Denim Wars: Who Has the Best Deal for Back to School?

NEW YORK ( TheStreet) -- Denim despair or delight? It depends who you ask.

As cotton prices soared earlier in the year, retailers were left scrambling on how they would handle the pricier fiber this fall. For denim in particular, in which cotton makes up about 55% of the total cost, this is an even bigger issue for the all-important back-to-school season.

Denim is one of the most important categories for back to school, constituting as much as 25% of sales for some retailers.

According to Brean Murray analyst Eric Beder, five retailers in his coverage universe raised denim prices to offset higher cotton costs, while four decreased ticket prices this back-to-school season.

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It's clear that average unit prices on denim have ticked up, but with price at the forefront of shoppers' minds for back-to-school season most retailers are offering compelling promotions to distract from the increase in original prices.

"The combination of rising costs placing pressure on margins, and retailers slashing average unit retail to drive traffic is a formula for margin deterioration for those who do not have the higher margin international presence," Beder wrote in a note.

Here's a look at how retailers are handling denim prices and where to find the deepest promotions.

Abercrombie & Fitch

Abercrombie & Fitch ( ANF) is dominating denim discounts for back-to-school season, pressuring margins of rivals like American Eagle Outfitters ( AEO)and Aeropostale ( ARO).

Abercrombie is offering 50% off all denim (excluding flagship exclusive styles) through Aug. 30. This time last year, the teen retailer offered 40% off its denim selection.

While Abercrombie's denim discounts appear deeper than last year, Needham analyst Christine Chen noted that the company has shifted its mix to higher price points. Most denim skews to the $39 to $44 price range versus the majority of jeans at the $39 price point last year at the namesake chain.

Abercrombie's average unit retail price also dropped by 47.2% to $39.25, according to Beder.

"The re-launched denim has a higher lycra content, which is not only a better fit, but now uses less cotton," Chen noted.

Hollister's average price point is $24.75, 17.2% less than last year, Beder noted.

Abercrombie & Fitch is set to report its second-quarter earnings on Aug. 17. It already reported that sales during the quarter rose 23% to $916.8 million, topping Wall Street's estimates of $877 million, while same-store sales grew 9%. At Hollister, comparable sales jumped 12% for the three-month period.

"We continue to think Abercrombie & Fitch will emerge the winner for back to school in the teen space given the product assortment and now compelling price points," Chen said.

American Eagle Outfitters

American Eagle Outfitters is offering all of its jeans for under $30 this week. The promotion is valid online only.

The teen retailer kicked off the back-to-school season with a 40% clearance, deeper than last year's 30% discount.

But for the most part, American Eagle's denim price points are consistent with last year, with Beder finding the average price at about $37.47 (before this week's discount).

"While the denim assortment is once again the most comprehensive and compelling in the teen space, it does not seem to be generating as much interest as Abercrombie & Fitch's 50% off denim in most locations, given that price points are now similar to Abercrombie and higher than Hollister," Chen noted.

American Eagle is scheduled to report its second-quarter results on Aug. 24, and analysts are calling for a profit of 11 cents a share on revenue of $651.1 million.

"We continue to worry that American Eagle Outfitters remains squeezed in the 'middle' of the triple A's given Aeropostale's renewed focus on the younger, value customer, and Abercrombie's premium pricing for the higher-income customer," Chen wrote.


Aeropostale is featuring a 50%-off denim promotion, with men's original boot cut jeans now $22.25 from $44.50 and girl's jeggings $23.25 from $46.50.

Earlier in the month, Aeropostale was offering $10 off denim, but this promotion actually increased the price of denim, according to Chen. After the promo, denim was between $24 to $28 for men's and $22 to $26 for women's, compared with $20 last year.

"Aeropostale's back-to-school assortment is wear now, and is more edited, with fewer colors and a return to classic preppy styles that are brighter and more appropriate for the younger customer," Chen noted. "Denim does not seem to be emphasized in this initial floorset, which given the heatwave, could be beneficial as the customer is still looking for shorts and wear-now apparel."

Aeropostale warned investors of a smaller-than-expected profit in its second quarter. Management slashed its outlook to earnings of 2 cents to 3 cents a share, including a 6-cent benefit related to a dispute with a vendor. This compares with a prior forecast of 11 cents to 16 cents a share. Wall Street was looking for a profit of 13 cents.

For the three-month period, the company reported a 5% decline in sales to $468.2 million, shy of Wall Street's estimate of $491 million. Same-store sales plunged 14%.

Urban Outfitters

Urban Outfitters ( URBN)has the most expensive jeans at $63.33, an average unit retail increase of 3.8% from last year, according to Beder.

"The lack of uniqueness will make it much harder to justify increased price points in the eyes of the money-tight consumer given their various options," Beder noted.

Urban Outfitters reported a 21% decline in second-quarter profit to $56.7 million, or 35 cents a share, on revenue of $609.2 million. Wall Street was looking for earnings of 32 cents a share on revenue of $604.5 million.


Gap ( GPS)is significantly more promotional than last year, with 40% off almost all categories of product.

The retailer has slashed the price on many of its styles of its 1969 jean to $49.95 from $69.95.

At its Old Navy chain, the average unit retail price for jeans is $24.67, a 12.1% increase from last year, according to Beder. This increase is likely a direct result of pricier cotton.

This week, Old Navy's Web site is featuring an all jeans sale, with adult basic jeans starting at $17, kids basic jeans starting at $12 and the new flares starting at $19.50.

Pacific Sunwear of California

Pacific Sunwear of California ( PSUN) is offering buy-one, get-one free denim on select styles as well as a buy-two, get-40%-off promotion on other denim merchandise.

The skate-and-surf-inspired retailer is featuring the BOGO event on select Bullhead Black and men's Bullhead styles. Women's Bullhead black leggings and other styles are buy two, get 40% off each pair.

These discounts are a direct result of PacSun being forced to raise original ticket prices on denim this back-to-school season due to higher cotton costs. Beder noted that PacSun's average unit retail price s $38.36, a 39.5% surge from last year.

"While the back-to-school assortment shows improved fashion, especially in denim, higher price points seem to be meeting customer resistance, resulting in continued challenges in girls and increased promotions," Chen wrote.

Wet Seal

Wet Seal ( WTSLA) has seen the biggest price increase in denim this year, up a whopping 113.9% from back-to-school 2010, according to Beder.

"We believe they have jumped on the bandwagon with the others who have raised prices and are going to take advantage while they rightfully protect their margins," Beder wrote in a note.

Wet Seal's average unit retail price is $32.08, higher than Aeropostale, Old Navy and Hollister.

But Wet Seal is offering discounts on these higher prices. The fast-fashion player is featuring its "Rock Blues" promotion on its Web site, with five fits and 12 washes on sale for $19.50.

- Reported by Jeanine Poggi in New York.

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