Retailers slash prices, but at what cost?

Hogan and other shoppers may have to wait a while: Many economists predict that the economy is unlikely to improve until at least well into next year. The latest batch of economic reports show consumers are still struggling to keep up with soaring living expenses. The Commerce Department reported Friday that personal incomes plunged in July, while consumer spending slowed significantly as the impact of billions of dollars in government rebate checks began to fade.

And despite a slight improvement in consumer confidence in August according to The Conference Board — helped in part by lower gas prices — the level is still near historic lows as shoppers worry about the job market and the housing slump.

The malaise is hurting all income levels, including more recently the affluent shoppers.

Saks told investors last month when it reported second-quarter earnings that it expects sales at established store to be anywhere from unchanged to down by low-single digit percentages for the second half of the year. Officials also noted that its high-end customers are now pulling back; previously, it was just aspirational customers retrenching.

But Saks is trying not to duplicate the mistake of slashing prices too much. Steve Sadove, chairman and CEO of the company, told investors last month, "I don't want us to repeat what happened five years ago or six years ago after 9/11 in terms of panicking and running. We feel very good about the assortments ... and we want to stay the course strategically."

That may be tough. Deborah Weinswig, an analyst at Citi Investment Research, noted in a recent note that she's worried that Saks' inventory levels at the end of the second quarter are high relative to recent sales trends and could hurt gross profit margins in the second half of the year.

Retailers overall are expected to report a 2 percent increase in same-stores sales for August on Thursday, with discounters like Wal-Mart and warehouse club operators such as Costco Wholesale Corp. expected to keep faring much better than the slumping apparel-based stores, according to the International Council of Shopping Centers-UBS index. Same-store sales are those at stores open at least a year, and are a key indicator of a retailer's health.

With no major fashion trend inspiring them to buy, shoppers are focusing on price and sticking to discounters even as mall-based clothing stores have been aggressively discounting. That's a big hurdle for the mall-based stores, Hess says. He noted that American Eagle's prices, with the deep discounts, are at least as good as those at Aeropostale Inc., a teen retailer that has benefited from the slow economy as it typically offers goods below American Eagle and other rivals. American Eagle's jeans, for example,are typically priced about 30 percent higher than those at Aeropostale.

Stores such as American Eagle, Hess said, are "struggling to get that value message."

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