Wednesday, December 21, 2005

Welcome to the Potemkin Mall


PARAMUS, N.J. - At the Garden State Plaza, a sprawling marble and skylight-filled shopping center just outside Manhattan, discriminating consumers can find a $400 fur-trimmed handbag at Coach, a $60 pair of distressed jeans at American Eagle Outfitters and a $25 make-your-own giraffe at Build-a-Bear.

And, if they look closely enough, they can also find dozens of retail analysts, hedge fund managers and institutional investors, their telltale briefcases and BlackBerries in hand, as they rummage through clothing racks to calculate markdowns, count shoppers to gauge a chain's popularity and quiz managers about sales.

"Is that denim sold out or just not restocked?" a Harris Nesbitt retail analyst, John D. Morris, asked the manager at Abercrombie & Fitch, pointing to the empty shelf where men's 32-waist light-wash jeans should sit.

Sold out, the manager responded, before Mr. Morris turned to his next line of questioning, about the performance of women's fur-lined jackets.

Garden State Plaza is no ordinary mall. Because of its proximity to the nation's biggest financial institutions, it has become an unusual laboratory where Wall Street comes to shop, not for apparel or electronics but for clues about the health of the $500 billion holiday shopping season.

That makes it an ideal place to observe the peculiar craft of retailing analysis, in which a store's strength is measured through dozens of tiny, seemingly imperceptible signs, ranging from the size of a 50-percent-off sale poster (revealing how desperate a store is to clear out merchandise) to the number of unfolded shirts on the sales floor (indicating a store, perhaps fearing poor holiday sales, has cut back on employment and is understaffed).

Such research is especially valuable this holiday season because some consumers appear to have become disenchanted with the mall. The number of Americans who walked into an enclosed shopping center as of Dec. 10 dropped more than 3 percent, compared with last December, though it appears to have picked up substantially since, according to ShopperTrak, a market research firm.

But, as retailing analysts freely admit, Garden State Plaza may be one of the worst shopping centers in America to judge anything by. Because of its location in Bergen County, a wealthy suburb of New York City, the average household income of its shoppers is $77,000, according to the Directory of Major Malls, well in excess of the national average.

The mall, now owned by the Australian conglomerate Westfield Group, is enormously profitable, generating sales of $576 per square foot, 60 percent more than a typical shopping center.

And if that were not enough, retailing executives know that Wall Street analysts rely on Garden State Plaza for research - which encourages companies to create a Potemkin mall with their best store designs, merchandise and employees to impress investors.

"There is no question the stores are prepped and warned," said Richard Jaffe, an analyst at Stifel Nicolaus.

None of that, however, stops Wall Street from flocking to the shopping center, a two-million-square-foot colossus with 280 stores. Mr. Jaffe confesses he "goes there all the time." Gabrielle Kivitz, who tracks retailing for Deutsche Bank Securities, calls it her "home away from home."

Thomas D. Lennox, the head of investor relations at Abercrombie & Fitch, jokes that on any given Friday afternoon "you will find more retail analysts at Garden State Plaza than on Wall Street and Midtown Manhattan combined."

Retailing analysts and fund managers say they never base judgments - particularly recommendations to buy or sell a stock - on observations from a single mall. In interviews, half a dozen analysts said they visited at least three malls a month. But nearly all conceded that they returned, again and again, to Garden State Plaza, about a 20-minute drive from Midtown, making it perhaps the single most influential mall in the country.

What Wall Street finds here becomes, for better or worse, instant fodder for the stock market. Long lines at Talbot's could show up in a research report as evidence of the chain's hidden value, sending shares inching upward. Too many "buy one, get one free" signs at the Gap could indicate trouble selling fall fashions, souring investors on the company.

One hedge fund manager, who spoke on condition of anonymity because of a rule prohibiting employees from talking to the press, said she had begun buying shares of the women's clothing store Bebe until she walked into the chain's Garden State Plaza store recently and saw a line of bright peach and orange clothes. Citing the "godawful" colors, she stopped buying the stock.

Retailing executives roundly denied that stores at Garden State Plaza received special attention that would skew analysts' research. But Ms. Kivitz, the Deutsche Bank analyst, noted, with a hint of skepticism, that stores there "always look so good."

In another oft-cited example of the mall's elevated status, retailers frequently test new store concepts there that they could just as easily try out at, say, Bal Harbour Shops in south Florida, which is the most profitable mall in the country but is nowhere near Wall Street.

For example, when Abercrombie & Fitch, the moody-lit clothing retailer for teenagers, created Ruehl, a moody-lit clothing store for young professionals, it put the first store at Garden State Plaza.

Even if retailers know that analysts are in the mall, the analysts say they can still ferret out valuable information from Garden State Plaza stores. They just have to be creative.

On a recent trip to the mall, Mr. Morris shed his suit and arrived in a white button-down shirt, a black windbreaker and denim jeans.

He never claims to be anything other than a Wall Street analyst, but there are times he would rather blend in with the soccer dads, anonymously sizing up the customer traffic at the Gap and the depth of discounts at Hollister, two of the retailers he tracks.

But achieving anonymity is harder than it seems. When Mr. Morris walks into Talbot's, a longtime saleswoman greets him with a loud "Merry Christmas, John!" and grasps both his hands in hers. His cover is blown.

In most cases, Mr. Morris wants employees to recognize him so he can loose a barrage of questions. Inside Hot Topic, a store that caters to the Goth crowd, for whom there is never enough black clothing, he approaches an employee and asks about the dozen unopened boxes filling a rear dressing room. The store, the employee says, has been "inundated with shipments" - a burst of honesty that worries Mr. Morris.

The chain, Mr. Morris says, "is choking on inventory" and could be stuck with it after the holidays.

Interviewing store staff is an art, Mr. Morris says. "It's about emotions and feeling. You build relationships over time. You don't go in and just ask people for their numbers. These are human beings."

Because turnover is high in the retailing industry - employees often quit, or are shifted to a different store - Mr. Morris keeps track of first names with his BlackBerry.

Paulette at Talbot's. Katherine at Hollister.

As he walks from store to store, Mr. Morris keeps a careful record of discounts, which he regards as a crucial window into a retailer's performance. Unplanned sales, when a chain is forced to cut prices sharply to clear out merchandise, are a red flag that the store may be in trouble.

But not all chains advertise their markdowns. Some simply slap a new, lower sticker price over an older one, a practice Mr. Morris calls "stealth discounting." After scouring the racks, he finds several examples inside J. Crew - a dark blue, women's cardigan with elbow patches, regularly $98, marked down to $59, and a camel-colored, fur-trimmed skirt, regularly $128, discounted to $89.

Over in the men's department, he spots a cluster of sale signs, including one for boxers, regularly $16.50, priced at $9.99. "It's a few days before Christmas, so why put such giftable items on sale?" he asks, explaining that consumers are more likely to pay full price during the holidays. "It may be an indication that the men's business is not up to par."

Over at the Gap, Mr. Morris is dismayed by the sight of piles of picked-over, unfolded sweaters. "They should have somebody folding here full time," he says. Then there is all the green - five different shades, by his count - which he says is likely to confuse shoppers who are looking for a simple message about what colors they should wear.

In the world of retailing analysis, even the size of the sale sign has meaning, conveying what Mr. Morris calls "levels of desperation." A large, bright sign positioned prominently outside the store in the mall's main corridor is "very desperate," whereas a small, unobtrusive sign, visible through a display window, conveys confidence.

Mr. Morris said that with few new malls under development and consumer spending creeping up slowly every year, retailing today amounted to a bruising struggle to steal a competitor's shoppers, making every detail - from the right mix of colors to the right number of sales people - count.

At Pacific Sunwear, which is fighting Abercrombie & Fitch, Aéropostale and American Eagle Outfitters for the loyalty of teenagers, Mr. Morris notices only one employee in the store and a pile of baseball caps on the ground. "That," he said, "is not a competitive advantage."

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