Is Target losing its cool and Wal-Mart finding its way at last?
For years Wal-Mart Stores Inc. struggled to find the right apparel formula as its competitor, Target Corp., solidified its reputation as the go-to discounter for affordable style. But the apparel fortunes of Target and Wal-Mart seem to have taken dramatically different turns of late.
Wal-Mart has tweaked its George collection to give it more currency and is selectively expanding its fast-fashion line, Metro 7. The company is also zeroing in on the under $10 price point for apparel. The latest move came earlier this week when the retail giant restructured its apparel organization, eliminating jobs in two divisions — sourcing and product development — while fortifying the areas of brand merchandising and buying.
A spokeswoman for Wal-Mart, Linda Blakely, said the moves were all part of Wal-Mart's increased focus on what works in apparel. "Our goal is to strengthen the relevance of apparel for our customer and the speed of product to market," she said. "We are not stepping away [from apparel] at all."
John Fleming, executive vice president and chief merchandising officer for Wal-Mart, put responsibility for the success of a brand's survival squarely in the hands of the apparel division. "The restructured apparel organization is built around brands that make clear statements and whose teams are accountable for financial returns and fully leveraging suppliers to efficiently deliver the product the customer wants," he said.
As for the competition, the economic downturn has been squeezing Target's aspirational low- and moderate-income customers. The retailer's comp-store sales were down 5 percent in December, versus a 2.4 percent gain at Wal-Mart. Target said it expects same-store sales for January to come in at the low end of an earlier estimate of a decline of 1 percent to a 1 percent gain. The chain acknowledged its apparel sales were off in November and December.
Over the last year, Target's stock price has fallen 12.8 percent to close at $52.38. During the same period, Wal-Mart's rose 3.2 percent to close at $49.16 on Wednesday.
Now Target faces the task of replacing a major revenue generator for its clothing business: designer Isaac Mizrahi, whose contract is not being renewed at the end of the year and who is becoming creative director for the Liz Claiborne brand. Mizrahi's line did about $300 million at Target and analysts estimate the retailer will have to replace $400 million to $500 million of lost revenue upon his departure, given that shoppers buying Mizrahi clothes also bought other products while there.Some experts said Mizrahi's collection — and Target's apparel in general — was beginning to look a bit tired. "I think it's always a challenge for someone like [Mizrahi] to continue to reinvent themselves," said Wayne Hood, a retail analyst at BMO Capital Markets. "I don't believe one designer should have such a large role that, if they falter, it creates a risk to the apparel offering. It's better to be diverse. Department stores stayed with certain labels for too long" and it hurt them.
Target has bigger issues to deal with, as well. First, its longtime chairman, Robert Ulrich, is retiring on May 1 and will be replaced by company president Gregg Steinhafel. And while for the last decade Target's performance has bounded past Wal-Mart's with an emphasis on design and style — at slightly higher prices — those attributes become less important to consumers as the economy slows.
The difficult macroeconomic climate seems to be working in Wal-Mart's favor as the Bentonville, Ark., giant benefits from its position as the low-price leader. Wal-Mart continues to hammer home its low-price message. On Tuesday, the retailer said it was cutting prices on "thousands" of items by 10 to 30 percent this week, calling the initiative an "economic stimulus plan for shoppers." Products include everything from grocery items to home theater systems.
"[Wal-Mart] is more in tune with their target customer than they've been for several years now," said retail consultant Robert Buchanan. "They're doing a better job of interpreting trends for their core customer. They're emphasizing juniors more in terms of floor placement. After all, juniors is the best trend opportunity they have, so why not lead with it? George is less dowdy than it was. The stores with their transitional products look better than I've seen them look."
For example, George features bell-sleeve blouses, Empire dresses and faux wrap dresses, many in black or geometric prints in a sophisticated color palette of black, teal and beige. There's also a black pinstripe one-button jacket and a navy jewel-neck cropped jacket.
"George has taken the spotlight in terms of trying to highlight a more fashionable look," said Neil Curry, a retail analyst at UBS Securities. "It's more about fashionable basics." The design direction seems to be "a relatively young look without taking too many risks. They're making good inventory decisions so they're neither out of stock on key items nor left with too many items. Wal-Mart has always been good on basics. Now they're trying to move toward a more fashionable look."The company is intent on avoiding its fashion blunders of 2006 when it bet too heavily on skinny-leg jeans and jackets with faux fur collars in the Metro 7 collection.
Tuesday's restructuring of the apparel division is meant to avoid such miscalculations in the future. Brand merchandising, which is responsible for building private label brands, will be responsible for brand positioning, assortment development, textile design, vendor selection, sampling and cost negotiation. The group will be based in New York. The buying organization, which will continue to be based in Bentonville, will be responsible for maximizing space productivity; selecting the product, both private label and from national suppliers; setting pricing, and in-store allocation in conjunction with the planning and replenishment departments. Blakely declined to say how many jobs would be lost. "Some positions on teams were eliminated," she said. "The sourcing and product development positions were eliminated, but look for the team to grow in New York."
Buchanan characterized the overhaul as positive. "I certainly don't see Wal-Mart stepping back from its penetration in apparel or home fashions," he said. "Fashion is becoming faster and faster and faster. With the pace of change when it comes to fashion trends, the more Wal-Mart can do out of New York, the better. It's easier to do that out of New York than anyplace else."
According to industry sources, Metro 7, which is now sold in more than 500 doors, is being expanded in about 100 of those stores. "Wal-Mart has decided to expand the product offering substantially," said one source. "For example, if Metro 7 has six racks in a store now, they might double that to 12 racks. It's a broader assortment and point of view. It's giving the consumer additional options and developing an item-driven business. The focus of Metro 7 has shifted from a collection point of view to one of key items."
Asked about Metro 7, Blakely said: "We've been making changes in our apparel offering on an ongoing basis and our customers are responding well to some of those changes. We're flexing the floor all the time."
Some of the initiatives have been attributed to Dottie Mattison, senior vice president and general merchandise manager of women's, who was promoted after Claire Watts, vice president of merchandising, resigned in July. Mattison is based in the company's New York fashion office, which occupies a 50,000-square-foot space in the Garment District. The office had a staff of about 10, has grown to more than 80 people and will swell again."A big part of the [Metro 7] assortment is very accessible," the source said. "Dottie has made a point of saying that she wants to own the under $10 apparel market. Not 100 percent of Metro 7 will be under $10, but there can be polo shirts and great-quality T-shirts for that price. In balancing the assortment, the price-value relationship is being exceptionally focused on. Dottie understands that she needs to have accessible product."
George doesn't yet bear Dottie's imprimatur, the source said, adding, "You'll see new labels and new brands."
Wall Street analysts said inventory levels are substantially lower at Wal-Mart. "They entered the fourth quarter very light on inventory," one said. "They found themselves short on product."
"Wal-Mart has seen improvement," said Hood. "Wal-Mart got back to basics and is less aspirational. There is a focus on the $10 price. A year ago [apparel] was down 15 percent. In the fall season, apparel was down in the very low-single digits. Wal-Mart is rethinking the business. It's very good at basics and has dramatically improved the quality of the basics."
The refocusing at Wal-Mart comes as retail experts say Target lost traffic over the holiday season, a trend that may continue, given the retailer's strong focus on soft goods and home decor. "Wal-Mart has a much greater commitment to grocery than Target, and grocery does better when times are lousy," said Mark Lilien, a consultant at Retail Technology Group. Richard Seesel, a principal of Retailing In Focus LLC and a former executive of Kohl's Corp. and Dayton Hudson, said, "Wal-Mart had better performance, but it's selling more necessities and consumables and has less dependence on discretionary products." Target's designer and exclusive brands are believed to represent 6 percent of total sales of about $63 billion.
"There comes a time when the cycle could be working against them," Hood said, referring to Target. "As things begin to slow down, the average ticket price and traffic begin to fall. They have to worry about inventory levels. For that reason, we'll see continued gross margin pressure in the first quarter."
One criticism of Target is that "they're constantly making little bets with Go and other brands. Merona and Cherokee are the more basic parts of their program," said a retail consultant. "The problem is on overall trend identification." Mossimo, a multiproduct brand, has been a staple at Target since 2000 and is still very much a part of the assortment. And Target is said to be launching Whim by Cynthia Rowley in April, but there won't be any apparel, just novelty items such as outdoor games and inflatable pools.Go International, the retailer's short-term tie-ups with young designers such as Proenza Schouler, Erin Fetherston and Behnaz Sarafpour, has long raised questions about how much revenue it generates in Target stores. While building the profile of the young designers, the collections generally aren't sold in all Target stores and are seen by many as primarily a marketing exercise. And even here, Target is facing increasing competition with fast-fashion lines: Where once it had the field to itself, stores such as H&M are now signing up the likes of Roberto Cavalli, Karl Lagerfeld and Stella McCartney.
Erin Armendinger, managing director of the Jay Baker Retailing Initiative at the Wharton School of the University of Pennsylvania, said the frequency of Go may be a lot for the average consumer to digest. "The collections were supposed to be out for three months, then they shortened it to six weeks," she said. "It's too much for the consumer, given that the designers are a little quirky and too out there."
What also may be ailing Target is what's ailing the industry at large: a decided lack of salable newness. A lack of novelty along with a tough economy is a double whammy for the discounter.
Bill Dreher, a retail analyst at Deutsche Bank, noted Target reined in its buyers as the economy worsened, which led to the drab assortments. "As far back as April, when they started recognizing the [economic] slowdown, management was clamping down on buyers to reduce risk in form of inventory levels as well as the variety of the product," he said. "We interpreted that to mean that they were limiting buyers to the more mainstream fashions and colors, those more likely to be accepted and have very strong sell-throughs. They limited the creativity of the buyers because they wanted to reduce inventory risk. They only wanted to go with the strong sellers."
Mizrahi's departure will put pressure on Target to inject some newness into its assortments. "I wouldn't be surprised if Target ends up picking one of the Go designers for a 12-months-a-year program," said Dreher. "Given the nature of the business, consumers are moving away from apparel. They're losing a designer in a category that's not doing well right now. It wouldn't behoove the company to find a household name who one day stood for premier fashion and no longer does. I suspect they're going to go out and find another has-been designer to provide class for the masses."In addition to Mizrahi's business in stores, there's a large wedding and party shop on the Target Web site, featuring gowns, veils, headpieces, gloves, bridesmaids dresses, shoes, handbags and formal dresses. Many, but not all, of the products carry the Mizrahi label. "They haven't really disclosed what they'll do with Isaac's bridal business," Hood said. "Other [designers] will come in and do that. At least for the time being, they'll continue to grow it. Bridal is successful."
But, while the seesaw appears to be flipping, with Wal-Mart now on the rise, there's little doubt Target's apparel business will get back on a strong growth track. "They've got a strong track record developing merchandise content and developing ideas," said Seesel. "This is more macroeconomic."