By  on January 11, 2005

BOSTON — Wal-Mart will “set its sights on apparel as the next sector to experience major market expansion,” according to a report released Monday by Moody’s Investor Service analyst Charles O’Shea. The resulting shakeout “over the next five years could eclipse that in grocery by a wide margin,” O’Shea wrote.

He put Wal-Mart’s annual apparel volume at $33 billion. Assuming a 12 percent annual growth rate, O’Shea estimated that the world’s biggest retailer may be selling $58 billion worth of clothes by 2010.

“I think there’s a sweet spot right now for these guys,” O’Shea said in an interview. “There’s a lot of noise in the market right now. Sears’ softlines [business] has not been doing well, Kohl’s comps have been mostly negative for the past year and a half. There appears to be some cannibalization there. It looks to me like an opportunity” for Wal-Mart.

Wal-Mart has for several years cited apparel as an area of growth and improvement. It has de-cluttered the department by reducing brand count and strengthening core franchises such as Faded Glory, White Stag and No Boundaries.

Most eyes, however, are on the George brand, the proprietary careerwear label developed by U.K. subsidiary ASDA that’s considered to be a litmus test of how fashionable and relevant Wal-Mart’s apparel can become. In the U.K., where George is the largest apparel brand by volume, Wal-Mart has opened several stand-alone George boutiques. In the U.S., the brand has coalesced in recent seasons from scattered items to a cleanly merchandised, trend-right presentation that stands out.

O’Shea predicts Wal-Mart will not hesitate to import George design talent to the U.S., to push the label even further.

“They’ll let the people in the U.S. go as far as the can go and when they hit the proverbial wall, they will find the best people,” he said.

O’Shea said the apparel landscape over the next five years becomes a fight for second. He said its “logical” to assume Target Stores Inc., the fourth- largest U.S. retailer, is currently the second-largest apparel retailer. The combined Sears-Kmart, at $55 billion total revenue, should take the crown once merged.Target Stores recorded $41.3 billion in total sales in fiscal 2003. The Minneapolis-based chain does not publicly release apparel revenues.

O’Shea said Wal-Mart’s rapid growth with food sales in its Supercenter format can be considered a road map for apparel growth.

“They’ve proven they can drive traffic with food,” he said. “Now that they’ve got people in the store, what are they going to do with them? Selling apparel is the way to go.”

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