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By
Reuters
Published
Aug 24, 2009
Reading time
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When, oh when will apparel's top line turn?

By
Reuters
Published
Aug 24, 2009

SAN FRANCISCO (Reuters) - It is taking more than bottom-line improvement this quarter to boost an apparel retailer's stock price, as hopeful investors who sent shares soaring this year are now antsy for signs of sales growth.



This week, clothing retailers from Gap Inc and Limited Brands Inc to Pacific Sunwear of California Inc and AnnTaylor Stores Inc all posted grim second-quarter sales that tempered bottom-line gains made through cost cuts.

Similarly, teen retailer Zumiez Inc gave a cautious third-quarter outlook, citing still-erratic consumer behavior, while a raised full-year profit forecast from Phillips-Van Heusen Corp, a clothing maker whose Calvin Klein brand has shown slower growth, failed to cause a stir.

2009 has been a year of cost-cutting, as retailers have lowered inventory, curtailed capital spending and streamlined their operations in order to offset the lingering sales slump caused by shoppers' aversion to spending in the downturn.

Out of 81 retailers that have reported second-quarter results so far, 78 percent of them exceeded analysts' expectations, according to research firm Retail Metrics.

While cost-cutting has been applauded by analysts and has managed to prop up profit in the difficult environment, calls for sales improvements are getting louder as the retail industry enters the back half of the year.

"With cost reduction a major driver of earnings preservation in the last year, the story is now transitioning to a top line focus," wrote Jefferies analyst Randal Konik in a note this week.

Earlier, U.S. retailers for the month of July posted their 11th straight month of sales declines, even as some provided upbeat profit forecasts.

Timing is everything and the focus on sales comes as students head back to class -- the second-biggest consumer spending period of the year -- and in advance of the holidays, when investors hope consumers will open their wallets in a flood of pent-up demand.

Shares of apparel stocks have been climbing this year in anticipation of such a turn. The Dow Jones U.S. Apparel Retail Index is up 65 percent since January -- in contrast to the mere 12 percent gain in the Standard & Poor's 500 index.

Those high prices may not be sustainable if companies do not deliver on sales this holiday season -- another reason why outlooks have been relatively conservative.

Earlier this week, Goldman Sachs analyst Adrianne Shapira raised her full-year outlook on Saks to a narrower loss than she had previously expected, but said questions still remain on the top line.

"The ultimate trajectory and timing of a full turnaround remains a question mark," Shapira wrote in a note.

"Cost reduction efforts have been impressive, but at some point, investors will demand top line in lieu of expense reduction to sustain current share price levels," she wrote.

Shares of Saks are up 28.5 percent this year and have quadrupled from their 12-month low of $1.50 in March.

"It appears the declining in shopping frequency and spending may be leveling off, but the sales trends are not yet on the rebound," said Saks' chief merchandising officer, Ronald Frasch, during a call with analysts.

One major exception to the widespread sales slump is Aeropostale Inc, whose value-priced fashions have drawn in droves of teenagers and their budget-conscious parents.

The company this week posted an unheard-of 20 percent rise in sales in its second quarter, but investors have become accustomed to Aeropostale's outperforming the market quarter after quarter and shares, as of Thursday (20 August)'s close, were up only 0.4 percent from a year high of $35.74 seen in May.

By Alexandria Sage

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