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Shoppers Buy Quality at Lululemon, Victoria’s Secret

Athletic apparel sits on display at the Union Square Lululemon retail store in New York. Photographer: Benjamin Norman/Bloomberg

Product is king again.

After using discounts and promotions to deliver the best holiday sales performance in six years, U.S. retailers will need unique merchandise to keep the momentum going.

“It’s got to be all about the product,” said Christine Chen, a Needham & Co. analyst based in San Francisco. Discounts alone are not enough to keep consumers shopping, she said.

Abercrombie & Fitch Co., Lululemon Athletica Inc. and Urban Outfitters Inc. are already winning shoppers with quality, fashion and merchandise that can’t be found elsewhere, Chen said. At Abercrombie, teenagers trading up to dresses from graphic t-shirts helped drive December same-store sales to almost five times the industry average. Coach Inc. yesterday reported a 26 percent increase in second-quarter profit after introducing new bags more frequently during the holidays.

Exclusive merchandise may help decide winners in retail in 2011. Even as the economy improves, existing stores likely will post sales growth of 3.4 percent, about the same as in fiscal 2010, which ends Jan. 29, according to the International Council of Shopping Centers in New York.

Though the 18-month recession ended in June of 2009, unemployment is still above 9 percent. At the same time, rising costs of cotton and raw materials are pushing up prices at the checkout counter and may restrain spending, said Marshal Cohen, chief industry analyst at market researcher NPD Group Inc.

‘Not Motivated to Buy’

“We are going to see increased retail prices and fewer promotions, and that means the consumer is not going to be motivated to buy,” said Cohen, who is based in Port Washington, New York.

Retailers may be hurting themselves by remaining timid in the wake of the recession and not renewing investments in new products, Cohen said. That may lead to a dearth of the innovation needed to persuade shoppers to buy.

Americans also are savvier shoppers now, says Richard Hastings, a consumer strategist for Global Hunter Securities LLC. Price trumped product quality during the slump and for much of its aftermath, says Hastings who is based in Charlotte, North Carolina. No longer.

“Customers are looking for quality and value,” said Claudio Del Vecchio, chief executive officer of Retail Brand Alliance Inc., the closely held owner of Brooks Brothers, the men’s clothing chain. “They are willing to make the investment in something of better quality if they know it is timeless and authentic, which will endure rather than impulsively buying several trendy items.”

Coach Tote Bags

Strong sellers at Brooks Brothers include $398 cashmere sweaters and the two-button Fitzgerald suit, which costs about $1,100, Del Vecchio said in an e-mail.

To woo customers with a fresher variety of merchandise during the past quarter, Coach Chief Executive Officer Lew Frankfort staggered handbag updates instead of debuting the bulk of them in October. The purse maker also introduced a line of tote bags in mid-December called Alexandra.

Net income rose to $303.4 million, or $1 a share, the New York-based company said in a statement. That compared with the 97-cent average of estimates compiled by Bloomberg. Coach advanced 1.8 percent to $54.04 at 4:05 p.m. in New York Stock Exchange composite trading. The shares have risen 56 percent over the past 12 months.

Victoria’s Secret is reworking its products to ensure customers keep coming. In August, the company introduced the “Incredible” bra, a supersoft push-up that is more comfortable than earlier versions. Its predecessor, the “Miraculous,” boosted busts by as much as two cup sizes.

‘Unique Product’

“Our business is about differentiation,” Stuart Burgdoerfer, the chief financial officer of Victoria’s Secret parent Limited Brands Ltd., said at a Jan. 12 investors’ conference. “We really have unique product, leading position with respect to our brands, no obvious immediate close competition.”

The brand’s television commercials, which feature such supermodels as Adriana Lima clad in revealing brassieres, are “iconic” and create “emotion” that drives sales and profits, Burgdoerfer said.

Victoria’s Secret, based in Columbus, Ohio, posted a 12 percent gain in comparable sales for the 11 months through December.

Retailers that sell a lifestyle are also doing well in this environment. One is Lululemon, the Vancouver-based purveyor of yoga gear with more than 70 U.S. stores. The company fosters a community feel by holding yoga classes in stores and a regular blog that features running tips and stories about employees tackling new challenges, such as the New York City marathon.

‘Powerful Combination’

Lululemon also has taken a basic category -- workout wear - - and made it fashionable, says Amy Noblin, a retail analyst for Weeden & Co. in Greenwich, Connecticut. “It’s a very unique, powerful combination,” she said in an interview.

This month the chain raised its profit forecast for the current quarter and said it expected same-store sales to surge more than 20 percent. Lululemon rose 1.5 percent to $68.11 on the Nasdaq Stock Market. The shares have more than doubled over the last 12 months.

Abercrombie & Fitch, after losing market share during the recession and moving downmarket, rediscovered its roots: aspirational clothes that make teen girls feel hip, says Noblin. The New Albany, Ohio-based retailer moved away from graphic t-shirts and sweatshirts, she said, and introduced dressy cardigans and skirts that compete with the fashionable Hennes & Mauritz AB’s H&M brand.

‘Reconnecting With its Customer’

Abercrombie rose less than 1 percent to $49.59 in New York trading. The shares have risen about 60 percent over the past 12 months.

“Abercrombie is reconnecting with its customer,” said Noblin, who is based in Greenbrae, California. “They just got off-track for a while.”

For the past two years, retailers have used discounts of as much as 70 percent off to get shoppers in the door. The tactic is now starting to lose its usefulness because consumers have discount fatigue, says Chen.

“When you promote all the time, there is no longer a call to urgency,” she said.

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