Slow Back-to-School Sales Signal Weak Holiday Season Ahead

Retailers reported weak August sales, capping a disappointing back-to-school season and signaling that the crucial holiday period could be the weakest in years.

Pinched consumers continued to focus on buying necessities and other items at low prices, giving a boost to discounters Wal-Mart Stores Inc., the world's largest retailer, and BJ's Wholesale Club Inc. But high-end Saks Inc. and Nordstrom Inc. posted worse-than-expected sales declines at stores open at least a year. On Wednesday, middle-market retailers J.C. Penney Co. and Kohl's Corp. also reported lower same-store sales.

Retailers have been planning conservatively for the holiday season. But this week, Penney Chief Executive Myron E. "Mike" Ullman III said at a Goldman Sachs retail conference in New York that he expects holiday shoppers to put off purchases until the last minute, much as back-to-school shoppers did.

Retailers may also face a slowdown in sales to foreign tourists, who last year helped prop up holiday results at some chains with a buying spree fueled by the weak dollar. The sales bump could disappear in coming months if, as expected, the dollar strengthens, European economies slow and airlines cut back on flights to the U.S., analysts said.

"Sales on Fifth Avenue and at some of the heavy tourist destinations are starting to slow," said Brian Tunick, a J.P. Morgan Chase & Co. analyst. That could hurt holiday results at Saks, Tiffany & Co., Macy's Inc. and Abercrombie & Fitch Co. Dana Cohen, an analyst at Bank of America Securities LLC, recently downgraded both Tiffany and Abercrombie shares, partly because of concern about a decline in foreign tourism.

Mike Nuzzo, Abercrombie's vice president of finance, acknowledged the problem, saying at the Goldman Sachs conference that "we're not naively thinking that the [same-store sales] trends that we're seeing driven by international tourism will continue forever." He said, however, that tourist sales at Abercrombie are still strong.

Overall, August sales at stores open at least a year -- a key measure of retail performance -- rose a better-than-expected 2% in August, buoyed by Wal-Mart's results, according to researcher Retail Metrics Inc. Excluding Wal-Mart, same-store sales rose a worse-than-expected 1%. Wal-Mart said its total U.S. same-store sales rose a better-than-expected 3%, excluding fuel.

For the rest of the year, Retail Metrics is forecasting same-store sales gains averaging 1% to 2%, compared with an average monthly gain of 2.6% last year and 3.7% in 2006.

"This is going to be a difficult holiday season unless the job market turns around rather dramatically in the next couple months or gas prices drop to less than $3 a gallon," said Ken Perkins, president of Retail Metrics.

Discounter Target Corp., which hasn't been doing as well as rival Wal-Mart, reported a slightly better-than-expected 2.1% drop in August same-store sales and said same-store sales in September would be relatively flat, rising as much as 1% or falling that much. Costco Wholesale Corp. failed to meet analysts' predictions on Wednesday with its 9% gain in August U.S. same-store sales.

Apparel retailers continued to struggle, with Chico's FAS Inc. posting a 10% decline in same-store sales and Gap Inc. reporting an 8% sales drop. But both chains did better than expected. Meanwhile, lower-priced teen chains Buckle Inc. and Aeropostale Inc. posted strong gains.

By: Jennifer Saranow
Wall Street Journal; September 5, 2008

Retailers 'Sell' to Young Virtually

Kohl's, Sears Build Brands As Children Clothe Their Avatars Online

Retailer Kohl's Corp. this month launched a new line of apparel, but the plaid skirts and printed T-shirts won't be sold in its 957 stores. Instead, it's trying something new in tween advertising, and selling them on Stardoll.com, a virtual community for teens and tweens where kids can fork over "Stardollars" -- purchased online at a nominal sum -- to buy apparel for their online characters.

With back-to-school sales off to a slow start, more old-line retailers and clothing labels are reaching out to kids online, enticing them to try virtual versions of their togs in hopes of making actual sales later. Kohl's first virtual line features pieces from its new Abbey Dawn collection, designed by singer Avril Lavigne. In its first 16 days, Kohl's Stardoll boutique logged some 2.2 million visits and sold 1.8 million items. Kohls.com lured 97,000 visitors who clicked through from the boutique site.

This month, casual-wear maker K-Swiss Inc. and lingerie and swimwear designer Eberjey rolled out virtual clothes on There.com. And in late July, retail pioneer Sears Holdings Corp. opened its first online boutique featuring back-to-school apparel and dorm-room furniture on teen site Zwinky.com. Sears said the boutiques logged 750,000 visitors and sold 850,000 virtual items during their first 16 days through mid-August.

These mainline retailers hope the virtual showrooms will be more effective than traditional teen advertising in hooking tweens and teens. Users of the sites already can spend virtual dollars on virtual clothes designed by the sites, or by early adopters such as American Apparel Inc. that went virtual two years ago. The sites are places to fashion digital personalities, called "avatars," that participants use to explore new styles, relationships and behaviors. Typically, these sites now offer a click through to buy the real products.

"When you look at an ad, it's pretty quick," said Jennifer Weiderman, vice president of global marketing for K-Swiss. "But when they're in this virtual world, this gets them to spend more time [viewing] your product. It's a little bit more sticky."

Ms. Weiderman said she is dialing back her spending on TV ads this year and expects to allocate 15% of her marketing budget to online initiatives, up from 5% last year. Sears and J.C. Penney Co., which last month made virtual versions of its teen and young-adult clothing available to users of Yahoo's instant messenger service, say they've increased online ad spending this year. Kohl's also said it is allocating more of its online ad dollars this year to targeting teens. None would detail the scale of the budget shift.

Details of the arrangements vary, but a retailer or brand typically pays a fee to have a virtual community host and develop its store and products. At There.com, the fee ranges from a few hundred dollars to a few thousand, depending on how elaborate the store is and how many items will be sold. The brand and the Web site sometimes split revenue from the virtual purchases. But since virtual clothes cost from under $1 to $5 -- brands regard this revenue as negligible.

"It's really a way to get shoppers to test-drive your product," said Carlos Mejia, chief financial officer of Eberjey, a maker of lingerie, swimwear and sleepwear. The brand, which largely sells to women ages 20 to 45, hopes to attract teenagers with its virtual line.

Penney decided this year to put back-to-school outfits on Yahoo after learning that, during a seven-week experiment last summer, 1.5 million avatars wore its clothing on Yahoo and 5 million Penney outfits were tried on. "It casts a very modern, current light on the brand with teens," says Mike Boylson, Penney's chief marketing officer. Before Penney's presence on Yahoo, "perhaps J.C. Penney wasn't on their radar before," he says.

Sears is marketing its virtual boutiques on billboards in the virtual world, and is hosting daily fashion shows on the site promoting its products through the end of August.

Not everyone is pleased. Patti Miller, vice president of Children Now, an Oakland, Calif.-based national children's advocacy group, expressed concern over marketing to youngsters via these virtual shops. The Federal Communications Commission in 1990 established rules governing the hourly amount of advertising directed at children. But the newer, Web-based virtual communities that have replaced TV viewing for some kids have no similar restrictions.

"Some of these younger kids, those younger than 8 and even kids up to 12, can't make the distinction between what's advertising and what's not," says Ms. Miller. She says children may not grasp that the virtual stores function as a brand advertisement.

Dave Bazant, Sears' marketing manager for online and emerging media, argues that children who frequent the virtual sites are savvy enough to know that the stores also function as a branding tool.

"It's fairly transparent -- kids are not very naïve these days," says Mr. Bazant. He notes that Sears is careful to not aggressively push its wares in these sites because teens and tweens are "turned off by direct advertising. We're not giving away our product for free. Most of these items, they have to purchase."

The online pitches are striking a chord with Jen Rediger's daughters, 13-year-old Tyler and 9-year-old Kenzie. In the first week that the Kohl's store opened on Stardoll, they spent about 70 Star Dollars, or $7, on virtual skirts and shoes. Ms. Rediger, 32, an interior designer who lives in Hoschton, Ga., says she doesn't mind her daughters being exposed to such marketing because "it's not worse than what they see on television."

Tyler has already asked her mom to take her to Kohl's to buy the real versions. "They look really cool on my doll," she says. "It's my style so I think I'll wear it a lot."

By: Cheryl Lu-Lien Tan
Wall Street Journal; August 19, 2008

Abercrombie Posts 4.2% Drop in Profit

Abercrombie & Fitch Co. said its fiscal-second-quarter profit fell 4.2%, hurt by consumers cutting back on discretionary purchases, and the teen retailer gave a weaker-than-expected full-year outlook.

Abercrombie sales have been curtailed by a slowdown in mall traffic and by consumers who have curbed spending or turned to lower-cost rivals such as Aeropostale Inc., analysts said.

"The selling environment, particularly as we moved into the back-to-school selling period, was tough," Abercrombie Chief Executive Michael Jeffries said on a conference call Friday.

Net income in the quarter ended Aug. 2 fell to $77.8 million, or 87 cents a share, from $81.3 million, or 88 cents, a year earlier. The latest results included a penny-a-share charge related to the departure of Chief Financial Officer Michael Kramer to become CEO of apparel maker Kellwood Co.

Sales rose 5.1% to $845.8 million. Comparable-store sales, or sales at stores open at least one year, dropped 4%.

In 4 p.m. New York Stock Exchange composite trading Friday, Abercrombie's shares rose two cents to $52.59.

The New Albany, Ohio, company, which owns a couple women's designer apparel and women's discount apparel stores, forecast full-year profit of between $4.95 and $5 a share, with the low end of the outlook reflecting a 7% decline in same-store sales. That fell below analysts' average estimate of $5.36 a share.

The company, which has expanded into international markets such as London as U.S. growth slows, said it plans to open stores in Milan, Italy. "Given our results to date, we are absolutely convinced that international expansion will drive long-term, top-line and bottom-line growth while further enhancing our brands," Mr. Jeffries said.

Abercrombie plans capital spending this fiscal year of between $405 million and $410 million, mostly for store openings and remodels. It plans to increase gross square footage by about 9% to 10% this fiscal year.

By: Andria Cheng
Wall Street Journal; August 16, 2008