Back-to-School Blues for Retailers?


The back-to-school shopping season is in full swing, yet retailers are fretting. Their worst fear is that the swooning economy will halt the free-spending American consumer, who has seemed impervious to the effects of the slowdown. If shoppers don't open their wallets wide for new school duds, there could be a real struggle among clothiers for the student set's dollars.

To many retailers, this is a critical time. The back-to-school season is second only to Christmas for producing revenue. And many retailers have already seen consumer spending start to soften amid consumers' worries about layoffs and a broad stock market decline. Compare this to "many years of historically sharp increases in back-to-school [spending]," says Holly Guthrie, an analyst with Janney Montgomery Scott. "We might see flat-to-down results for the season."

Against this backdrop are growing concerns that retailers have too much of the same merchandise on the racks. If you've been to the mall recently, you've probably noticed that so called "fashion forward" denim of all kinds is this year's back-to-school must-have, whether in a pair of studded low-rise kick flares or a micro-miniskirt.

TEEN TASTES. The fear is that an oversupply of denim could touch off a wave of promotional selling among apparel retailers, which could hit their bottom lines hard. "Everyone's going after the same people with the same product," says Mike Porter, an analyst at Morningstar. "It stands to reason someone's going to lose out if teens don't buy as much as the stores hope."

Unlike basic 5-pocket jeans, this year's denim can be pretty far out. And some apparel retailers are more denim-exposed than others. The Gap (GPS), Abercrombie & Fitch (ANF), American Eagle Outfitters (AEOS), and The Limited (LTD), which owns Express, have focused heavy marketing efforts on denim products, Porter says. The problem with that strategy is that brick-washed denim with rhinestone-encrusted unicorns could soon be a flash in the pan.

"In the past, when denim didn't sell now, it would sell later," says Porter, who adds: "This is so fashion-driven, if this stuff doesn't sell, it's not going to sell. You can't just bring it out later." Instead of 3 or 4 different washes and cuts, he notes, some stores are hawking as many as 8 to 12 styles. If too many teens grow weary of denim, some retailers will be forced to put their stock in the sale bin. "None of these companies would be immune," if the denim doesn't take, he adds.

WAIT AND SEE. Like the holiday shopping season, the back-to-school spending season is longer than it used to be, in part because teens and preteens are more fashion-conscious than ever. "Kids want to wait and see what other kids are wearing. This means we could get a fair amount of [buying] in September," says Elizabeth Pierce, an analyst with Wedbush Morgan Securities.

So far, retailers are reporting modest increases fueled by back-to-school items. U.S. chain-store sales rose in the week ended Aug. 18 as retailers matched or beat sales targets, the Bank of Tokyo-Mitsubishi and UBS Warburg said. U.S. chain-store sales rose 0.6% during the same week after remaining flat a week earlier, the firms reported in their Weekly Chain Store Sales Snapshot. The Redbook Retail Sales Average grew 0.2% during the first two retail weeks of August, above last week's 0.1% rise, Instinet Research reported.

This watching-and-waiting trend could give a boost to off-price retail companies like TJX Co.'s TJ Maxx (TJX), Marshall's, and Burlington Coat Factory Warehouse (BCF), which sell at discounted prices the merchandise other stores have trouble moving. Notes Porter: "There's more of a trend where people have been willing to dig for brands at bargain prices."

WIDER CHOICES. Some teen-focused apparel shops -- like Urban Outfitters (URBN) and Wet Seal (WTSLA) -- seem to have the right idea by offering a wide array of trendy denim clothes along with other styles popular with teens. With so many stores offering variations on jeans, the retailers that have denim along with other styles expected to be popular with teens this fall -- camouflage, military-theme, plaid patterns, '70s style duster sweaters, and corduroys -- would seem to have a better chance of winning the most back-to-school dollars.

Urban Outfitters is one of the few teen-focused specialty apparel retailers to say it's pleased with back-to-school results so far. Pierce recently raised her rating on the company to buy from hold because of the company's seeming ability to meet teenagers' "demand for uniqueness."

The category of clothes for girls known as juniors is one of the fastest-growing segments in apparel retail. The key to this group of young shoppers is variety. Wet Seal and Charlotte Russ (CHIC), which sell clothing and accessories only for teens and young women, have trendy denim in stock along with numerous variations on such basics as T-shirts. "If you look at some other teen retailers, they have very narrow offerings between denim and collared polo shirts," Pierce says.

BASIC ECONOMICS. Target (TGT), in particular, could do well in selling to school-bound fashionistas, Porter says. He points out that, like other discount-retailers, it has made huge strides in convincing teens and young-adult shoppers that its clothes are hip. It recently signed an exclusive deal for rights to the Mossimo brand of teen clothes. "More and more people are buying stuff at Target," he says. "They're stealing market share from Gap and others when it comes to basics."

By all accounts, denim in its many variations should be popular with teenagers this fall. But the best back-to-school results will probably come from stores that combine popular jeans with a selection of other trendy styles, as well as from those shops offering the latest styles at cheaper prices. In this back-to-school shopping season, diversification in inventory appears to be just as important as diversification in investing. By Amy Tsao in New York


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