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Retailers May Push Consumers' Limits This Back-To-School Season

--Back-to-school shoppers face higher prices --Retailers develop strategies to offset their own costs --Earnings, margins stand to be affected By Karen Talley Of DOW JONES NEWSWIRES NEW YORK -(Dow Jones)- Retailers are walking a tightrope this month as the back-to-school selling season gets under way, trying to balance higher merchandise costs against consumers who are used to promotions and uncertain because of the rocky economy. Retailers and apparel makers are looking to raise prices 10% to 15% for products including jeans, t-shirts, sheets and towels because of the surge in cotton and other raw material prices. However, many will try to spread the pain across the entire chain, with suppliers, retailers and customers taking a hit. Back-to-school shopping, which traditionally runs July through Labor Day, is usually the second-biggest buying season of the year. Last year, consumers spent $55.1 billion on everything from pens and backpacks to pants and sweaters, the National Retail Federation said. They spent $462 billion during the Christmas holidays in 2010. "The stakes are very high," said Adrienne Tennant, retail analyst at Janney Capital Markets. "Retailers must pass along cost increases to a consumer that is very used to a promotional environment." The back-to-school season will have an effect on third-quarter earnings and margins, as well as help set the tone for the key end-of-the-year holiday shopping period. Patti Johnson of Elmhurst, N.Y., is just beginning her back-to-school shopping. As a mother of two girls, one in elementary school and another in junior high, she has a lot to buy, and she's nervous. "I only have so much to spend, and I hear things will cost more this year," she said. That skittish mindset is what retailers will be dealing with this year. To cut merchandise costs, they are tinkering with their offerings. Consumers may see synthetic thread used on cotton products, thinner linings and more embellishments, like buttons, to cut down on cotton use. "Parents are going to be shocked and disappointed by the price of goods," said Kit Yarrow, professor of psychology and business at Golden Gate University. "They're going to make sure their kids are outfitted, but won't go beyond their budgets like they have in the past." The cost of cotton began rising last summer at the same time retailers had to place their back-to-school merchandise orders. Given long lead times, the higher-priced product is now hitting shelves, just in time for the heavy back-to-school buying season. The ability to pass higher costs to consumers "is uncertain and will largely depend on the strength of the product or retailer and the way the merchandise can stand out," said David Galper, head of specialty retail and apparel investment banking at KeyBanc Capital Markets. Retailers are bringing out their back-to-school apparel, in varying degrees, and largely at full and, in a number of cases, higher prices than a year ago. A Gap Inc. (GPS) store on Sixth Avenue in New York City is displaying children's jackets and hoodies. An Abercrombie & Fitch Co. (ANF) Hollister store in Massapequa, N.Y., had completed converting its male section to back-to-school and fall wear and was preparing for women's wear. Sleeves are getting longer in displays at Wal-Mart Stores Inc. (WMT). Target Corp. (TGT) is preparing to roll out apparel, an employee said, and is full of school supplies. "They start putting it out fairly early," she said. Macy's Inc. (M) is on the cusp of putting out its back-to-school merchandise, a customer service representative said. Retailers have been running tests to get a sense of how customers will take to new pricing. Macy's Chief Financial Officer Karen Hoguet said early indications suggest consumers are willing to absorb some higher prices, although moderately-priced home merchandise appeared to have seen some resistance. Target merchandising chief Kathryn Tesija said increases on some products the retailer took in the spring will be extended to apparel and home goods and cover a greater amount of the products. Dana Ferro, of Seaford, N.Y., who was shopping in a Target near her home, said she is "very price sensitive," but welcomes early rollouts of merchandise. "It lets me get my shopping done faster, and I can spend the rest of the summer with my children," she said. -By Karen Talley, Dow Jones Newswires; 212-416-2196; karen.talley@dowjones.com

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