California Apparel News

Retail isn’t sitting pretty.

A confluence of factors—executives attending nonstop merchandising meetings, promotions escalating to frenzied seven-day-a-week events, rampant store closings and a state of recession—amount to a far from rosy outlook for the retail industry.

Adding to the woes are Gap Inc.’s recent downgrade to a rare “sell” rating, so-so holiday mall traffic and stunning losses reported by a host of merchants, including upscale retailer Neiman Marcus, which saw sales down 54 percent in its first quarter.

Most retailers and analysts aren’t seeing the light at the end of the tunnel this year, nor for the better part of next year, when the real wave hits—consolidation.

“There will be weakness in January, February and March based on jobless claims that will hit retailer demand, and if things continue to deteriorate, there will be casualties and retrenchment in the retail industry,” said Mike Niemira, vice president and senior retail economist at Bank of Tokyo-Mitsubishi.

Though most analysts aren’t expecting a repeat of the early-1990s bankruptcy frenzy, they expect to see fewer players and shuttered stores as merchants try to re-tailor their messages and focus as brands. Marquee names like Wal-Mart and Target won’t disappear from the stage, but the vast wasteland of mid-tier department stores and 10- to 15-store chains are fair game, said Jackie Fernandez, a partner at the consumer practice at Deloitte & Touche.

Getting a Gauge of Holiday Sales

The closest gauge for the long term is the near-term results of holiday spending. Sales predictions are widespread, from the National Retail Federation’s forecast of a 2.5 percent sales increase to the 1.5 percent rise expected by Wedbush Morgan Securities, with results hedging on the extra day in the selling season—32 compared to 31 last year—and the steep holiday promotions.

So far, retail executives are reporting ho-hum results. On the Friday after Thanksgiving, some Southern California malls posted gains, including Glendale Galleria, which reported a 10 percent increase in year-over-year traffic, while South Coast Plaza and others stayed flat. Retailers reported mixed sales results for the following week, with Macy’s West and other West Coast merchants fairing better than their Eastern counterparts, who are battling unseasonably warm weather.

Wedbush analyst Liz Pierce, whose team completed a 564-store tour over the two days after Thanksgiving, says she found a weaker retail environment than in the past.

“I was thrilled people came out, but there wasn’t the same reckless abandon or indiscriminate buying that I’ve seen in previous Thanksgiving shopping weekends,” she said.

Retailers saw sales upticks in fashion categories from women’s boots and sweaters at Bloomingdale’s to cashmere tops and denim jeans at Macy’s West.

Most merchants, however, say a solid holiday season isn’t the panacea for a tough year or the silver bullet for next year’s profits.

“We’re seeing a better start in Christmas as the consumer feels emotionally tied to gift-giving,” said Robert Mettler, president of Macy’s West. “Having said that, we’re not seeing a lot of changes in the economic outlook that affects retail positively. We have a cautious outlook for the first six months of next year.”

Indeed, the Los Angeles County Economic Development Corporation predicts a mere 1.4 percent rise this year in California’s taxable retail sales compared to the 12.3 percent jump last year. Jack Kyser, the agency’s chief economist, remains cautious for 2002, anticipating a 1.9 percent rise next year given the state’s troubles.

“There’s a lot of pain concentrated in the Bay area with the tech sector crash, the real estate downturn and exposure to problems in tourism—about 60 percent of people who go to San Francisco fly in,” Kyser said.

In Southern California, Kyser said he’s keeping an eye on the Grove at Farmers Market following its opening in March next year and its impact on the Beverly Center, Hollywood & Highland and other area malls.

He also said Kohl’s will be the formidable opponent in the retail ring, as other retailers fight to hold on to market share. The Menomonee Falls, Wisc.-based discount chain plans to open around 30 stores in Southern California by 2003, including locations in Simi Valley, La Habra, Buena Park, Downey and Rancho Santa Margarita.

“Next year is the year to watch where Kohl’s goes. They can hurt people nearby so you don’t want a Kohl’s near you,” Kyser said.

Some Retailers Forge Ahead

At a time when many retailers are pulling in their horns, including San Francisco-based Gap and New Albany, Ohio-based Abercrombie & Fitch, others with stronger balance sheets are bucking the trend with aggressive growth schedules next year.

Posting a whopping 72 percent jump in third-quarter earnings, Foothill Ranch, Calif.-based Wet Seal Inc. plans to open 50 Wet Seal stores, 20 Arden B. stores and 15 Zutopia locations.

Meanwhile, Los Angeles-based Windsor Fashions, riding high on 10 percent comparable-store sales for November, is banking on new availability at some of the best malls nationwide by the first of the year. President Ike Zekaria said principals of the teen retailer visited 27 malls in three days over the Thanksgiving holiday covering Chicago, Milwaukee and Madison, Wisc., scouting for opportunities.

“Come January, we think a lot of mall space will be coming up and we’re basically hanging tight on new deals to see what’s to be had,” Zekaria said, adding that the company opened nine stores this past year.

Reaching Out to the Consumer

Upscale retailers hit hard by the economy are relying on customer service to set them apart from the retail crowd.

At La Perla on Rodeo Drive in Beverly Hills, Calif., the sale doesn’t stop at the register, said store manager Peri Ellen Berne. Sales representatives are sending follow-up letters to clients and thanking them for their business.

“It’s service, service, service—taking the time to listen and asking questions, finding out what kind of bra they like, do they like it padded [or] sheer, and then telling them how to care for it,” Berne said.

She remains optimistic about the spring season, based on the store’s collection and the psyche of the affluent shopper.

“People who buy luxury continue to buy luxury—they don’t say that’s it,” she said. “Once you’ve got the Mercedes, you don’t go back to the Toyota.”

Teen retailers may see the usual spending resiliency of its customer base subside in the next year, Wedbush’s Pierce said.

“Teens aren’t normally influenced by an external event like a recession since fashion and music are constants in their lives, but if the money is funneled from mom and dad, that saps spending power,” she said.

To maintain shopper interest, these retailers plan to have razor-sharp focus in the next year.

Anaheim, Calif.-based Pacific Sunwear plans to grow its women’s division to 33 percent of volume—up from 28 percent—by shifting its marketing focus. President Tim Harmon said this year’s campaigns targeted men and women with an X Games sponsorship and advertising on teen-oriented networks the WB and ESPN. He said the 2002 budget will decrease to 1.2 percent of sales from 1.8 percent and will focus on monthly two-page spreads in Seventeen, Teen, Teen People and YM.

“We’re putting our money where we see the best opportunities and spending less overall,” Harmon said.

Wet Seal said that its event-oriented promotions this year, including sponsoring “Boarding for Breast Cancer” in Lake Tahoe, Calif., and participation at KIIS-FM’s “Wango Tango 2001” concert, are strategies the company plans to build on in the next year.

“We want to be where our customer is,” said Steve Strickland, Wet Seal’s senior vice president of creative and marketing. “To do that we’ve increased our ad budget considerably. We’ve also found that our print marketing for Arden B. in Vogue, InStyle and Harper’s Bazaar and [for] Wet Seal [in] Seventeen, YM and Teen People is working well. We’ve had customers walk into Wet Seal and Arden B. with the magazine and say, ’I want this.’”

Staying True to Fashion

Providing trend at the right price points is the focus next year, say retailers.

“Basics aren’t selling as well as fashion,” Macy’s Mettler said. “People aren’t wanting to simply replace things in a closet—they want something that strikes a responsive chord. We’ve had cutbacks in footprints, but we’ve planned to have appropriate levels of inventory in spring, delivering on fashion and newness, which are the strongest opportunities, we believe.”

BCBG Max Azria, whose stores posted 9 percent comp-store sales increases in both October and November, is staying more conservative than in the past in terms of inventory for its freestanding stores, but its commitment to strong fashion designs is unwavering, said founder and chief executive officer Max Azria.

“We design from a lifestyle perspective,” Azria said. “Our customer doesn’t come to us simply for a great pair of pants, but rather, a great pair of pants, a shirt and a dress. We provide an overall concept in dressing and want to continue to give our consumer varying product categories to choose from.”

The key lies in managing inventories—a tricky balance that often weighs in favor of department store retailers compared to branded stores. If mass retailers have leftovers, they have a manufacturer to turn to for chargebacks, unlike Gap, Bebe and others that oversee the manufacturing of their own product.

“A vertically integrated retailer has to carry the full blame,” Pierce said. “And, a branded retailer can chase product if they need to, which is harder for a [vertically integrated retailer].”

Azria points out, however, that striking the right balance as retailer and manufacturer ultimately has its rewards.

“It gives the retailer the ability to control the influx of goods to their respective boutiques, most directly impacting how the goods are ultimately merchandised on the floor,” he said.