Retailers brace for a back-to-school slump

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By Anne D'Innocenzio ASSOCIATED PRESS

NEW YORK | With the benefits of their stimulus checks dried up, American consumers are focusing even more on necessities like detergent and milk. That's creating big problems for apparel chains at the malls as the important back-to-school shopping season gets under way.

Shoppers are struggling with higher food and gas bills, tighter credit and a persistent housing slump. Even more ominous: The number of newly laid off people unexpectedly reached the highest level in more than six years, according to a government report released Thursday.

The Labor Department reported Thursday that the number of recently laid-off people signing up for benefits rose by a seasonally adjusted 7,000 to 455,000 for the week ending last Saturday - putting claims at their highest level since late March 2002.

“Most kids will be returning to school in last year's duds,” Lazard Capital Markets analyst Todd Slater wrote in a report after seeing the July results from apparel retailers.

Shoppers are struggling with higher food and gas bills, tighter credit, a persistent housing slump and increasing layoffs. Sales reports for July from the nation's retailers show a widening gap between low-price operators and fashion chains, and analysts say the next couple of months will be critical for clothing stores that are on the cusp.

But discounters such as Wal-Mart Stores Inc. will have their challenges as well.

The world's largest retailer, whose July sales results were slightly below Wall Street estimates, said that it's seeing customers increasingly unable to stretch their dollars to the next payday. It also predicted that August's sales pace would be slower than July.

“The consumer is taking the mindset that, if I don't need it today then I am not going to buy it,” said Patricia Walker, a partner in the consulting firm Accenture's retail practice.

Many mall-based apparel stores and department stores, including teen retailer Abercrombie & Fitch Co., Gap Inc. and J.C. Penney Co. saw steeper declines in July. Luxury stores like Saks Inc., which operates Saks Fifth Avenue, also struggled with weak sales.

The harsh environment has contributed to a spate of bankruptcy filings from apparel sellers. On Monday, Pennsylvania-based Boscov's Department Store LLC, which operates 49 stores, filed for Chapter 11 protection. That followed last week's Chapter 11 filing by Mervyns LLC, a privately held regional department store that operates 175 stores.

The fate of other struggling apparel stores will rest on how they fare in the next couple of months. But Michael P. Niemira, chief economist at the International Council of Shopping Centers, believes that if the climate worsens, stores on the brink may not wait until after the holiday season to file for bankruptcy protection.

Clothing retailers in general saw their fortunes unravel even further in July. The International Council of Shopping Centers-UBS sales tally of 38 stores reported a 2.6 percent increase in July, in line with the 2.5 percent pace seen since the beginning of the industry's fiscal year, which started in February. Excluding Wal-Mart's sales results, however, the tally was up just 1.4 percent.

Wal-Mart reported a 3 percent gain in same-store sales for July, missing the 3.4 percent gain expected by analysts polled by Thomson Financial.

Chief rival Target Corp., which has been stumbling in recent months, said same-store sales slipped 1.2 percent, worse than the 0.3 percent decline that Wall Street expected.

Same-store sales at wholesale clubs were up 9.5 percent, while discounters posted a 2.3 percent increase. But department store results dropped 5.7 percent, worse than the year-to-date decline of 4 percent.