Blacks Retail Report

Luxury Menswear
June 2005

 

Men’s Inside Track

Economic data continues to pour in and the results are mixed. As outside advisers to high end men and women’s stores, our outlook continues to be optimistically cautious. Our merchants continue to post flat to moderate increases with little signs of significant growth. It’s clear that business is becoming more difficult and we expect this trend to continue throughout the year. In addition, cooler rainy weather, particularly in the northeast, has delayed sales activity on initial spring/summer deliveries. We expect to see Big Box retailers forcing sales promotions that eat away at planned margins. This high level of promotional activity will force the independents into an early markdown season.

On a positive note, crude oil prices continue to improve. This reflects the steady rise in American oil inventories and the fact that OPEC has kept its promise to pump oil at full throttle. Economic markets continue to be soft, but have shown recent signs of progress; major stock market components started to rebound in the latter part of May. Year-to-date, the Dow is down 3.3%, the S&P is down 1.7% and the NASDAQ is down 5.1%. The markets continue to post negative red arrows but there are brighter lights ahead.

 

Retail Cycle Versus Fashion Cycle

A positive retail cycle typically lasts between 18-24 months. Retailers have been experiencing this prolonged period of growth since April of 2003. We are now experiencing the development of a new retail cycle. We anticipate this retail cycle to be positive but to start off with slower initial sales growth. This transitional period between retail cycles will last between 6-9 months and is affected by new fashion trends and overall economic activity. It’s critical that we understand how these retail cycles impact our businesses. More importantly, how can we financially benefit from these cycles? Initially we need to be able to differentiate between a ‘retail cycle’ d a ‘fashion cycle’.

Retail Cycle – A cyclical sales pattern that resembles a bell curve that normally lasts between 18 to 24 months.

Fashion Cycle – Key items or categories of merchandise that develop into a prolonged period of sales growth and/or decline.

An example of a ‘fashion cycle’ in our stores today would include both denim and sport shirts. Each store starts and finishes its fashion cycles at different times. Here’s the question: How can some stores continue to see increases in sport shirts while others are experiencing flat or decreased sales if sport shirts are in a fashion trend? The answer is simple: both stores follow similar fashion cycle but are at different points in the retail cycle.

As independent business owners, we need to understand where we live within these cycles. We need to become ‘Cycle Experts’. It’s important that we include this knowledge into our merchandise planning decisions. It’s critical to our financial well being that our purchases follow the peaks and valleys of both Retail Cycles and Fashion Cycles.

 

Initial Markup % vs. Net Profit

Initial Markup (IMU) is a key component in determining gross profit and hence net profit. For successful merchants, it’s critical that a business plan is developed with a net profit target. In order to accomplish our net profit goals, let’s use a simple equation to help build a profit target. Let’s start with the following:

Net Profit Goal:	10%
Operating Expenses As % of Sales:	40%
Markdown Plan:	10%
Total:	60%
Calculation: 60% / 110% (Sales 100% + Markdown 10%)

In this example, the IMU% required to meet the profit target is 54.5%. Simply stated, any product that falls below this IMU% will have a negative impact on our net profit target. It’ critical that we constantly evaluate the IMU in our product assortment to ensure that we reach our net profit plans.

Next Month: Margin Planning / Gross Profit Planning