Apparel retailers face tough back-to-school time

Friday, August 8, 2008

NEW YORK -- With the benefits of their stimulus checks dried up, Americans are focusing even more on necessities like detergent and milk. That's creating big problems for apparel chains at the malls as the important back-to-school shopping season gets underway.

Even more ominous: The number of newly laid off people unexpectedly hit the highest level in more than six years, according to a government report released Thursday.

"Most kids will be returning to school in last year's duds," Lazard Capital Markets analyst Todd Slater wrote in a report after seeing the July results from apparel retailers.

Sales reports for July from the nation's retailers show a widening gap between low-price operators and fashion chains, and analysts say the next couple of months will be critical for clothing stores that are on the cusp.

But discounters such as Wal-Mart Stores Inc. will have their challenges as well.

The world's largest retailer, whose July sales results were slightly below Wall Street estimates, said that it's seeing customers increasingly unable to stretch their dollars to the next payday. It also predicted that August's sales pace would be slower than July.

"The consumer is taking the mindset that, if I don't need it today then I am not going to buy it," said Patricia Walker, a partner in the consulting firm Accenture's retail practice. "Department stores are going to have the right incentives to get customers into the store."

July is among the least important months of the year for retailers since stores are clearing out summer goods to make room for back-to-school merchandise. So analysts will pay closer attention to August and September to gauge the fall selling period. Still, the July figures do provide a glimpse of shoppers' willingness to spend.

Many mall-based apparel stores and department stores including teen retailer Abercrombie & Fitch Co., Gap Inc. and J.C. Penney Co. suffered deeper declines in July. Luxury stores like Saks Inc., which operates Saks Fifth Avenue, also struggled with weaker sales.

With some exceptions, the apparel industry has been plagued in recent years with the lack of must-have trends, but a challenging economy is forcing shoppers to cut back even more. The financial woes are not evaporating anytime soon. Shoppers are struggling with higher food and gas bills, tighter credit, a persistent housing slump and increasing layoffs.

The Labor Department reported Thursday that the number of newly laid-off people signing up for benefits rose by a seasonally adjusted 7,000 to 455,000 for the week ending Aug. 2 -- putting claims at their highest level since late March 2002.

Such a harsh environment has contributed to a spate of bankruptcy filings from apparel sellers. On Monday, Pennsylvania-based Boscov's Department Store LLC, which operates 49 stores, filed for Chapter 11 protection. That follows last week's Chapter 11 filing by Mervyns LLC, a privately held regional department store that operates 175 stores. Others that have recently filed for protection include Steve & Barry's LLC, once a growing force in low-priced fashion.

The fate of other struggling apparel stores will rest on how they fare in the next couple of months. But Michael P. Niemira, chief economist at the International Council of Shopping Centers, believes that if the climate worsens, stores on the brink may not wait until after the holiday season to file for bankruptcy protection. He estimates that the November-through-January period accounts for as much as 40 percent in profits and about 30 percent of sales.

Clothing retailers in general saw their fortunes unravel even further in July. The International Council of Shopping Centers-UBS sales tally of 38 stores reported a 2.6 percent increase in July, in line with the 2.5 percent pace seen since the beginning of the industry's fiscal year, which starts in February. Excluding Wal-Mart's sales results, however, the tally was up just 1.4 percent.

The tally is based on same-store sales -- those at stores open at least a year -- which are a key indicator of a retailer's health.

Same-store sales at wholesale clubs were up 9.5 percent, while discounters posted a 2.3 percent increase. But department store results dropped 5.7 percent, worse than the year-to-date decline of 4 percent.

Wal-Mart reported a 3 percent gain in same-store sales for July, missing the 3.4 percent gain expected by analysts polled by Thomson Financial. The results excluded gasoline sales. Including gasoline results, same-store sales would have been up 3.7 percent.

The discounter said sales increased in grocery, entertainment, and health and wellness, but that its home and apparel business posted small declines. Wal-Mart noted that it saw sales momentum building in back-to-school offerings across the store and expects the momentum to carry through August. Still, the company forecast a same-store gain of only 1 percent to 2 percent for August.

"With the end of the stimulus checks, we know consumers are spending more cautiously, and we continue to see a pronounced paycheck cycle at the end of the month," Eduardo Castro-Wright, president of Wal-Mart's U.S division.

Chief rival Target Corp., which has been stumbling in recent months, said same-store sales slipped 1.2 percent, worse than the 0.3 percent decline that Wall Street expected. Retail analyst Ken Perkins notes that the discounter has a higher percentage of nonessentials like clothing and home furnishings compared to Wal-Mart.

But wholesale club operators keep turning in results that beat Wall Street estimates. The sector has been benefiting because they are a one-stop shop -- consumers are increasingly filling up their cars with cheaper gas and then heading into the stores for groceries.

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