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Apparel Retailers Brace For The Ride

More dips and crests are likely this year in the apparel marketplace.

After enduring what one analyst refers to as "a year of ups and downs" in 1997, the nation's apparel retailers can look forward to another roller-coaster ride in 1998. Intense competition among industry players, fallout from the Asian financial crisis, uncertainty among consumers about how long our own economy will remain healthy -- all are factors that will impact the retail apparel business in the coming year.

Market conditions Apparel sales were up about 4 percent in 1997, according to Rosalind Wells, chief economist for the National Retail Federation, a Washington, D.C.-based trade organization.

"Casual clothing is the 'in' thing," she notes, with branded apparel sales also showing strength. "For the past year or so, both ends of the apparel price spectrum -- the discounters and the high-end retailers -- have turned in strong performances. It's the mid-range stores that are having a tough time of it, probably because middle-income families are doing more apparel shopping at discount stores."

Cody McGarraugh, an apparel/home furnishings/textile analyst with Richmond-based Scott & Stringfellow, agrees with Wells. "Consumers are definitely migrating toward value in their apparel purchases," he says, "and retailers in the mid-price range are definitely being left out."

Middle-income consumers are flocking to stores such as Stein Mart and The Gap's Old Navy concept, reports McGarraugh, while The Gap itself also is enjoying strong performance because consumers perceive it as offering value.

Meanwhile, high-end apparel retailing remains stable, continues McGarraugh, and the department stores "are doing a better job of merchandising on both the high-end and value portions of the apparel spectrum."

Department stores engaged in a great deal of promotional pricing of apparel during 1997, particularly during the holiday season. "A year of promotions certainly didn't help their profitability," he says, "but it helped take market share away from the mid- to upper-range specialty retailers, such as Ann-Taylor and Talbots."

The closely watched holiday season was a microcosm of the year for apparel retailers, according to Legg Mason retail analyst Sally Wallick, speaking from her office in Baltimore. "For apparel retailers, sales were good early on, then dropped, and picked up again right after Christmas," she says.

The Christmas numbers for apparel retailers were generally good, with clothing sales up 5.4 percent in December 1997 over December 1996, reports the National Retail Federation.

But they came at a price. "When sales came late in the Christmas season, retailers got anxious to move their goods, and discounted aggressively," Wallick explains.

In recent years, the holiday shopping season has become increasingly promotional for apparel (and other) retailers, she says, adding that when it comes to promotional price discounting these days, "it's not a question of if, but how much."

Overall, 1997 was a year of ups and downs for apparel retailers, says Wallick. "Depending at what point during the year you asked them, they were either very positive or very worried," she notes, adding that the year started out strong, but an unseasonably cold spring tossed a wrench into the works. "Weather does affect apparel sales more than people like to think. Cool weather in the spring caused sales of summer apparel to get off to a slow start, which really hurt the business."

Consumer preferences Apparel retailers are dealing with a fickle consumer marketplace, with price a main concern among consumers, says Kurt Barnard, president of Barnard's Retail Trend Report, a Scotch Plains, N.J.-based forecasting firm.

"People these days are not nearly as prone to go broke on clothing purchases, be they for work or for leisure," he says. "America is an aging nation, and as people get older, they are less concerned with the tags they wear on their collars or derrieres. What they really want is good-looking, practical, quality clothing they can purchase without going broke in the process."

A consumer "shift to thrift," apparent in other retail sectors, is also at work in the apparel retailing marketplace, reports Terrance McCrary, retail analyst with Stamford, Conn.-based Auerbach Pollak & Richardson. This trend is even affecting high-end apparel sales at such retailers as Neiman Marcus and Lord & Taylor, he notes.

"Apparel shoppers who used to shop the high-end retailers exclusively are now maybe making a few more of their purchases at department stores," says McCrary. "Department-store shoppers are now looking more to the discounter for their apparel needs."

The rationale for this behavior is clear, adds McCrary. "I like labels as much as anyone else," he says. "But if I can get my Polo shirt for $40 instead of $70, I'll definitely opt for the place where I can spend the $40. A discounter like Target often has some of the same apparel merchandise as Macy's priced at 20 percent less, so why not shop there for clothing?"

Market segments Some apparel retailers are faring better than others in today's market. Most notably, those catering to teenagers have tapped into a growing market, according to a recent report from San Francisco-based NationsBanc Montgomery Securities LLC.

"The teen market enjoys extremely favorable demographics," the report notes. As a demographic entity, this group is projected to grow in numbers at an annual rate of 1.2 percent to 1.7 percent between now and the year 2000, outpacing growth in the population as a whole, says the report.

"Teenagers spend most of their income (which totaled $105 billion in 1996), which tends to increase as they age," the report says. And because teen enjoy the tides of changing fashion, "Inventory turnover is five to eight times per year at teen retailers, vs. three to four times at department stores."

Teens make 40 percent more trips to the mall than other shoppers, the report notes, citing statistics from the International Council of Shopping Centers. "Furthermore, there is less sensitivity to the overcapacity of U.S. retailing among teen retailers, as teens prefer their own stores."

Teen-oriented apparel retailers -- such as Wet Seal, The Buckle, Urban Outfitters, Pacific Sunwear, Gadzooks and Hot Topic -- had a good year in 1997, reports Kelly Armstrong, equity research analyst for Wheat First Butcher Singer, Richmond, Va.

Department stores offer some competition to these specialty retailers, she notes, but their apparel is not strongly merchandised.

"Department stores don't have a big share of the teen apparel market," says Armstrong, "because teens typically don't want to shop the same stores as their parents."

Apparel retailers catering to the preteen-and-younger market, such as GapKids, babyGap and Gymboree, enjoyed strong sales in 1997, particularly at Christmas, says McGarraugh.

He also points to the rebounding of menswear retailers, including S&K, Jos. A. Banks and The Men's Wearhouse.

"This is a sector that was struggling," he explains. "Menswear is a tough sector because men tend not to be particularly fashion conscious, and they typically really hate to shop."

European-influenced changes in fashion may be spurring increased sales in this sector, he says, while a trend away from casual Fridays in the workplace may be launching a comeback of the suit wardrobe.

Success factors Faced with competition from department and discount stores, specialty retailers in the apparel business must focus on their markets, says Richard Jaffe, senior analyst with New York-based PaineWebber.

"They must be unique, highly differentiated, and have a clear merchandising vision," he notes. "Of course, excellent execution of that merchandising vision is also necessary. Retail is detail, and execution of the details of the merchandising vision makes for excellent performance."

With the national economy still in good shape, apparel retailers are enjoying the fruits of a thriving marketplace. But the overall economic environment is not the only factor in the success of apparel retailers.

"At any given point in time," says Legg Mason's Wallick, "a company may be doing worse -- or better -- than the environment would suggest. Often, the reason is that they either have their merchandise very wrong -- or very right."

What is the "right" merchandise these days? "In apparel, people are looking for value," says Wallick. But that does not necessarily mean rock-bottom low prices. "What it does mean is that customers feel they are getting what they pay for, and that the quality is good, relative to the price."

The right merchandise for an apparel retailer also depends on the targeted customer.

"The right merchandise for a company targeting teenagers is obviously very different from that of a Talbots," Wallick explains. Apparel retailers must not only understand their customers, she says, "but they also have to keep their merchandise fresh and interesting. You can only go so far doing the same thing over and over again."

Outlook Specialty apparel retailers will continue to rely more on the strength of their individual offerings than on what is happening in the economy at large, says Jaffe.

The moderate-income consumer is underserved in today's apparel marketplace, he says, "and as a result, the off-pricers and concepts such as Old Navy have filled that niche. There is continued opportunity for growth in that sector."

1998 should look much like 1997 for apparel retailers, replete with the peaks and valleys that marked the previous year.

"One thing that may affect the business is the Asian financial situation," says Wallick. "Companies like The Limited and The Gap purchase a lot of apparel from Asia, and the costs of these imports may come down because of the devaluation of Asian currencies. The big question is whether apparel retailers will pass on these lower costs to consumers, in hopes of driving unit sales enough to offset lower prices."

Wallick's guess is that they will. "It's a very competitive market out there," she notes. "Companies are looking to move merchandise, and one way to do that is through lowering prices."

The state of the economy will affect the consumer in other ways, too. First, says McGarraugh, "We won't see much of an increase in overall sales -- probably a 2 to 4 percent increase, closer to 2 or 3 percent."

Second, the strength of the current national economy is causing some consumers to move up the food chain in their apparel purchases, spelling trouble for "low-end strip center retailers such as Cato's and Fashion Bug," says McGarraugh. "This group has had a hard time because people are not seeing them as offering both value and quality."

Conversely, the Asian economic turmoil is creating a sense of unease among consumers over the nation's economy, perhaps causing them to hold on to their dollars.

"People are increasingly wondering if we are going to see continued growth, or whether we are entering a cooling-off period," says McGarraugh. "As a result, I don't think consumers are going to be willing to open their wallets much wider in 1998 than they did in 1997."

Martin Sinderman is an Atlanta-based freelance writer.

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