Slashing prices a risk for retailers

New York —- In a bid to pull hesitant shoppers into their stores, retailers are slashing prices on everything from jeans to dinnerware. But those fat discounts will likely come at a big cost to the companies.

At teen retailer American Eagle Outfitters, shoppers who buy jeans get a second pair at half off. Jewelry chain Zale is offering an extra 20 percent off on a slew of items such as gold earrings that were already slashed up to 70 percent. Pottery Barn has discounts of up to 75 percent.

“There’s a fine line between aggressive promotions and panic, and we are seeing a little bit of both right now,” said Dan Hess, founder and CEO of research firm Merchant Forecast.

While retailers entered the fall season with inventories well below last year’s, analysts say many were still a little too hopeful: August sales are turning out to be even weaker than expected, which analysts fear could lead to more piles of marked-down merchandise. That could, in turn, hurt third-quarter profits as the industry prepares for the critical holiday season. Major retailers, including Wal-Mart, J.C. Penney and Gap, which also operates the Banana Republic and Old Navy chains, are slated to announce final August sales results today.

Hess estimated that discounts are 10 percent deeper at mall-based apparel stores than a year ago, despite a drop of anywhere from 10 percent to 15 percent in inventories.

“Even though retailers are entering the season conservatively, they still have been too optimistic about the consumer,” he added.

Stifel Nicholas analyst Richard Jaffe noted that the weak sales trend suggests a downturn that more closely resembles the mid-1970s than more recent difficult periods.

“It’s a more prolonged consumer spending downturn,” he said. “It’s going to be tough. There’s no quick way out of it.”

Offering such deep discounts can cost high-end retailers such as Nordstrom and Saks in more ways than lower margins or falling profits. By doing so, analysts say, they risk hurting the cachet of their brands. That’s what happened to Saks, which operates luxury chain Saks Fifth Avenue, after the Sept. 11, 2001, attacks, when deep cuts on designer goods hurt the retailer’s tony image.

Another major worry is that retailers could lose the power to raise prices once the economy improves. The longer stores are forced to offer generous discounts, the more used to them consumers will get. The malaise is hurting all income levels, including more recently the affluent shoppers.

WHAT’S IN STORE

> What’s new: Despite cutting inventories, stores are being forced to be even more aggressive about discounting than a year ago in an effort to lure financially squeezed shoppers.

> The costs: A weak August may mean more piles of marked-down items on the floor, which could hurt third-quarter results just as stores prepare for the critical holiday period.

> Will it be enough? Shoppers may still avoid mall-based clothing stores in favor of discounters, thinking they’ll get better deals.