which explains the stronger rates among the mass merchants.

But how are consumers paying for all this fashion spending? Debt, said Richard Hastings, credit economist at Bernard Sands.

Hastings said tax rebates and refunds also contributed somewhat to household spending, as did small contributions from an uptick in the job market and wages. But he said the majority of cash is coming from “the tail end of the mortgage refinancing liquidity bonanza.”

“The fastest-growing area of debt has been home equity lines of credit,” Hastings said.

So it may not be pretty if and when consumers sober up after the refinancing boom ends. They could face higher credit card rates thanks to an anticipated interest rate increase from the Federal Reserve in coming months, and they could choke on the fumes of more expensive gas prices, which some analysts see rising to $3 and more a gallon this summer. But for now, retailers are pleased to post solid results.

For the three months ended April 30, Wal-Mart Inc. said net income grew to $2.17 billion, or 50 cents a diluted share, from $1.86 billion, or 42 cents, a year ago. Earnings beat analysts’ forecasts by a penny.

Total revenue for the period climbed to $65.44 billion from $57.22 billion last year, while net sales rose to $64.76 billion from $56.72 billion. As for comparable-store sales, Wal-Mart’s U.S. stores increased 5.9 percent and consolidated comps jumped 6.4 percent.

“Gross margin improvement for the quarter resulted from better apparel performance and the benefit of our global sourcing,” said chief executive officer Thomas Schoewe on a prerecorded call. “As [ceo H. Lee Scott] said, apparel had a solid quarter and inventory is in good shape. We had strong performances in activewear, intimates and infants.”

Much improved apparel sales also added to robust profit and sales gains at Target Corp. For the three months ended May 1, the Minneapolis-based discount chain said net earnings climbed to $438 million, or 48 cents, which exceeded Wall Street’s estimates by 1 cent. Last year, by comparison, the company recorded profits of $349 million, or 38 cents.

Total revenue for the quarter jumped to $11.59 billion from $10.32 billion a year ago, while net sales advanced 12.7 percent to $11.25 billion from $9.98 billion. Company-wide, comps improved 6.6 percent.

“We enjoyed strong sales growth in our apparel and seasonal categories, both of which generate stronger than average profitability,” said Target Stores president Gregg Steinhafel on a conference call with analysts and investors.

Kohl’s Corp., which has had its stumbles last year, posted first-quarter earnings that rose 2.5 percent on a 12.5 percent gain in sales. For the three months ended May 1, income was $113.8 million, or 33 cents a diluted share, versus $111 million, or 32 cents, in the same year-ago quarter. Sales jumped 12.4 percent to $2.38 billion from $2.12 billion. Comparable-store sales, however, dipped 0.1 percent.

During the Kohl’s conference call, management said sales of apparel and home merchandise were “good.” On the apparel front, shorts have not been a must-have item for shoppers. They have targeted T-shirts, capris and sandals instead. For fall, the company is gearing up for the introduction of apt. 9, a line the company describes as modern, sophisticated and clean. Also on the agenda for fall is a beauty line in partnership with Estée Lauder.

Dillard’s Inc. said its first-quarter net income rose to $53.8 million, or 64 cents, from $24.3 million, or 29 cents, in the prior year as sales increased to $1.85 billion from $1.81 billion.

Top performers included shoes, innerwear and accessories, while men’s wear was “slightly above trend,” the retailer said in a statement. Women’s wear and juniors’ were in line with expectations.

In the specialty channel, the first quarter bloomed, and offered encouragement for a teen apparel rebound–already foreshadowed by strong results at Abercrombie & Fitch and PacSun.

As expected, Urban Outfitters Inc. thrashed expectations, with sales across all four business segments posting high double-digit gains for the quarter. For the three months ended April 30, earnings sailed 163.9 percent to $16.9 million, or 41 cents a diluted share, on a sales gain of 59.1 percent to $170.3 million. Comparatively, the company reported earnings of $6.4 million, or 16 cents, on sales of $107 million a year ago.

“Apparel sales continued to generate the strongest gains,” said Richard Hayne, chairman and president, during the company conference call. Home goods and accessories performed well, he said.

Warrendale, Pa.-based American Eagle wasn’t left out of the specialty party, recording a 292.1 percent earnings increase to $25.1 million, or 34 cents a diluted share, compared with earnings of $6.4 million, or 9 cents a share, in the year-ago quarter. Sales improved 19.9 percent to $350 million from $291.9 million.

“I believe this quarter marks a turning point for our company,” said James O’Donnell, ceo, during the company’s conference call. “We’ve managed inventories appropriately and curtailed excessive promotions, which depress our profit margins and also were not meaningful to our core customers.” American Eagle added that its markdown rate was its lowest in five years.

— With contributions from Vicki Young, Dan Burrows and Ross Tucker

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