US Retailers Wage Back-To-School Price War

With costs for everything from apparel to food on the rise, retailers are waging a price war this back-to-school shopping season.

Apparel, the season's top-selling category for school-aged children, is bracing for the first major cotton cost inflation of as much as 20% the first time in at least a decade. The recent weeks' price declines in the commodity don't help, because stores paid for their goods about six to nine months earlier.

Retailers also are trying to gauge whether they have room to pass on any of the higher costs to shoppers, whose budgets are limited by higher gasoline and food prices. Consumer spending has declined as Americans chose to save more amid a sputtering job market and weak economic growth.

Spending on clothing and school supplies for children in grades K-12 is expected to decline this back-to-school season, a National Retail Federation survey showed.

Shoppers are already paying attention to prices. A July Deloitte survey showed 70% of respondents with school-age children said higher food and energy prices may lower their spending this summer.

About 30% of consumers believe prices on new back-to-school merchandise are higher and nearly two-thirds say low prices, far above other factors, are their biggest purchase consideration, the survey showed.

"Low prices continue to be what will bring customers to stores," said Alison Paul, who heads Deloitte's retail practice. "Retailers are getting more scientific about which items they put on promotions versus the items they leave on regular prices. There's a delicate balance. You have to be very sharp with those top selling items."

For popular basic items like jeans, where cotton use is significant, some retailers may choose to absorb higher costs, sometimes even selling them at a loss, in order to stay competitive and drive traffic, she said.

Meanwhile, stores are opting to raise prices on products catering to more affluent shoppers, or are more exclusive to their offerings that will give them more pricing power, analysts said. So far, that strategy appeared to have worked.

"Having differentiated and new products is key," apparel giant VF Corp. Chief Financial Officer Bob Shearer said in an interview. "As consumers make decisions around gas versus apparel, every dollar just becomes more important."

For instance, updating its jeans with different fabrics, sizes, fits and new styles has allowed VF (VFC) to raise prices on its Wrangler and Lee jeans sold respectively to retailers like Wal-Mart Stores Inc. (WMT) and J.C. Penney Co. (JCP) with little price resistance so far, Shearer said.

"We are at the very forefront of price increase" this back-to-school season, Shearer said. "What we know is what we've seen. No one knows really what to expect. We are obviously optimistic."

Most retailers declined to be more specific about their pricing strategy or detail the specific amount of price hikes they have taken or plan to. Teen retailer Buckle Inc. (BKE) is an exception. It said it raised its men's clothing prices by about 8% in July and about 3% for women's clothing.

 
   Raising Prices And Promoting At The Same Time

Retailers' July same-store sales results showed consumers are under pressure and still focused mainly on food and life's necessities unless given a compelling reason, such as deep discounts, to open their wallets.

"Retailers could be quietly raising prices and promoting at the same time," said Erin Armendinger, managing director of the Wharton School's Jay H. Baker Retailing Center. "It's going to be a very promotional season."

At department store operator J.C. Penney, the company began late last year to test different prices on various merchandise to gauge consumer response.

This season it's holding prices steady on lower-priced basic items but may reduce the amount of time it keeps those products at promotional prices to help bolster profit, spokeswoman Rebecca Winter said.

"We've become much more surgical in our pricing," she said, adding that Penney also hasn't met with resistance when it raised prices on newer and fashionable assortment.

 
   Private Label Strategy

Penney also has bought products earlier to reduce sourcing costs and is touting its portfolio of private label or exclusive products, together representing more than half of its sales and including products like Arizona jeans for teens, in a strategy echoed throughout the industry.

"You have greater control over your brands and more ability to make prices go up or down," Kmart's (SHLD) Chief Marketing Officer Mark Snyder told MarketWatch, adding the discount chain is pitching its private labels including Route 66 jeans and exclusive lineup such as teen star Selena Gomez's clothing line. "We need to take a balanced approach with pricing. We are very anxious to see what consumer reaction is going to be."

At No. 1 U.S. clothing chain Gap Inc. (GPS), which in May forecast an above-industry-average second-half cost increase of as much as 20%, it's also been "testing price increases" across all of its brands, spokeswoman Liz Nunan said, adding it's offering "a variety of options at various price points" to meet different budget needs.

"We've been very selective with these increases," she said. For instance, at the company's discount and largest unit, Old Navy, it also chose to be price competitive on basics. Its web site recently touted basic khaki uniforms for $10, down from $14.50; and polo shirts for $5, from $9.50.

Like other retailers, Gap said consumers also haven't balked at its price hikes on pricier "better and best" products.

 
   At Wal-Mart, Target

Wal-Mart, declining to detail how its pricing goods this season, said it's focused on its everyday low prices strategy and including price-matching guarantee in its ads.

It also may be getting more promotional. The company, which is focusing on basic apparel categories like T-shirts, jeans and underwear, has increased its rollbacks, or temporary price cuts, for those items "significantly," Citigroup's analyst Deborah Weinswig said.

"If the company is successful in lowering its prices relative to its peers, it should help drive increased volume and market share," she said.

Target (TGT), Wal-Mart's smaller rival, said it sees cost inflation beyond cotton and food to other fabrics and other parts of its store. It said it's studying how buttons and hems are sewed among elements in the production process to cut costs, or to absorb or defer passing on cost increases.

"We were very thoughtful about the consumers' tolerance for higher prices," said Carter's Inc. Chief Executive Michael Casey on a recent conference call, adding average out-the-door prices for its namesake and OshKosh kids' clothing brands are planned up 10% in the second half. "We made a strategic decision to stay very competitive on pricing. We did not pass through all of our cost increases."

The apparel sector isn't the only one worried about inflation.

 
   High Stakes For Office-Supplies Sector

OfficeMax (OMX) projected its fuel costs to rise 50% in the second half of the year and sees cost inflation on basic products like paper and pulp.

"We are not raising prices because of inflation," Chief Financial Officer Bruce Besanko said, adding the season is expected to be the company's biggest selling period this year. "We need to be competitive on prices."

To offset higher costs, OfficeMax is cutting other expenses such as closing three customer fulfillment centers in the second half.

Winning the season's sales is key for office-supplies retailers as their sales have been hurt by slow job growth that hurt businesses' orders for new computers and other office-supplies products.

At OfficeMax's larger rival, Staples Inc. (SPLS), pricing is also a key call out, with fliers promoting 10-cent composition books and 50-cent scissors. The company for the first time is selling a $10 savings pass that will give a 15% discount on school supplies all season long.

Office Depot Inc. (ODP) touts things such as in-store penny savings and deals including a free backpack and lunch tote with a $15 minimum purchase.

"We expect significant promotions," particularly from office-supplies retailers this back to school, Citigroup's analyst Kate McShane said, adding average discounts in the sector are more than 7 percentage points higher from a year earlier. "This is a critical sales catalyst for these retailers."

-By Andria Cheng, 415-439-6400; AskNewswires@dowjones.com

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