By  on August 29, 2007

Wal-Mart Stores Inc. may have just hopped a wave in the fashion race.

In a major coup for the world's largest retailer, the mass merchant has scored an exclusive deal with Iconix Brand Group to carry the Ocean Pacific and Op brands, the iconic labels often credited with spawning the surf and beach culture that's been mined by retailers such as Abercrombie & Fitch Co. and Hollister Co. Ocean Pacific's legacy includes distribution in such high-end specialty stores as Fred Segal and Barneys New York. Later, the brand was sold in department stores such as Kohl's and J.C. Penney.

Adding Ocean Pacific to its apparel offerings is a boost for Wal-Mart, which has been struggling with fashion, especially on the women's side. The retailer had to pull its trendy Metro 7 line from about 500 stores last year after an overly ambitious expansion. Meanwhile, George has had trouble gaining traction in the U.S., although the ASDA-designed brand does well in the U.K. Earlier this year, Wal-Mart discontinued its capsule collection, George ME, which was designed by Mark Eisen.

The Ocean Pacific and Op deal covers a broad range of apparel and accessories, and is expected to launch in Wal-Mart stores in the U.S. in the spring. It's a step in Wal-Mart's strategy to get shoppers to "cross the aisle" from groceries, its largest single business, to soft goods and perhaps an acknowledgement it cannot do it with in-house brands alone.

"Op is a youth brand focused on the surf lifestyle," said a Wal-Mart spokeswoman. "It will help expand the range of our apparel offering as we leverage the brand equity to address this growth lifestyle."

"We are excited that the world's largest retailer, Wal-Mart, will now bring this global brand to the broadest audience of consumers in its history," Neil Cole, chairman and chief executive officer of Iconix, said in a statement. "We are looking forward to working with Wal-Mart to continue to develop Ocean Pacific into a year-round lifestyle brand that we are confident will resonate deeply with the Wal-Mart customer."

Iconix granted distribution rights to Wal-Mart for the U.S., Brazil, China and India. The agreement provides for opportunities in other countries in the future."This is a huge opportunity globally," said Dick Baker, former ceo of Ocean Pacific, who pulled the brand out of mass-market distribution to move it upmarket. "This is a big deal. The brand is a very successful upper-middle-market [player] in Japan in license with Nikki."

Baker said it also has a strong businesses in Canada, Mexico and Central America.

"It's an incredible opportunity for Wal-Mart," Baker added. "To have a brand like this, a true American lifestyle surf brand, as part of their stable is great. Iconix is a great partner. My only issue is if you look at the landscape of mid-tier and mass retailers, there's been a lack of execution with these brand deals over the last 10 years. The good [deals] have been Mossimo and Target because there was a lot of product and brand strategy that went into it, and the Candie's strategy with Kohl's. Other than that, there's a lot of roadkill of brands that attempted to fit into the retailer's domain."

Nonetheless, Baker said, "John Fleming [Wal-Mart's chief merchant] is a great merchant. To have his hand on this is going to be a big positive. Wal-Mart has the opportunity to create a Hollister-type of execution."

While national brands are critical to the success of Wal-Mart's apparel business, the retail giant has been slow to make acquisitions or sign licensing agreements. It launched Levi Strauss Signature in July 2003, but the arrangement was exclusive for only a limited time; it bowed at Target six months later. Other brands at Wal-Mart include Riders, Wrangler, Faded Glory and Just My Size.

Ocean Pacific was born in the Sixties as a surfboard label. Jim Jenks, the founder, created an apparel line in 1972 that identified a burgeoning culture and connected surfing with music, skateboarding, motocross, BMX and snowboarding. The company called it the West Coast lifestyle. By the end of the Seventies, the youth market came of age and Op began aligning itself with all action sports and selling its brand of casual California clothing. The company sponsored athletes in a variety of sports and collaborated with musicians and artists.

Op in August 2004 was sold to Warnaco Group Inc. for $40 million and the assumption of $1 million of debt. Iconix purchased Op in November 2006 for $53 million. Iconix assumed 15 domestic licenses covering product categories such as footwear, sunglasses, kids' apparel and fragrance. Upon acquiring the Op brand, Iconix granted Warnaco the license for junior swimwear. Since the Iconix deal closed, the brand has been on "hiatus," said Baker, noting Op did $250 million in wholesale sales worldwide in 2005."Wal-Mart is likely acknowledging that they need help with apparel and that brands matter in this area of the store," Christine Augustine, an analyst at Bear Stearns, said in a research note. "We view this deal as a positive and expect to see more like it in the future. Wal-Mart will work with Iconix to develop and source the product, which will be priced above opening price points. It is possible that the brand gets extended to other categories in the store, such as footwear and home."

"It's an upscale brand and has some recognition among young customers," said Walter Loeb, a retail analyst at Loeb Associates. "Customers will be more receptive to that brand than some of those Wal-Mart has featured. I think they will start by putting it into 300 to 500 stores and testing it thoroughly instead of plowing it into 1,500 stores like they did with Metro 7."

Harry Bernard, a partner in San Francisco-based Colton Bernard, worked on research for Op's repositioning by Baker. He called the deal "a fascinating combination of totally different cultures. Wal-Mart has been hit across the bridge of the nose enough times to figure out they can't do it on their own. Iconix can look at the market and see where it's going not where it's been. If [positioning the brand] doesn't become a battle of the titans during the decision-making process, I think there's a chance that it" will succeed.

"They're going to make it what they want to make it," Baker said of Wal-Mart's handling of Op. "If I were them, I would put a lot of time and effort into positioning and strategy. It's an iconic American brand. If they do it incorrectly it will be an injustice."

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