Apparel Recession? Maybe, Maybe Not


Wall Street is shopping for retail bargains.Even before consumers rang up the weakest Christmas in five years,retail shares were beaten down and plagued by worries of just how slow the American consumer will become in 2008.

That's why it is ironic to see retailers in the green last week and at the beginning of this week. Will it last? As one of CNBC's favorite traders and Wall Street veteran Art Cashin reminded readers in his newsletter this morning, "rallies in bear markets are short, sharp and die in low volume.”

Of course, whether or not these retail stock pops become sustained rallies is up to the whims of investors and the realities of how consumers shop over the next few months. Buckle up for same store sales on February 7th--ICSC is warning that this could be the weakest January in more than 23 years.

That said, I want to share some comments from Jim O'Donnell the CEO of American Eagle . I interviewed him at the ICR conference in Dana Point, CA and we aired parts of the interview regarding the launch of www.77kids.comon the 17th. Some of his comments didn't make air but because I found Mr. O'Donnell's comments on the clothing business and his own views on the economy so engaging, I decided to post some of the interview transcript below.

Note: my questions have been cut down to make room for O'Donnell's full comments.

MB: Are you seeing signs of a recession?

O'Donnell: I don’t really think it's a recession. I do think we have a very conservative consumer at this particular point in time. I think you really have to give then a reason to buy. it's an economy that's very price sensitive and we've been finding we're very competitive prices and we have the value to go along with the product. we've been seeing satisfactory results. we've had pockets of the country though that seem to be more down market for us than others. Others have responded quite nicely and we haven't really seen that much of a negative response from the consumer.

MB: Do you think that Wall Street is overreacting to the consumer worries?

O'Donnell: I don’t’ think they’re overreacting. You know, it’s a very bland holiday the whole season and I must tell you that is there aspects of it that are disappointing? Absolutely. Was it all gloom and doom? No. some of our businesses were really quite good. Women’s sweaters were incredibly good. And our jeans business is phenomenal. We’re the number 1 jeans provider in 15 – 25 year old in both young men and young women, so we’ve had categories that responded very well.

Some of the things that we didn’t do a very good job in, that we’re addressing, is accessories, women's accessories in particular. We had a very dismal season. We didn’t really have a very compelling line. We could have been better in women's knit tops. These are things we’re working on, and I think when you get into a season like this previous holiday season, I think your flaws are more pronounced. You can’t hide them. When you’re in a more vibrant time of the year, and the customers a little more resilient, sometimes they can get disguised and they don’t’ look as prevalent as they do right now, but you know it’s a good thing it’s sobering and it keeps us focused and it also keeps us honest and say we don’t have all the answers."

MB: Why enter a new market--kids clothing--at a time when consumers are cutting back?

O'Donnell: I think a children's purchase has a little bit of emotion to it especially from the mother, but maybe more so for the grandparents on the gift giving side, so I think you factor that in with the kids always need the clothes, kids will always be priority number 1, and you can leverage somewhat off that, and I do think that mitigates probably some of the down side on a market that maybe is not as robust as we would like it to be.

MB: Are you changing how you do business in this environment? Are you closing Martin + Osa?

O'Donnell: Right now, Martin and Osa has been a bit of a disappointment from a variety of areas, not just in product but really in some of the operations execution some of our souring production really wasn’t where I felt it should be and I take the responsibility for that... [Last year ]We would have a T-shirt last year from anywhere from 26 –28 dollars. We’re gonna open up this year at 18 dollars. And so I think you’re gonna find this year that the young woman and the young man, which is, when you say young, you're really targeted at 34, so they have a pretty good sense of who they are--they know what they like, they know what they dislike.

They’re very discerning and I think if we can slide in to that market and we can provide that product that the customer, that customer deems to be appropriate as we say in this business there’s lots of white space in that demographic. There are not many places for this 34 year old, actually 28 –40 years old is really our demographic profile, there’s really not that many places they can shop outside of department stores so if we can do the things we feel we know how to do, we have a pretty good chance at success. On the flip side, if in fact for whatever reason, the consumer does not vote in a positive way, I’d have to make a very difficult decision, and I’m more than prepared to make that decision.

MB: Piper Jaffray reports that apparel is in a recession. Women's apparel makers have been the hardest hit. How is it that you say women's' clothing is doing well?

O'Donnell: This business is cyclical. I have a few more gray hairs than you so I’ve seen it a few more times…one of the things you can’t do is you can’t panic you can’t overreact, you have to be prudent but you really have to stay focused on who you are, be true to that brand, be true to your customer, that’s the most important thing, and never be what you’re not and don’t try to chase a trend that’s not within your area of expertise and who the consumer feels who you are and who they identify you with and do you hit some bumps in the road? Absolutely. But if you run a company that’s sound both financially and operationally, you can weather those bumps, you can.

Will the results always be with the shareholder and what wall street feels would be appropriate? Probably not. Will you have the opportunity to bounce back and achieve higher margins and other financial barometers that are deemed to be the signals of a well run company? Sure. And I think we’re that company, I really do. We have invested very heavily over the years in a number of different entities whether its in technology, sourcing and production, design creative, new stores, remodeled stores, so we’ve done all the things we need to do to protect the business and I feel good about where we are and where we’re going.