Denim Trend May Add to Retail Blues

Denim, many retailers’ biggest bet for fall sales, already is looking like it could end up being their biggest headache.

Although denim has traditionally been a popular fall item as kids and teenagers buy back-to-school clothes, jeans this year have virtually taken over youth-oriented clothing stores--which has some analysts worried that fall will bring a denim glut and more profit-sapping markdowns.

“We’re concerned with the overall supply of denim relative to the historical demand for denim at this time of year,” said Todd Slater, an analyst with Lazard Freres in New York. “The companies have made a huge bet on denim for back to school; if kids don’t buy denim there could be a five-pocket disaster on the retailers’ hands.”

And even before the verdict is in on the newer, riskier styles, many retailers are continuing to report poor performances and warning about lean times ahead.

Gap Inc. on Thursday posted second-quarter earnings that were down 52% from the previous year, to $89.7 million or about 10 cents a share. The company said third-quarter profit could fall below last year’s numbers, which were likewise down from the year before.

And while executives at Gap, one of the country’s biggest sellers of jeans, said sales on the newest fall fashion items were good, they added that the sales were still below plan. Some of the jean styles were selling well, the company said; but other new styles are already showing signs that they will need to be marked down.

August sales have been sluggish, continuing the trend seen in July, Gap said. July sales at stores open at least a year fell 12%.

“We’ll continue to mark down inventory aggressively,” Chief Executive Millard “Mickey” Drexler said. “We’ve not been able to move through it as quickly as we anticipated.”

The sheer volume of denim at stores such Gap, American Eagle, Pacific Sunwear, Express and Abercrombie & Fitch could lead to price wars as bargain-hunting consumers seek out the best deals.

Discount department store chain Kohl’s, for example, said Thursday its low-cost jeans helped it post a sales increase of 21%.

Jeff Klinefelter, an analyst with U.S. Bancorp Piper Jaffray in Minneapolis, said that worries about just such a denim price fight is already causing tension in the industry.

And while specialty retailers run the risk of being hurt by a denim glut, he said, an oversupply of blue jeans is even more foreboding for department stores, which have also increased their denim buys.

Department stores have a greater risk, Klinefelter said, because their big-name denim brands are higher priced.

According to Lazard Freres research, denim is at its peak sales in fall, comprising 7.4% of all third-quarter apparel sales.

Gap, which because of its young core customer usually stocks more jeans than the average store, said last month that denim inventory this year makes up about 25% of the total mix--an increase from what Slater estimates was between 15% and 20% last year. Gap maintains that the numbers are much closer.

At Pacific Sunwear of California, jeans last year made up about 10% of the product line; this year it’s 18%, according to analyst estimates. At American Eagle, another key youth retailer, the denim allotment has risen to 15% from 13%.

Women’s styles include everything from low-rise jeans to belly-button revealers. Many have sparkles, some display a boot cut and just about all of the different styles come in varying shades of navy to bluish-brown.

Jeans for men likewise run the gamut, with light stitching on darker baggy styles, patchwork-looking denims, multi-pocket varieties and others, all available in an array of different colors.

Those different washes might be a problem, at least in men’s jeans. “Guys can’t have too many colors,” said Jason Chen, 18, who was shopping in Pasadena with friends. “Everybody thinks it’s girlie.”

Many retailers have spent the summer slashing prices in an effort to move out poor-selling merchandise. Fall spending was supposed to be the light at the end of the tunnel.

That won’t be the case if shoppers don’t embrace denim. And even if it is a hot seller, there’s so much of it in the stores, markdowns might still be necessary.

“Those who have marketed the best, are ahead of the curve on style and rinse and those with the most compelling prices will be rewarded,” Slater said. “The rest will be singing the blues.”

Shares of Gap fell 25 cents to $23.35 on the New York Stock Exchange.