Employment Slump Pressures Consumer Companies

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Sales are slumping and stores are carrying less inventory—a one-two punch that many apparel makers are struggling to absorb.

While shoppers will buy if they are offered better value for their money, we expect purchasing of luxury apparel and accessories to be far from robust.

"Consumers' behavior has clearly changed," said Standard & Poor's Ratings Services Director Jayne Ross. "Unless people see an offer they can't refuse, they are simply not going to buy."

Some companies in the apparel sector have struggled more than others in an increasingly competitive market—one that carries significant risk associated with changing fashions, even in the best of times. Liz Claiborne (LIZ) (B), for example, has in recent years added higher-margin contemporary brands such as Juicy Couture, Lucky, and Kate Spade while selling, exiting, or discontinuing noncore businesses, including many of its moderate-margin brands. In this difficult and more promotional retail environment, the company's revenues and margins have suffered as more value-oriented consumers eschew higher-end goods.

Meanwhile, clothing companies that can rely more on classics and basics are poised to fare comparatively well. For example, Jones Apparel Group (JNY) (BB-), with its strategy of offering multiple brands over various price points and distribution channels, looks as if it may have righted itself. While the company's sales dropped 8.9% in the first quarter, the decline was far less than it originally expected. Jones Apparel's well-recognized brands in the women's apparel and footwear segments—including Anne Klein, Gloria Vanderbilt, and Nine West—will likely help.

Moves down the pricing scale to "value" products have also occurred in household and personal care items. Consumers are also waiting longer to repurchase necessities, rather than maintaining a stockpile as in the past. Companies that have anticipated these trends stand to fare better than their competitors. Procter & Gamble (PG) (AA-), for instance, built its product portfolio on the premise of developing and selling more premium products through pricing, packaging, and innovation. But as consumers trade down to lower-cost alternatives and private labels in several of the company's segments—particularly grooming, health care, and beauty—or curtail discretionary spending, Procter & Gamble is increasing its investment in new products, trying to balance its product-value equation, and continuing to broaden its product mix.

(Next: Gaming & lodging, airlines, carmakers, and technology.)

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