NEW YORK — Retailers who put their faith in denim were rewarded in August as same-store sales results last week again failed to support the prediction of Wall Street retail analysts that a denim glut would deflate the back-to-school season.
Although August comps across all retail channels were regarded as lukewarm, specialty retailers in particular pointed to continued strength in denim as a key driver of sales. In the months leading up to the crucial back-to-school season, many analysts’ were ratcheting up their rhetoric about the consequences of retail overzealousness in the category. There were a range of warnings — from widespread markdowns to a price war instigated by Gap.
While the most recent results of sales in stores open at least a year have helped tone down those alarms, analysts are still cautious heading into September.
“Same-store sales were generally in-line with expectations across the retail spectrum, with the second half of the month posting stronger results than the first half as a result of more full-price selling of new fall and b-t-s merchandise,” Bear Stearns analyst Dana Telsey said in a research report on Sept. 2. “Bottoms, especially distressed and destroyed denim, continue to be the hot, must-have items this fall.”
The tone was different from the one several weeks earlier. After a tour of a Gap store in Atlanta, Telsey suggested denim markdowns she observed at Gap stores throughout the country could have widespread impact on retailers. “We wonder if this move will start price warfare,” Telsey said in an Aug. 3 report.
August sales results indicated that markdowns at Gap had less to do with an oversupply or competition and more to do with missing the fashion trends. Comps at Gap’s U.S. stores fell 7 percent in August, despite a special promotion that allowed anyone who tried on a pair of jeans to download a free song from iTunes. Comps fell 11 percent at Old Navy as well, again largely because of weak denim sales.
“Gap’s denim event was disappointing primarily because stores lacked deconstructed, distressed and embroidered denim,” said Joseph Teklits, a senior analyst with Wachovia Securities in a report on Sept. 1. Teklits said the poor performance of denim at Old Navy was a result of the denim being “too basic.”
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“[Gap’s] denim underperformed due to its basics focus [lack of updated washes and embellishment],” Citigroup analyst Kimberly Greenberger said. She also said in a Sept. 1 report, “Denim appears to be performing well at nearly all retailers.”
Goldman Sachs & Co. analyst Margaret Mager tabled the idea of a denim glut altogether. “Many retailers have substantially increased denim assortments for back-to-school, and thus far, robust demand continues at many retailers,” Mager said in a Sept. 1 report. “We see denim as a positive this year and we are not concerned about a glut.”
Jeff Klinefelter, a senior analyst with Piper Jaffray, saw reason for continued faith in denim while attending the MAGIC trade show in Las Vegas.
“We also heard time and time again that denim continues to sell well, particularly ‘status denim’ [priced at $50 to $100] and ‘premium denim’ [priced at $100 and above],” Klinefelter said in a MAGIC recap on Sept. 2. “We believe the more embellished fashion denim is selling now as fashion-conscious teens pick out just the right jeans to wear to the first day of school. We expect more basic denim styles to sell later in the season as the weather cools and consumers begin buying for need.”
Klinefelter left MAGIC feeling retailers with “strong premium denim assortments and an appropriate commitment to denim inventory” would stand to gain the most for the second half of the year. He cited J.C. Penney, Abercrombie & Fitch, Pacific Sunwear and Guess as retailers well positioned to reap the benefits of denim.
Of course, not all analysts were fully convinced. Prudential analyst Stacy Pak left MAGIC with a different outlook on the health of the denim market.
“Vendors indicated that men’s premium denim has been performing below plan in department stores and our sense is that the denim category overall is weakening, with vendors focused on other drivers such as sweatsuits and twill,” Pak said. “Going forward, we don’t see any significant fashion trends coming to replace denim or boho in the young-contemporary market.”
Oversupply is still an issue, said Dana Cohen, an analyst with Banc of America Securities. “Yes, we’re still keeping an eye on inventories, including denim,” she said in a Sept. 2 research report. “As we have been saying, the level of fall inventories at specialty — primarily in teen — remains a concern.”