Young women's apparel retailing is intensely competitive. dELiA*s
Last week, The Wet Seal
During the company's quarterly earnings conference call, management blamed the drop on two factors. First, its revenue mix shifted from direct sales to a greater emphasis on retailing. Second, merchandise was less profitable at its retail stores, because of increased promotional activity. dELiA*s used more discount pricing in the first quarter to keep up with its intense competition. Although gross margin in its direct segment did improve, it wasn't enough to offset the profitability decline from its retail stores.
Peering into the second quarter, management predicted that retail margins would continue to suffer -- partly because the company enjoyed unusually low rates of markdowns in the year-ago period. With inventory levels "back to normal," management sees more promotional activity in the coming quarter as well.
In happier news, dELiA*s scored strong sales, with comparable-store sales increasing 9% year over year. Its retail segment's growth is clearly outpacing its direct sales business, in which revenues rose only 3%. On the whole, revenue increased by 11%. Management forecasts high single-digit comps growth continuing into the second quarter.
As with bebe stores
The other big piece of news from the call was the damage expected to its direct-mail biz from increased postage rates. The rate hike is projected to add as much as $2 million in extra costs through the remainder of the year. In response, the management team has drafted a series of cost-saving initiatives to reduce expenses by $1.2 million, offsetting some of the increase.
The squeeze on dELiA*s profitability is worrisome, but I still like the potential here. Retail revenues make up a minor part of the company's overall sales picture, offering plenty of opportunity for growth. Note also that dELiA*s is on track to grow its store base by 25% this year. When coupled with dELiA*s currently strong comps, I like the opportunity that trend presents.
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