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Monday, August 16, 2010

Back-to-School Standoff Risks Profit Margins as Consumers Wait


The back-to-school shopping season is off to a slow start as retailers and consumers wait to see who will blink first.

Americans are looking for more discounts, and retailers are trying to hold out in an effort to protect profit margins, said Craig Johnson, president of the New Canaan, Connecticut-based consulting firm Customer Growth Partners. Department stores J.C. Penney Co. and Kohl’s Corp. lowered their profit forecasts last week.

“No one buys on the first markdown,” said Johnson. “Only chumps pay full price. We haven’t seen the desperation fire sales yet.”

As a result, the back-to-school shopping marathon, the second-largest shopping season in the U.S. after the end- of-year holidays, could be pushed deep into September, said Eric Beder, an analyst at New York-based Brean Murray Carret & Co.

Retailers ordered more merchandise when the U.S. economy was rebounding earlier this year, he said. Now they will have to clear out their summer stock. The question is when to cut prices and by how much, he said.

“There are a lot of retailers losing sleep,” Beder said.

In July, the National Retail Federation estimated back-to-school spending would top $55 billion in the U.S. this year, up 16 percent from $47.5 billion last year.

Evidence is mounting that the group’s estimate was too optimistic, according to John Canally, an investment strategist and economist for Boston-based LPL Financial.

Low Confidence

Retail sales rose less than forecast in July, the Commerce Department said on Aug. 13. Consumer confidence, meanwhile, held near an eight-month low.

“Retailers aren’t going to get a boost out of higher prices, so if they’re going to hit 16 percent growth, they’re going to have to sell a lot more stuff,” said Canally.

J.C. Penney, the third-biggest U.S. department-store chain by revenue, last week lowered its annual profit forecast to $1.50 a share from $1.64 and said consumers were putting off shopping trips.

A “terrific denim selection and school uniforms” would make J.C. Penney a leading destination, said Chief Executive Officer Myron E. Ullman in a call with analysts.

“However, we expect the peak back-to-school selling period to be very close to school openings,” he said. J.C. Penney could not be reached for comment.

Lowered Forecast

Kohl’s, the fourth-largest department store chain, lowered its most optimistic per-share profit forecast by 5 cents to $3.70, though CEO Kevin Mansell said in a conference call Aug. 12 that denim sales were looking “very, very positive” for back-to-school. Kohl’s couldn’t be reached for comment for this story.

Not everyone is pessimistic. Limited Brands Inc. said last week back-to-school sales were off to a “solid start.” Macy’s Inc. raised its earnings and sales forecasts for the year last week.

“The start to back-to-school has been very encouraging,” Chief Financial Officer Karen Hoguet said on a conference call, adding that sales of the exclusive Material Girl line designed by Madonna and her daughter Lourdes boosted sales overall.

“We don’t have a crystal ball on the economy,” Hoguet said. “We do have confidence we can continue to gain share profitably no matter what the environment.”

Macy’s declined to comment. Limited couldn’t be reached for comment.

Hedging Bets

Weather and the economy have many retailers hedging their bets. Globally, July was tied for the third hottest summer on record, according to a NASA report, including unusually warm temperatures in the eastern part of the U.S. The heat has prompted some stores to push back discounts, say analysts.

“Any attempt to sell clothes for cooler weather has been met with resistance,” said Richard Jaffe, equity analyst at New York-based Stifel Nicolaus.

Some retailers are waiting to offer their biggest seasonal discounts until state tax holidays conclude, according to Customer Growth’s Johnson. In recent years, many U.S. states have waived sales taxes during the back- to-school period to help Americans buy new gear for their children.

Stores check inventory levels after the tax holidays to see if they need to cut prices to move the merchandise. This month 16 states have tax-free holidays, according to government data.

Price Wars

A possible sign of the promotions to come can be seen in the price wars being waged by the teen-oriented retailers. Abercrombie & Fitch Co., American Eagle Outfitters Inc. and Aeropostale Inc. are cutting prices on denim more than usual, said Johnson.

New Albany, Ohio-based Abercrombie is offering 40 percent off all jeans and jeggings -- leggings made of denim, or denim-like material -- which start under $30. Aeropostale, based in New York, has cut some denim to $19.99 a pair.

American Eagle was offering free smartphones to shoppers who tried on a pair of its jeans, which sell for as low as $24.50. That promotion ended Aug. 3, and the Pittsburgh-based retailer is now offering a sale on all jeans plus free shipping.

‘Best Butt’

Shoppers who buy a pair of Abercrombie jeans can post pictures of themselves wearing them on Facebook. Abercrombie employees and Facebook users will then vote on who looks the best, and the winner may be featured in a Hollywood movie.

Abercrombie’s Hollister Co. division, which targets athletic teens and kids shoes, will give a vintage surf bus to the denim wearer with the “best butt.” Hollister also has cut the price on its least-expensive jeans to $19.89 from $39.50, its lowest non-clearance price ever on the product.

The three teen retailers report earnings later this month and couldn’t comment because they are in a quiet period.

Predicting the strength of the back-to-school season and what it might say about the holiday shopping period is difficult given the mixed signals from the economy, says Canally. An increase in fourth-quarter hiring, a drop in gasoline prices, a continued surge in mortgage refinancing and higher incomes could push more people into stores as the year ends, he said.

“I don’t expect either season will be robust,” he said. “But there are some positives out there.”