Retailers Fight to Remain Competitive Despite Higher Input Costs

The apparel industry has been hard hit by the rising cost of cotton, which has inflated costs nearly 20%. While they’d like to pass those higher costs on to consumers, with food and gas prices high, Americans have less to spend. A survey by the National Retail Federation shows that spending on clothing and school supplies for children in grades K-12 is expected to decline this back-t0-school season.

A Deloitte survey showed that 70% of those responding with school-age children expected the higher costs of food and energy in July to ultimately take a toll on their spending. The survey also showed that 30% of consumers think back-to-school merchandise has become more expensive, and nearly two-thirds say price will be their main consideration when making a purchase.

So instead of passing higher input costs on to consumers, at the risk of hurting sales, many retailers are choosing to instead absorb the higher cost of cotton, even selling some items at a loss in order to stay competitive and keep up traffic. Retailers are in turn raising prices on higher-end items that tend to be purchased by their more affluent shoppers, or on items that are offered exclusively by those stores, meaning the retailers don’t have to worry about competitively lower pricing elsewhere. Many retailers have also chosen to differentiate and create new products to create demand.

Promotion will be key to success this season, as consumers need to be given a compelling reason to spend. While some retailers will be promoting lower prices, even if only on a select few items, others will be promoting new product lines, especially those that are exclusive to their stores. Some chains will be testing price increases to see what they can get away with. For example, Gap Inc. (NYSE:GPS) has been increasing prices across all of its brands, but continues to offer “a variety of options at various price points.” The company recently decreased the cost of its basic khaki uniforms at Old Navy, while increasing prices on what it calls its “better and best” products that have always been pricier than its lower-end merchandise.

Meanwhile, companies like Wal-Mart (NYSE:WMT) are focusing on lower prices and price-matching guarantees. Wal-Mart has not only been only lowering its prices relative to its peers, but increasing promotion, focusing on basic apparel categories where it has significantly lowered prices. Target (NYSE:TGT) is studying how its products are made in order to determine where they can cut or absorb costs to prevent them from being passed on to consumers.

The apparel sector isn’t the only one hurting because of higher input costs. Fuel costs are projected to rise 50% for OfficeMax (NYSE:OMX) in the second half of the year. But the company won’t be raising prices because it must stay competitive. So instead, to offset higher costs, OfficeMax is cutting down on other expenses, saving money by closing three customer fulfillment centers. In the office supplies business, this back-to-school season is key, as the industry’s sales have been hurt by slow job growth, which resulted in fewer business orders for new computers and other office-supplies products.

Stocks to Watch: Bed Bath & Beyond (NASDAQ:BBBY), Costco (NASDAQ:COST), Dollar Tree (NASDAQ:DLTR), Ross Stores (NASDAQ:ROST), Sears (NASDAQ:SHLD), Urban Outfitters (NASDAQ:URBN), Wet Seal (NASDAQ:WTSLA), American Eagle Outfitters (NYSE:AEO), Abercrombie & Fitch (NYSE:ANF), Aeropostale (NYSE:ARO), Best Buy (NYSE:BBY), Big Lots (NYSE:BIG), BJ’s Wholesale (NYSE:BJ), Chico’s (NYSE:CHS), Dillard’s (NYSE:DDS), Dollar General (NYSE:DG), Family Dollar (NYSE:FDO), Gap Inc. (NYSE:GPS), J.C. Penney (NYSE:JCP), Nordstrom (NYSE:JWN), Kohl’s (NYSE:KSS), Limited Brands (NYSE:LTD), Macy’s (NYSE:M), 99 Cents Only Store (NYSE:NDN), Saks (NYSE:SKS), Target (NYSE:TGT), The TJX Companies (NYSE:TJX), Talbot’s (NYSE:TLB), Wal-Mart (NYSE:WMT).