NEW YORK — Early signs of a denim glut that analysts prophesied would sour the back-to-school season failed to show in July’s comparable-store sales results released last week.
Instead, the majority of retailers cited strong performances in denim for the month.
Eric Beder, analyst with Brean Murray, took note of this in a report released Monday, arguing that clearer signs of a glut should have shown up in July comps. Beder based his position on the observation that virtually all the major teen retailers had put b-t-s product out a week earlier to capture full-price sales.
“As such, we would have expected a somewhat tepid initial response to denim-driven fashions if there was a glut, which should have led to deeper discounting levels at a materially earlier period,” said Beder.
Negative reactions to July comps were also unwarranted, according to Beder.
“In fact, July 2005 results were the denim players’ strongest same-store sales performances over the last three Julys,” said Beder.
Beder conceded that consumers at stores and malls were being offered a wider array of denim, but he believes there is a glut in almost every item of clothing for the teen shopper.
“By no means does increased supply always translate into a harmful surplus, especially in fashion items,” said Beder.
However, with the b-t-s season approaching its peak, the great denim debate of 2005 is heating up and many retail analysts still predict drastic markdowns that could lead to a price war this month.
Stacy Pak, a retail analyst with Prudential Equity Group, has been among the more vocal naysayers, citing rapid increases in the number of denim styles available to consumers and a rise in the amount of premium brands found on the shelves of discount retailers. In an Aug. 2 research report, Pak said specialty stores had increased their denim assortments by 40 percent between spring and fall; Abercrombie & Fitch and American Eagle Outfitters each boosted their selection by 78 percent.
The number of styles available on 21 “premium and moderate” retail Web sites increased 42 percent between May and July, said the report. Pak also noted that A&F, American Eagle, Gap and Hollister were among the rising number of premium brands showing up at off-pricer T.J. Maxx.
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“We continue to be concerned about the potential for a denim glut in the industry for fall, as we continue to question whether the industry will be able to absorb all the denim supply coming into the market,” Pak said. “While denim sales have undoubtedly remained strong, we see evidence of increased promotions and huge increases in supply that we believe reinforce our thesis of a denim glut for back-to-school. We continue to believe there will be an alternative to denim bottoms in the fall — stretch corduroy and velvet — and that few if any of the retailers we cover are positioned to capitalize on these trends.”
The sentiment was echoed by Banc of America Securities analyst Dana Cohen in an Aug. 4 research note released following comp results. Cohen wrote: “The fact that the teen retailers were disappointing, coming in with comps up midsingle digits on average, is very important given our concern over high inventory levels both overall and specifically in denim. This has been our critical investment issue on this group and, with numerous companies disappointing, it continues to raise the risk profile.”
Bear Stearns analyst Dana Telsey took the issue a step further in an Aug. 3 report on her b-t-s shopping tour at Atlanta’s Lenox Square Mall, suggesting markdowns at Gap could spur widespread price deflation.
“Gap recently reduced its price point for jeans to $39.50, from a range of prices from $49.50 to $58, and this was prominently featured on the windows and displays within the store,” said Telsey. “This was a surprise, considering that the prices had been changed since our last shopping tours in San Francisco and Los Angeles. Considering the amount of jean assortments in the market and the concern for a denim glut, we wonder if this move will start price warfare.”
Telsey also pointed to discounts at American Eagle and a “$20 off” jeans promotion at Express as further evidence of rising denim pressure.
Express has been singled out as the chain that stands to lose the most if denim prices deflate; Express flooded its stores with inventory after failing to have enough denim last year. The strategy is paying off in the near term, said Wachovia Capital Markets analyst Joseph Teklits in a report following a King of Prussia, Pa., mall walk in early August.
“The question longer term is whether Express has found a formula for success,” Teklits wrote in the report. “We don’t think so at this point, and we believe the stores may end up having too much denim with not enough of the right styles and a presentation that is a bit too confusing.”