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Thursday, January 15, 2009

Retailers Keep Cutting Prices

As posted by: Wall Street Journal

Worried that consumers won't go back to paying full price after the holiday season's deep discounts, some retailers are cutting prices on early spring merchandise as soon as it hits store shelves.

The deals on fresh goods suggest that retail profit margins will remain under pressure in the first half of the year. On Thursday, most chains are expected to report that their same-store sales declined in December, with many likely to cut their profit outlooks.

"This is really the first time that we have seen such quick discounting on new seasonal goods," said Kimberly Greenberger, an analyst at Citigroup Inc.

On Wednesday, discount giant Wal-Mart Stores Inc. said it would cut prices this week on certain exercise machines, athletic apparel and food items, in what it calls the second phase of its Operation Main Street initiative to help consumers save money, this time on health-related products such as organic baby clothing and natural baby clothing.

Many deals at other stores involve apparel, which has a short shelf life and must be cleared out quickly to make way for new styles. Spring orders were generally placed before the financial crisis exploded in late September, causing consumers to cut spending sharply. As a result, stores may once again have more inventory than they need to meet demand.

By trimming prices selectively on early spring goods now, department stores, specialty apparel chains and teen retailers hope to persuade skittish shoppers to buy new styles, analysts said. They're also trying to capitalize on crowds flocking to winter clearance sales, fearing that traffic will fall off sharply after the sales end.

"It's never a good thing to be marking down merchandise as it hits the floor," but "if you have to move [it], try to move it when traffic is in the mall," said Amy Wilcox Noblin, an analyst at Pali Capital.

Polling suggests retailers are right to think shoppers will balk at paying full price. In an America's Research Group survey of 1,000 consumers the first weekend of 2009, 90% said they would primarily buy advertised specials, up from 84% in early November.

Some of the deals on new styles require shoppers to buy more than one item. Gap Inc.'s Old Navy chain is selling new $12.50 women's lace jersey-knit camis tops online for $6 each if shoppers buy two or more. And AnnTaylor Stores Corp.'s Ann Taylor division will sell two $29 split-neck cotton tops for $35. A Gap spokeswoman said the chain routinely offers new-item specials as part of a strategy to focus on value. At AnnTaylor, a spokeswoman said the strategy is to be "more promotional in order to remain competitive, to provide our clients greater savings, and to continue to keep our inventories clean."

Other clothing makers such as J. Crew Group Inc. and Bebe Stores Inc. are trying to attract shoppers by cutting their opening price points on some spring merchandise before it even hits stores.

"The reset button has been pushed on price," Millard "Mickey" Drexler, J. Crew's chairman, told analysts in a conference call in late November. He cited ballet flats for the company's spring collection, which now start at $98, down from $125.

Bebe, meanwhile, plans more "two for" deals this spring than last year and is also lowering opening price points in categories like rings and tops. Later this month, it plans a campaign called "The New Deal" to promote the new prices. "It's a good practice right now that we show a client that if today all she has is $29, we might have a top for $29," said Chief Executive Greg Scott.

And at Intermix, a chain of boutiques based in New York, Chief Executive Khajak Keledjian said he has negotiated with a few U.S. labels to produce some items at lower prices for spring. A one-shouldered, ruffled dress by Madison Marcus, for example, will carry a $295 price tag this spring at Intermix, compared with $395 for a similar style by the label last spring, he said.

Premium-denim maker Rock & Republic is producing a Recession Collection of jeans priced at $128 to $138, or about $50 less than the label's previous opening price point for denim. President Andrea Bernholtz said the collection, due in stores in March, was created after discussions with retailers on what consumers want now.

"If a starting price point of $180 is going to throw you into a tailspin...we thought we'd take lesser margins on our end and pass that on to the consumer," she said.