By  on April 26, 2005

NEW YORK — Specialty stores are looking for the niche inside the niche.

Driven by a need to please Wall Street and Main Street, rolling out new store concepts is back in vogue for specialty retailers to extend their customer reach and compete against department stores, such as Macy’s, J.C. Penney Co. and Kohl’s Corp., which are increasingly offering improved product assortments.

The latest to join the stampede are Aeropostale Inc., with its Jimmy’Z format set to open this summer, and Gap Inc., with the new Forth & Towne chain launching this fall, while American Eagle Outfitters Inc. and Pacific Sunwear of California Inc. are developing new concepts. Limited Brands is testing a new beauty format — Bigelow — as well as an innerwear format, Pink. Abercrombie & Fitch Co. is rolling out Ruehl and Polo Ralph Lauren is trying out Rugby. Chico’s FAS recently tried a new concept and failed, but is attempting another. Meanwhile, there’s speculation that Urban Outfitters Inc. and Ann Taylor Corp. are in the planning stages of launching new concepts, perhaps as early as next year.

The payoff of specialty retailers launching spin-offs is potentially big. If it’s a hit, the strategy creates cachet for the companies because it meets the needs of an increasingly demanding — and diverse — consumer. The goal is to grow market share, sales and the bottom line, which will hopefully drive the stock price up. Once matured, a new division can add hundreds of millions of dollars to top-line results. Abercrombie’s five-year-old Hollister division, for example, had sales of $210.1 million in the most recent fourth quarter, which made up about 30 percent of Abercrombie’s consolidated quarterly sales.

But it is risky business. For every successful concept launched over the past 20 years, there have been just as many flops, including Chico’s Pazo and Wet Seal Inc.’s Zutopia. Still, one thing is certain: Specialty retailers are aggressively pursuing ways to fill new niches.

New Concepts Are Back

The concepts in the pipeline are expected to cater to shoppers slightly older than the core demographic segments the companies currently target. In developing the spin-offs, retailers have asked themselves where their core customers — many of whom are teenagers — would shop as they grow older. The result is a niche of a niche. And there are many niches out there, analysts and consultants said.“There is a need in the market for really chic, great clothing for someone in their 20s that [doesn’t cost] a fortune,” said retail consultant Annette McEvoy, founder of A. McEvoy & Associates. “Your typical 23-year-old would love to wear Gucci and Prada, but that’s not happening mainly because they can’t afford it.”

Yet while retail experts say there is space in the market for a new concept, they warn that if the retailers haven’t appointed an appropriate, diverse management team and researched where the concept will fit by clearly identifying the target customer, the new format stands the chance of failing in an increasingly crowded market.

“Growth for the need of growth just doesn’t work unless it’s really, really, really thought out. And unfortunately, if the product isn’t outstanding, it’s not going to work,” McEvoy explained. “It all comes down to the team, to the management talent.”

The Lineup

Abercrombie’s Ruehl is probably the most well-known of the recent breed of new concepts. The first Ruehl store opened in the fall and Abercrombie now operates four Ruehl locations. The spin-off is geared toward women and men, aged 22 to 30, with apparel price points 20 percent higher than the company’s Abercrombie & Fitch brand. The firm — which already has been successful in creating its Abercrombie kids and Hollister divisions — expects to have 10 Ruehl stores by yearend.

American Eagle and PacSun also are at work on new concepts. Details, however, have been scarce. American Eagle announced its plans in November, and the first three-to-five, yet-to-be named concept store prototypes are expected to launch in fall 2006.

PacSun said in early March it will provide more details on a new concept later this year. The company is no stranger to spin-offs, however, having launched its lucrative urban hip-hop chain D.e.m.o. in April 1998.

Gap updated investors last week when it revealed its new concept will be called Forth & Towne. The company’s initial announcement of the chain, which will cater to women over 35 years old, came in September. Gap expects to open four stores in Chicago and one in New York this fall; about 30 stores are expected by 2007. Price points at Forth & Towne will be below traditional department stores and between Gap and Banana Republic.“It all starts with product, delivered through engaging shopping experiences,” Paul Pressler, Gap’s chief executive officer, told analysts last week. “Customers care about a satisfying shopping experience as much as they do about product. We know what it takes to win….We’ll walk customers through the product line before merchants make the buy.”

Of course, Gap already has its successful, organically grown Old Navy concept, which is 10 years old. Gap expects to add 200 more Old Navy stores in North America through 2007. The company’s Banana Republic division was a two-store acquisition in 1983 and recently started opening freestanding Banana Republic Petite stores, of which Gap expects to have five by the end of this year.

From Aeropostale comes a concept called Jimmy’Z. The retailer is rolling out six test stores in July; a total of 14 stores are expected by yearend. With price points higher than its Aeropostale brand, Jimmy’Z will focus on the “California lifestyle,” catering to women and men aged 18 to 25. Julian Geiger, chairman and ceo, said the merchandise will reflect a “blend of some of the more sophisticated styles most popularized by Abercrombie & Fitch and Hollister, with a dash of the irreverence of Urban Outfitters added for spice.”

Geiger said the current Aeropostale customer, those between 11 and 20 years old, aren’t necessarily expected to graduate to Jimmy’Z. Chris Finazzo, chief merchandising officer at Aeropostale, clarified the Jimmy’Z concept in a recent interview, calling it a “Hollywood, West Hollywood, California, Fred Segal-esque lifestyle that is all about glamour.” The brand will cater to customers that “want to look like a celebrity and act like a celebrity,” he said.

Meanwhile, Urban Outfitters and Ann Taylor could be working on additional spin-offs of their own, analysts said. Richard Jaffe of Legg Mason Wood Walker noted in a March 16 research report that a fourth concept from Urban could be in the works, though it likely wouldn’t be launched before 2006.

Urban is already a poster child for new concepts with its hugely successful Anthropologie division and the growing Free People brand, which expects to open three stores this year in addition to the two it already has. Holly Guthrie, senior vice president at Morgan Keegan & Co., expects Urban to eventually launch an apparel concept geared toward consumers over 50, partially because Anthropologie targets customers roughly 30 to 45 years old.“Urban is the kind of company that does it right; they’ll sit on that egg for five years. Then all of the sudden they’ll launch something and it will blow you away,” said Guthrie, referring to the company’s multiyear test of Anthropologie before rolling it out in the late Nineties.

Urban Outfitters executives declined to comment on whether a new brand is in development.

At Ann Taylor, which successfully launched its Loft division in 1998, a foray into lingerie could be on management’s mind, Guthrie speculated. “I don’t know what their intentions are, [as in] if they want to grow square footage. If they do lingerie, they could do it outside the box, and if they do it right, it could probably be accretive.”

Ann Taylor could not be reached for comment.

Lessons Learned ... Or Not

Do Charlotte’s Room, mishmash, Orchid, Pazo and Zutopia sound familiar? They’re all failed concepts launched in the last few years by Charlotte Russe Holding Inc., Too Inc., Gadzooks Inc., Chico’s and Wet Seal, respectively. Their downfall, according to McEvoy, was that they weren’t carefully thought out.

But that’s not stopping the new horde of specialty retailers — including Chico’s — from planning, testing and launching spin-offs. For example, Chico’s operates 10 intimate apparel and sleepwear test stores called Soma by Chico’s, which rolled out last year. The concept is geared toward the company’s Baby Boomer target demographic: women over 35 years old. Six more Soma stores are planned to open this year.

Chico’s identified the need for Soma because “the majority of our customers are shopping in department stores [for intimate apparel],” said Michael Smith, director of investor relations at Chico’s, during the Merrill Lynch Retailing Leaders conference in late March.

Clearly, Soma is still in test mode. “We have had a number of hits in Soma since we’ve opened up, but also a number of misses,” Smith said.

Chico’s previous concept, Pazo, was geared toward 25- to 35-year-old women. Pazo launched in March 2003 with 10 test stores; the company announced plans to shutter it six months later, despite having tested Pazo merchandise in Chico’s stores since fiscal 2001.“We wanted to focus our efforts on areas with greater potential for growth,” a Chico’s spokeswoman told WWD in September 2003. The company had acquired the White House|Black Market chain in July 2003, which it plans on expanding.

Pazo was supposed to be Chico’s “hip, groovy concept,” said McEvoy. But “let’s face it, they’re not known for hip and style,” she said, referring to Chico’s private label apparel.

So What Makes A Winning Concept?

Industry analysts and consultants say winning concepts require hard work, tenacity, and some out-of-the-box thinking. Chief of these is the need to hire outside talent. Pazo, which was managed by existing Chico’s executives, may have failed, analysts said, because it was too insular.

“Things can get a little insular when you’re creating your own product if you’re a vertically integrated retailer,” explained McEvoy. “You kind of perpetuate your own [existing] vision.”

Aeropostale believes it has the right mix of talent running Jimmy’Z, Finazzo said. In addition to Jill Kronenberg, general merchandising manager of women’s apparel for Aeropostale, who has moved over to lead merchandising at Jimmy’Z, the design team employs a combination of internal and external talent.

At American Eagle, the retailer has tapped two former Abercrombie & Fitch executives, Michele Donnan Martin and Charles Martin, to lead product development and design of its new concept.

Gap, however, moved over the president of its Gap division, Gary Muto, to run Forth & Towne in September. Muto has worked at Gap for more than 15 years but has never launched a new retail concept. He has started up several categories of merchandise, including plus sizes, maternity and khakis at Gap, as well as accessories, shoes and petites at Banana Republic.

It’s important to note that certain financial benchmarks should also be met before a concept launches, which is done, in part, to please Wall Street. A target level of operating income should be set, suggested Guthrie, so that the extra costs associated with launching the spin-off don’t negatively impact overall results.When Aeropostale reached 600 to 675 stores, with about $1 billion in sales (sales in the last fiscal year were $964.2 million), Finazzo said is was time to start “brewing” a new concept. Finazzo thinks Jimmy’Z could be another 500 to 800 store chain. The company operates 561 Aeropostale stores, with 100 expected to open this year.

Finazzo said Aeropostale spent roughly two years conceptualizing the Jimmy’Z brand and is modeling the launch after Abercrombie’s and PacSun’s launches of Hollister and D.e.m.o., respectively. For its part, Abercrombie had Hollister in development for three years prior to launch, and then tested it for another year.

According to Guthrie, there are two types of retailers: those that mature an original concept nearly to the point of saturation before launching a new one and those that are always thinking about a new concept.

“Those are two very different types of companies,” Guthrie said. “I think that the latter is the more prudent way to run a business. The saying, ‘If you don’t grow, you shrink,’ there is something to it.”

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