Retailers May Flunk Back-to-School as Costs Soar, Sales Stall

By Heather Burke and Zahra Burton
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Aug. 6 (Bloomberg) -- Retailers in the U.S. may be dreading the approach of the school year almost as much as kids, given a forecast for the worst back-to-school season in seven years.

Even with projections for almost no growth, stores need to raise prices, says Burt Flickinger, managing director of Strategic Resource Group, a New York retail consulting firm. Otherwise, higher costs for everything from cotton, to shipping, to labor in China will eat away at already narrow profit margins, he said.

``It's an absolute balancing act,'' said Patricia Edwards, a portfolio manager with Seattle-based investment firm Wentworth Hauser and Violich. ``This is retail high-wire at its finest.''

Sellers and buyers are up against similar economic realities. Retailers such as J.C. Penney Co. in Plano, Texas, San Francisco-based Gymboree Corp. and Cincinnati-based Macy's Inc. must cope with higher costs and a U.S. dollar worth 9 percent less than a year ago. Their customers are confronting $4-a-gallon gasoline and food price increases amid a housing market decline, falling asset values and job losses.

Shoppers ``don't have any more money in their pocket,'' said Joseph Gromek, chief executive officer at New York-based Warnaco Group Inc., with brands that include Calvin Klein and Speedo. ``So to think that they're going to pay more for the same is not going to happen. The consumer is not willing and candidly today not able to spend more on discretionary items.''

Kathi Nunziato has noticed the price creep. As she shopped at a J.C. Penney's in Paramus, New Jersey, the mother of a school-age boy and girl said clothes she bought in June were more expensive by the time she returned to the store in July.

``I would say $5 per item'' more expensive, she said. ``They've gone up, just in that short time.''

Reluctant Parents

Back-to-school purchases from July through September, retailing's second biggest season after Christmas, this year may climb 1 percent to $38.5 billion, according to the International Council of Shopping Centers in New York. That would be the slowest growth since 2001, the group said.

Almost 30 percent of U.S. parents plan to spend less money this year on back-to-school purchases, according to a survey of 1,000 adults by America's Research Group conducted July 8 through 10. Last year, that figure was 16 percent, said Britt Beemer, chairman of the Charleston, South Carolina-based firm. This year, 45 percent of those who planned to cut back said they had less money.

Even with the threat to volume, some retailers are trying to increase prices 8 to 9 percent on certain items, said Flickinger. For instance, Warnaco said it has raised prices on its Calvin Klein jeans because it is a premium brand.

A Matter of Survival

Stores are hoping that new merchandise, already priced higher, and well-promoted discounts will mask the inflated costs, Flickinger said.

``It's a risky strategy, because people who are already buying less at full-price will have even more sticker shock and be less inclined,'' Flickinger said in a telephone interview. ``This is simply a matter of survival.''

One of the biggest contributors is inflation in China, where a quarter of all the clothes sold in the U.S. are made. China's producer price index, a measure of inflation, climbed 8.8 percent in June, the biggest increase since Bloomberg data began in 1999. In May China's PPI rose 8.2 percent.

That in turn helped push U.S. costs on goods from China up 4.8 percent in June, the biggest year-over-year gain since the Labor Department started tracking the data in 2003.

China's Inflation

Footwear, one of the purchases parents can't easily avoid each year, has felt the squeeze. Eighty-four percent of shoes sold in the U.S. are made in China.

``We'll continue to look at sourcing some of our products from other countries such as Indonesia and Vietnam,'' said Ron Fromm, the chief executive officer of Brown Shoe Co., the St. Louis-based maker of Buster Brown and Dr. Scholl's footwear. ``But they could never build to the volume to offset the main production capability in China.''

Companies that have announced price increases include Collective Brands Inc., the Topeka, Kansas-based owner of the Payless ShoeSource chain; Los Angeles-based Rebels Footwear, which supplies Macy's with juniors' shoes; and Brown Shoe.

For discounters like Wal-Mart Stores Inc. and Target Corp., the trend isn't all bad news. Both order larger quantities than department stores, said Flickinger, which means they can negotiate better prices from suppliers. This may allow them to ``selectively'' raise prices 3 percent to 7 percent in the next month, he said.

Discounters Benefit

Bentonville, Arkansas-based Wal-Mart, the world's largest retailer, and Target in Minneapolis said they're working with suppliers to absorb costs rather than pass on increases. Target will be ``price competitive'' for back-to-school with Wal-Mart, spokeswoman Lena Michaud wrote in an e-mail.

They may also benefit from increased traffic, according to a survey by Brand Keys, a New York-based market-research firm. The survey showed 85 percent of parents said they would shop for back-to-school at discounters including Wal-Mart, up from 75 percent from 2007.

Some retailers are saying they will tough out the higher costs -- at least until next year when the economy may bounce back. J.C. Penney, Children's Place Retail Stores Inc. in Secaucus, New Jersey, and American Eagle Outfitters Inc. in Pittsburgh said they weren't raising prices for back-to-school.

``You can't totally sacrifice sales, but you can't sacrifice margins either,'' said Wentworth Hauser's Edwards. ``Show me the margin, show me the earnings.''

To contact the reporters on this story: Heather Burke in New York at hburke2@bloomberg.net; Zahra Burton in New York at zburton1@bloomberg.net