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By
Reuters
Published
Aug 21, 2009
Reading time
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Back-to-school looks weak for apparel retailers

By
Reuters
Published
Aug 21, 2009

SAN FRANCISCO (Reuters) - If earnings reports released on Thursday 20 August are a sign of business to come, U.S. apparel retailers will have to continue cutting costs and discounting as slumping sales persist.



Gap Inc, operator of the Gap, Old Navy and Banana Republic chains, streamlined operations and reduced inefficiencies to generate a quarterly profit that beat analysts' expectations. But its revenue fell 7 percent in the quarter and same-store sales dropped as much as 15 percent in its stores.

Other retailers that focus on teens rather than adult shoppers similarly struggled with sales while barely beating profit expectations.

The dismal current sales atmosphere caused one analyst to temper his optimism for the rest of the year.

"The second-quarter earnings season is shaping up with all the excitement on the bottom line, as the top line remains stagnant or down at best," said Brean Murray, Carret analyst Eric Beder. "There are faint signs of a turn, but it is way too early for retailers to get excited."

Gap said net income for its fiscal second quarter, ended August 1, fell to $228 million from $229 million a year earlier. Earnings per share were 33 cents, narrowly above the 32 cents per share expected by analysts, according to Reuters Estimates.

Revenue fell 7 percent to $3.25 billion, while same-store sales, a key gauge of retail performance, fell 8 percent.

Pacific Sunwear of California Inc topped analysts' estimates by a penny although it swung to a loss in its second quarter.

But wary investors were more concerned about the company's outlook, which was far worse than analysts had expected and its shares fell nearly 10 percent after the bell.

"Clearly we have a lot of work to do to stem our decline in sales and ultimately return to profitability," said new Chief Executive Gary Schoenfeld in a statement.

Rival Zumiez Inc, which sells snowboard- and skate-inspired clothing and gear, reported a loss for the quarter that was narrower than expected and said sales trends had improved.

But a third-quarter forecast from Wet Seal Inc was below Wall Street expectations and shares fell 6.6 percent.

"Back to school is likely to be disappointing for all but a few select value-oriented retailers," wrote Moody's Investors Service in a report published Thursday 20 August.

FALL INTO THE GAP

Last week, the Gap chain launched a major denim campaign, offering jeans with better fits and higher-end styling in hopes of bringing back once-loyal customers who gravitated to more fashionable rivals.

Gap has improved profit margins in recent quarters even as slumping sales have pressured results.

"We are finding the right balance between maintaining cost discipline and changing the trajectory of revenue that we've been on for far too many years," said Chief Executive Glenn Murphy, speaking to analysts during a call.

Gap stores saw a 10 percent decline in same-store sales, while Banana Republic, a more upscale chain that sells clothing to young professionals, recorded a 15 percent drop.

At Old Navy, the company's largest unit in terms of total sales, same-store sales fell 4 percent as recent merchandise improvements and value-priced goods lured new shoppers.

But analysts believe Gap's cost-cutting efforts will be difficult to sustain in coming quarters.

In the second quarter, operating costs fell by $52 million, but those costs are likely to be flat or rise about $20 million in the third quarter due to more marketing, Gap said.

EXCEPTION TO THE RULE

Aeropostale Inc was the exception to the tepid sales as its low prices appealed to teens and their budget-conscious parents.

Its second-quarter net income rose 83 percent on a 20 percent rise in sales. The company has been one of the few apparel retailers to consistently post higher monthly sales amid the downturn on lower pricing.

Net profit was $38.6 million, or 57 cents per share, from $21.1 million, or 31 cents per share, a year earlier -- above the 56 cents per share Wall Street had been expecting.

The company said it expects third-quarter earnings of 76 to 78 cents per share. Analysts were expecting 76 cents. Aeropostale shares rose less than 1 percent to $36.08.

Shares of Pacific Sunwear fell 9.8 to $3.60, while shares of Zumiez closed at $12.28 and did not move after hours.

Wet Seal shares fell 6.6 percent to $3.10 and Gap shares fell 1 percent to $18.65 after closing at $18.85.

(Reporting by Alexandria Sage; Editing by Steve Orlofsky)

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