Blog: Leonie BarrieBusiness weighed down by "lumpy" economy

Leonie Barrie | 22 August 2011

With its turnaround efforts continuing to be hampered by deep discounting, higher production costs and flat or falling same-store sales across all divisions, Gap Inc has yet another thorn in its side: women's wear. The specialty clothing retailer last week admitted its women's sales are a drag on company performance, which saw second-quarter profit fall 19%.

Attempts to reinvigorate the business are also being weighed down by a "lumpy" economic environment, which is hurting its North American units especially hard. But despite struggling to reconnect with shoppers during the critical back-to-school holiday shopping seasons, Gap stuck to its full-year earnings forecast of $1.40 to $1.50 a share.

Apparel and consumer goods supplier Li & Fung is trying to offset the uncertain economic environment in the US and Europe with a focus on the Asian market - both as a sales and sourcing destination. Indeed, production volume from China is already up 30% in the first six months of the year. The company discussed its plans as it saw its first-half profits cut by the cost of acquisitions and other investments, despite a 33% hike in group revenues.

Meanwhile, Spanish retail giant Inditex is facing criticism after one of its Brazilian suppliers was accused of enforcing slave labour conditions on workers producing garments for Zara. Raids on a number of sweatshops found Bolivians making clothing for the chain were living and working in "poor conditions" around Sao Paulo. Inditex says the workers were employed illegally by a subcontractor, and that it has "zero tolerance" for such infringements.

On the retail front, rising prices of men's and women's wear have done little to dampen overall apparel spending in the US in the first half of the year, although higher demand for men's clothing is offsetting a fall in women's garment sales. New research shows average retail prices rose 6% year-on-year during the six-month period, with men's wear up almost 8% and women's wear rising 3%.

And the US back-to-school season has started with a bang as shoppers hit the stores in July to take advantage of promotions on items including apparel, shrugging off concerns that consumers would begin pulling back on their spending. The latest Commerce Department figures show July sales at clothing and accessory retailers were 0.5% higher than the month before, and a solid 7.7% year-over-year.


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