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Tuesday July 31, 7:52 am Eastern Time, TheStreet.com - View from TSC

Blue Summer Leaves Retailers Reaching for Denim, But can fall's fashion fad lift downtrodden apparel stocks? A glut may be

on the way. By Tim Arango, Staff Reporter

Denim to the rescue! Sweating through another slow summer, the nation's apparel retailers have assembled a daring recovery plan: Sell more blue jeans. Apparel makers are marketing jeans frayed around the edges and jazzed with tints, studs, graffiti and other embellishments. Merchants are feverishly stocking up on all things denim and planning advertising campaigns hyping jeans. And Wall Street analysts are claiming that denim could cure the sector's ills. But can denim really be the industry's savior?

Don't bet on it. Like the promised late-year recovery that kept analysts and investors keen on retail stocks in the first half, a denim-driven

turnaround looks like wishful thinking. In going off on their denim kick, retailers are targeting a consumer who hasn't spent much on clothing all year and who, on average, owns seven pairs of jeans already, according to industry trade group Cotton Inc. And with so many retailers emphasizing denim, there's a risk of a fashion glut that will push down prices -- and force more of the markdowns that have been so pervasive in apparel shops this year.

Take Gap, for example, which has posted 16 consecutive monthly same-store sales declines and has been promising Wall Street for months that it would get its act together. Its latest gambit is to become the "denim headquarters" for fall. Gap is expected to return to television advertising -- it stayed off the airwaves last fall -- with a campaign focused on denim.

"Management is making an enormous bet on denim being the must-have fabric," says Emme Kozloff, an analyst at Sanford Bernstein, who warns the plan could backfire because "everyone has denim." (Her firm doesn't do investment banking, and she has a market perform rating on the stock -- analyst parlance for don't buy it.) Shares of Gap were up 19 cents to $27.40 at midafternoon Monday.

Sales at specialty-apparel retailers have lagged for much of the year, dragged down by the twin forces of a slowing economy and a lack of

winning fashion. Meanwhile, stocks in many of the companies have outperformed the market on hopes that lower interest rates and a tax cut would propel a second-half turnaround in consumer spending.

The men's clothing business has been especially hard hit, and turning around men's clothing divisions has been a focus for companies from

Federated Department Stores to Gap to Abercrombie & Fitch. A large part of that effort is denim, which companies hope will give a jolt

to both the men's and women's businesses. "There's so much in terms of new fabric treatments, and wash treatments and fashion treatments, that there's something for everyone," says Mark Minsky, general merchandise manager for men's and children's apparel at

Doneger Group, a fashion merchandising and consulting firm in New York.

Some Wall Street analysts are hyping the trend, saying more jeans could be just the thing to drive sales in the fall. Take U.S. Bancorp Piper Jaffray analyst Jeffrey Klinefelter, for example. He published a report Friday touting the denim plans of Abercrombie & Fitch: "We believe fashion denim in a variety of washes and styles will be the key component for the back-to-school season," he writes. (He has a strong buy rating on the stock, and his firm doesn't have a banking relationship with Abercrombie.)

Typically, the back-to-school season is heavy on denim. According to market research firm NPD Group, late-summer denim sales have

averaged $3.4 billion over the past five years -- about 30% of annual sales. But jeans sales have fallen on an annual basis in the past two years for men, boys and girls, indicating there may be room for growth. But that doesn't mean investors should anticipate any meaningful jump in sales figures -- and, in turn, a boost in stock prices.

Denim typically has slightly lower gross margins than other apparel, notes Klinefelter. Thus, there is less room to maneuver should stores be forced to slash prices to rid themselves of extra blue jeans, as happened last year when leather was the craze.

"The pervasiveness of denim will likely create a highly competitive environment in this category, driven by inventory buildup and a lack of other key trends," wrote UBS Warburg analyst Richard Jaffe in a recent report. "A real concern is that the denim marketplace could become highly competitive, as supply outstrips demand and underperforming retailers seek to gain market share through aggressive price reductions. This could, in a worst-case scenario, undermine the efforts of all retailers."

Companies -- and analysts -- also are hopeful that tax-rebate checks, the first batch of which recently hit mailboxes, could find their way into the cash registers of clothing stores this fall. Early evidence suggests that, too, may be a fallacy. Wal-Mart , the nation's largest retailer that is often looked to for clues on the direction of the retailing sector, attributed a jump in weekly sales to the tax rebates, but said most gains were in hard goods such as TVs, DVD players and air conditioners, not clothing.

That won't stop stores from hoping.