A Happy Spring: Apparel Stars as Stores’ Profits Soar in Qtr.

Fashion retailing was alive and well in the first quarter, with the likes of Wal-Mart, Target and Kohl’s posting solid earnings on robust apparel sales.

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NEW YORK — Fashion retailing is alive and thriving.

Well, at least during the first quarter, as Wal-Mart, Target, Kohl’s and Dillard’s, along with specialty retailers Urban Outfitters and American Eagle, all posted solid earnings that were built on robust apparel sales.

Results jibe with consumer expenditure data from the Bureau of Labor Statistics that showed spending on apparel and fashion footwear grew by $20 billion year-over-year during the first quarter.

First-quarter results were strong despite April’s cooler temperatures, which left same-store sales that, although robust, were down from March. While year-over-year comparisons were easier, earnings were still impressive. Dillard’s delivered a 121.4 percent net income gain on 2.2 percent sales growth; and Wal-Mart posted a 16.4 percent earnings increase on 14.4 percent sales growth while Target Corp. reported a 25.5 percent profit gain on 12.3 percent sales growth.

Retailers cited color and a positive response to apparel merchandise sets to explain sales, but it could be a shift from wonton spending on home goods to replacing threadbare clothes in the closet that is driving sales.

Dana Telsey, equity analyst with Bear, Stearns & Co., said in her research report, “Vital Signs: Diagnosing Retail Growth,” that apparel is going through “an impressive fashion cycle [that] is leveraging sales and promoting firming pricing power.” This explains the improved margin rates seen across all channels.

Telsey went on to say the labor market recovery “bodes well for careerwear and the lower-to-middle income demographic,” which explains the stronger rates among the mass merchants.

But how are consumers paying for all this fashion spending? Debt, said Richard Hastings, credit economist at Bernard Sands.

Hastings said tax rebates and refunds also contributed somewhat to household spending, as did small contributions from an uptick in the job market and wages. But he said the majority of cash is coming from “the tail end of the mortgage refinancing liquidity bonanza.”

“The fastest-growing area of debt has been home equity lines of credit,” Hastings said.

So it may not be pretty if and when consumers sober up after the refinancing boom ends. They could face higher credit card rates thanks to an anticipated interest rate increase from the Federal Reserve in coming months, and they could choke on the fumes of more expensive gas prices, which some analysts see rising to $3 and more a gallon this summer. But for now, retailers are pleased to post solid results.
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