Retailers scramble to survive the slump - East Valley Tribune: Business

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Retailers scramble to survive the slump

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Posted: Sunday, May 25, 2008 1:07 am

NEW YORK - The latest reports from the nation’s merchants show that higher energy and food bills and slumping home values are pressuring shoppers so much, they’re being forced to nibble at the edges — buying single pillows rather than whole sets and opting for new paint instead of renovating.

With the consumer spending environment expected to remain rough for the rest of the year, major retailers are cutting back further on inventory, increasing discounting and focusing on their best customers.

But the weakening climate could also spell more store closings and layoffs, as the industry looks ahead to a second half of 2008 that could be worse than the first half.

“Things are not getting any better,” said Dan Ansell, a partner at Greenberg Traurig LLP and chairman of its real estate operations division. “It’s the same theme of strongest will survive, and the weakest will not, or at least will have to adapt.”

Earlier this month, bedding and home furnishings retailer Linens ’n Things filed for Chapter 11 bankruptcy and said it will close 120 stores. Others that filed for bankruptcy reorganization this year include gadget seller Sharper Image, which is selling all its assets to an investment group at auction; gift catalog and online retailer Lillian Vernon, which is being acquired by Current USA; and Wickes Furniture Co., a Wheeling, Ill.-based company owned by private investment firm Sun Capital Partners.

Plenty of other stores, including jewelry retailer Zales, AnnTaylor Stores and Talbots, have been closing locations.

“Everyone is facing a new reality,” Ansell said.

That reality looks to become even more dire. Burt P. Flickinger III, managing director of retail consultants Strategic Resource Group, expects that more than 10,000 stores across food, drug and apparel categories, or about 5 percent to 10 percent of the total retail industry’s sales volume, will close from now until 2010.

Shoppers are confronting a new reality, too: gas at the pump that’s hitting more than $4 in many parts of the country, home values that keep getting lower and tightening credit lines.

Such mounting economic problems are dampening hopes among retailers that shoppers will be using their stimulus checks for anything but debt reduction and food.

In fact, several large retailers, including Lowe’s and J.C. Penney, told investors during their conference calls this month that they were unsure how much the stimulus checks would help lift their business amid such rising financial pressures.

Of more immediate concern to analysts, though, is the unrestrained rise in the price of gasoline. Gas now costs more than an average of $3.80 nationally — peaking well north of $4 a gallon in major coastal cities — and is expected to keep following oil higher.

“Historically, Fed rate cuts as well as fiscal stimulus packages have been beneficial to our business. However, consumers are facing rising costs elsewhere that may dampen their spending on home improvement,” said Robert Niblock, chairman and chief executive of Lowe’s, which reduced its earnings outlook as it reported on Monday an almost 18 percent drop in first-quarter profits.

Ken Hicks, president and chief merchandising officer at J.C. Penney, told investors that the benefits from the stimulus checks will be “modest and short-lived.”

Given so much economic uncertainty, many retailers are trying to ride out the economic storm by focusing on cost-cutting and sharpening their prices.

Talbots, which also operates women’s clothing catalog J. Jill, plans to end the year with inventory down 20 percent. But the company also said it will be targeting its best customers with specific events.

“We are seeing that we get a good response from our customers when we e-mail them and send them (an) invitation or call them,” said Paula Bennett, president of the J. Jill brand.

Wal-Mart has stepped up its discounting, but it is also further adjusting its merchandising mix around when consumers get their government paychecks, including Social Security and public assistance.

The retailer is increasing its offerings of smaller items like rice and condiments in the days before the paycheck arrives. But after payday, the discounter stocks up on bulk items as consumers have enough money to spring for bigger sizes that can last longer.

Target President and CEO Gregg Steinhafel told investors that the discounter is stressing its sale prices more in its advertising, especially the 50 million newspaper circulars it puts out. He added that shoppers are focusing on buying necessities.

“We are just very mindful that the consumer is very cash-strapped right now and is looking for good values,” Steinhafel told investors Tuesday.

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