Catalogers profit from cost cuts

Though well-known catalog brands like Sharper Image and Smith & Hawken have gone out of business, and other mailers are dramatically cutting circulation, the sun may not be setting on the once vibrant catalog industry. Several catalogers reported better-than-expected profits last week, showing some light at the end of the tunnel.

Last week, J. Crew, Chico’s and Casual Male Group all reported profit increases, while Williams-Sonoma posted better-than-expected profits, even though net income was significantly lower than a year ago.

Any time profits are up, “it is a good sign, because it means companies are doing business more efficiently,” said Erin Armendinger, managing director of the Baker Retailing Initiative. “There’s a lot less inventory in the stores these days,” which means less discounting is taking place as supply and demand even out. Armendinger expects retailers will stay away from the heavy discounting they resorted to during last holiday season.

Sales, however, continued to trend downward in the second quarter for several multichannel merchants. The exceptions were J. Crew and Chico’s, which each reported gains in their direct-to-consumer businesses. Both companies said improved merchandise selections made the difference.

Chico’s, Casual Male and Williams-Sonoma all indicated that cost-cutting measures such as inventory rationalization and catalog circulation reductions in the first half were behind the improved profits. Williams-Sonoma reported a 18.7% reduction in catalog circulation for the second quarter, and J. Crew said its circulation was down 30% for the first half.

Further reductions in mailings are likely. Bill LaPierre, SVP of brokerage at Direct Media Millard, a list manager, reports that many clients are cutting their circulation plans by between 10% and 25% heading into the holidays.

With catalog circulations being reduced so significantly, these companies appear to be placing less trust in the channel.

“It is not that we are touching fewer customers, it is how we touch the customer,” said James Scully, CFO at J. Crew, during a call with analysts discussing second quarter results. He added that the company has eliminated some re-mailings, and is testing niche mailings and different size books, among other strategies.

“There is a belief that you have to send catalogs to get sales and, in a lot of cases, that is not true,” said Kevin Hillstrom, president of MineThatData. Hillstrom says catalogers with customers who are interested in online shopping can reduce the number of books they mail to “good customers” by up to 50% and see only a 5% reduction in sales. “A lot of catalogers are trying to figure out how to do this right now,” he said.

The key to the catalog circulation rationalization, however, is taking a portion of the savings and reinvesting them in online strategies, Hillstrom pointed out.

“If catalogers continue to just put ink on the problem [of declining sales], they will be in trouble,” LaPierre agreed. “They have to be thinking about what they can be doing to drive more people to the Web and get more activity and response there.”

A few are. “There is new opportunity in terms of our marketing campaigns,” said Robert Atkinson, VP of investor relations at Chico’s. He pointed to the recently revamped catalog which “reminds customers that they can order online.” Atkinson said this strategy is partially responsible for the 46% increase in direct-to-consumer sales posted by Chico’s in the second quarter, 90% of which came from online sales.

Chico’s last week launched its first TV campaign since 2006, using savings from cost reductions in the first half. The effort extends to a national print campaign and will likely continue into the holiday season.

“The reason for the TV campaign is to let potential customers know that there is a new Chico’s,” said Atkinson, pointing to the brand’s new merchandise, marketing and store environment.

Williams-Sonoma is embracing online marketing even more aggressively, shifting advertising dollars from catalogs to digital marketing. In a conference call with analysts to discuss its second quarter results, Williams-Sonoma said it wants to capitalize on e-mail, affiliate and search marketing. The company will also participate in a strategic test with Google’s new Caffeine algorithm at the end of this month.

“We are very optimistic about our opportunities in the back half of the year across a wide range of digital marketing efforts,” said Howard Lester, chairman and CEO at Williams-Sonoma, during the call.

The danger with cutting catalog circulation is knowing when to stop cutting, said LaPierre. “Eventually if you cut back far enough, it will give you profitability, but you won’t have any sales,” he said.

This is what happened to Chico’s. The multichannel merchant made cuts in the spring to its catalog circulation that were “too deep,” said David Dyer, CEO at Chico’s, during the company’s second quarter conference call. So, for summer, it invested in reactivating lapsed customers via catalog mailings and e-mail and will invest in prospecting more heavily the fourth quarter.

“When you cut out prospecting, it’s a short-term gain because you really count on a lot of the new customers coming into the brand to continue to populate your customer file,” said Dyer.

Catalogs aren’t the only marketing vehicle multichannel merchants are cutting from, Armendinger said. Advertising is down in fashion magazines, said Armendinger, because retailers, “are not getting the bang for their buck from print magazines they need for the price they are paying.”

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