Distressed Denim: Savior of a Distressed Economy? (Updated)

(Gap's new denim line added.)

NEW YORK ( TheStreet) -- Who would have thought that the worn-in jean would be the key to this year's back-to-school spending? Most consumers, after all, have more than a few pairs of jeans hanging around in their closet.

But apparently you can never have too much of a good thing.

Although apparel spending for the important retail holiday is expected to receive a failing grade -- down 12.7% according to the National Retail Federation -- denim has been outperforming almost every other category in the fashion sector.

Jeans sales were up 1% to $16.3 million in June from the year prior, and grew 4% from 2007 levels, according to the NPD Group. In comparison, overall apparel spending in June slumped 5% to $194.2 million from 2008.

Indeed, across the board, retailers are updating their selection with popular styles like distressed denim, super-skinny jeans and the boyfriend fit. And who does denim best could well determine who wins this back-to-school season.

Gap ( GPS), which has been struggling to bring back customers after several years of merchandise misses, is relaunching its "1969" denim line.

Denim was once a key category for the specialty retailer, making up 20% to 30% of sales. But the iconic Gap jean no longer has the same cachet among shoppers.

The relaunched jean is said to be better-fitting and of premium quality, but most pairs cost between $54 and $59, significantly lower than the $200 or more for true premium denim.

A glance through store offerings reveals that Abercrombie & Fitch ( ANF) is clearly the leader in its selection of destroyed denim. While the retailer has been struggling, posting double-digit same-store sales declines for several months, according to Needham & Co. analyst Christine Chen, its jeans are the best looking in the space.

"Distressed and destroyed denim is popular because right now it's not cool to look like you're spending a lot of money," Chen said. "These styles are not a rich look."

For the price-conscious shopper -- and for a limited time -- Abercrombie is also offering more basic denim styles at $59.50.

In order to remain competitive, rival American Eagle Outfitters ( AEO) re-launched its most popular jean, the AE Artist. The AE Artist was the best-selling jean in American Eagle's history, and the teen retailer is ramping up its marketing to rehash its prior success. The company is currently offering a free graphic tee shirt to every shopper who buys a pair of jeans.

Even flailing Pacific Sunwear of California ( PSUN) has reported that it can't keep its boyfriend fit jeans on the shelves.

In order to take full advantage of the resurgence in denim, PacSun is also including fashion pieces like acid wash jeans, snake-skin prints and colored denim to its girls' assortment. (If only it could get its other merchandise to sell as quickly, maybe it would be back in business.)

But it's not just the value-priced denim that's attracting shoppers. While, for the most part luxury is dead -- or at least in critical condition -- premium denim still has strong legs.

Buckle ( BKE), a company that has been largely under the radar, is particularly well-poised to profit from the denim boom.

The Kearney, Nebraska-based company predominantly sells better-priced denim, and even raised its prices this year, a feat deemed nearly impossible for most retailers amid the recession.

Even with higher prices, Buckle has managed to post 22 consecutive months of double-digit same-store sales growth. The key behind this success? Customer service.

Sales associates assist shoppers through every step of the sale, ostensibly improving the odds that the customer will walk out of the store with the best-fitting jeans for their body. Women, especially, value this service as worthy of the higher prices.

"Shoppers can find a way to wear a pair of jeans in almost every setting," Marshal Cohen, chief industry analyst at the NPD Group said at the Oppenheimer Consumer, Gaming, Lodging & Leisure Conference in Boston earlier in the month. "Since they are wearing jeans so many different occasions, shoppers are willing to invest in premium denim."

This also bodes well for companies like True Religion ( TRLG), Joe's Jeans ( JOEZ) and Guess ( GES).

Indeed, back-to-school denim now comprises 40% of Guess' product mix, up from 30%, with $128 premium denim its best selling price point.

And on Wednesday Jones Apparel Group ( JNY) said during its second-quarter its wholesale jeanswear division jumped 28.5% even as revenue fell at its other segments.

So maybe not everything needs to be Wal-Mart prices to move. Maybe, in fact, all it takes to get shoppers to open their wallets is a comfy American tradition.

-- Reported by Jeanine Poggi in New York.

Copyright 2009 TheStreet.com Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed. AP contributed to this report.

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