Retailers Pull Back, at a Cost

Stingy consumers force retail chains to keep inventories low. That's boosting profit margins but it may be reducing sales growth, too

The Children's Place (PLCE) store at the Paramus Park Mall in northern New Jersey has a set of sales racks, each placed at four different sections of the store, with items for babies to older girls and boys. Sharad Shah, a young mother of two children, is shopping at the store and is disappointed with the lean sales racks, which carry just a few T-shirts and pants. "Maybe I'll come back for Labor Day sales," she says, leaving empty-handed.

During a normal year, this would be a healthy sign for a retailer. It would indicate the store sold its stock at full price and doesn't need to rely on clearance sales. However, in the current environment, when more and more shoppers are looking for deals, turning them away from the store without enticements might not be what retailers want. Nonetheless, many chains are keeping a tight lid on inventory to the point where it's putting a crimp on sales.

"There's a fine line between not having racks of clearance from leftover inventory, and cutting to the bone," says Erin Armendinger, managing director of the Jay H. Baker Retailing Initiative at the Wharton School of Business at the University of Pennsylvania.

Indeed, on Aug. 7 The Children's Place reported sales were flat in July at its stores open for at least a year or more. That fell far short of the 7% increase expected by Wall Street. "We are in a conservative inventory position for the fall," said Jane Singer, vice-president for investor relations, in a prerecorded call discussing monthly sales. Its stock was down 0.94, or 2.7%, to 33.98.

Sales Gains for Wholesale Clubs

Consumers have continued to tighten their purse strings for almost all discretionary purchases and seem to be spending only on basics. That has been good news for off-price discounters like TJ Maxx and Marshalls. TJX Companies (TJX), which runs those two chains, saw same-store sales rise 3% in July.

Stores that sell cheap gasoline and food also posted positive sales gains in the Aug. 7 industry reports. Wal-Mart's (WMT) same-store sales increased 3%. That was lower, however, than analyst expectations of a 3.4% gain and investors sold its shares, which were down 3.80, or 6.3%, to 56.96. Costco (COST) reported a 10% increase in sales, and BJ's Wholesale Club (BJ) reported a 16.7% increase in same-store sales as shoppers flocked in to load up on bulk purchases of food and gasoline, which is typically a few cents cheaper at wholesale clubs than at gas stations.

Inventory Questions

But for retail executives in areas other than food, it's a treacherous time to try to forecast how much merchandise to order for stores. More often than not, retailers are choosing to err on the side of caution. That has resulted in better profit margins—in the first quarter Wal-Mart reported its gross margins were up 11 basis points—but perhaps at the expense of losing some potential sales. "In an economic downturn everyone is in a cutback mode and they might be missing the few opportunities that present themselves," says Frank Badillo, senior economist at TNS Retail Forward, a research firm.

For instance, discount department store chain Kohl's (KSS) saw sales in July dip sharply, by 10.4%. The company didn't give details about its inventory levels. "July was a month driven by clearance sales of spring and summer merchandise," says Larry Montgomery, Kohl's CEO. But he notes: "Our inventory levels in these clearance and transitional categories were significantly lower than last year, affecting sales results, but leading to improved gross margins."

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