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Back to School

Innovation in retail may start with the customer, but finance offers some new lessons.

Teens chattering their way into Abercrombie & Fitch stores for back-to-school clothes this year were greeted by two things: the iconic retailer’s heavily stylized decor — dark lighting, wood-shuttered windows, pulsing music — and, with few exceptions, the exact size and color of fleece pullover or polo they wanted to buy. That’s because the $3.3 billion retailer recently equipped associates with handheld scanners that show at a glance exactly which floor items need to be replenished from the stockroom. By eliminating the need to print out and scan written sales reports throughout the day, the new system is yielding not just better stocked stores, says Abercrombie & Fitch CFO Michael Kramer, but more time for associates to spend with customers.

Using technology to keep a close eye on supply levels may be old hat in many industries — think automakers and anybody else practicing just-in-time inventory — but it is revolutionary in retailing. Although $348.7 billion Wal-Mart Stores Inc. began tracking inventory electronically in the 1980s — an in-house innovation that helped it leapfrog its discount-store competitors — most retailers have continued to rely on a fuzzy amalgam of gut instinct and institutional memory to decide how to best stock shelves. “Because our industry’s success is perceived to be all about merchandise,” says Paul Carbone, CFO of $884 million apparel retailer Tween Brands Inc., “we haven’t been big innovators in terms of leveraging technology or thinking about how we run the business.”

Today, though, that paradigm is being turned on its head. Retail CFOs are weighing in on operating decisions, pushing business units to focus on metrics that drive sales, and funding technology initiatives that are bringing new science to the black magic of merchandising. Good thing, too. Consolidation has weeded out many of the weaker retailers, such as May Department Stores Co. and Albertson’s Inc., notes Citigroup analyst Deborah Weinswig, leaving a more competitive marketplace. At the same time, higher food, energy, and debt-service costs are prompting consumers to push not just for quality products but also great prices. More dramatically, fast-changing consumer expectations are leading to shorter product life cycles, forcing retailers to constantly rejigger their merchandising strategies. Abercrombie & Fitch, Kramer notes, now puts new product at the front of its stores not on a seasonal or monthly basis, but weekly. And, of course, industry leader Wal-Mart is hardly standing still. Having conquered the traditional discount-store space, it made giant inroads into the grocery business over the past decade, and, more recently, put the squeeze on electronics retailers by beefing up its own selection of flat-screen TVs and other high-tech goodies.

In such a fluid environment, waiting for the end of the season to figure out whether this year’s line of women’s tops is selling won’t cut it. Fortunately, the timing is right for finance to step into the breach. Having wrestled their companies into compliance with the Sarbanes-Oxley Act, CFOs are focusing on greater value to operations. The typical CFO’s job may not be “to come up with new product ideas,” says John Mahoney, vice chairman and CFO of $18.2 billion office-products retailer Staples Inc. “But it is their job to make sure the business understands the value of innovation in order to get the top line growing.” And in retail, he adds, “if you’re not constantly thinking about new things, you’ll ultimately suffer declining productivity in your stores.”

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