More Players Vie for Shrinking Better Space

Economy may pummel weakest lines.

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The better floor of department stores is in for a shake-up — or shakedown — for spring.

This story first appeared in the October 29, 2008 issue of WWD.  Subscribe Today.

Even before the financial downturn, better-priced misses’ offerings in department stores were struggling, and the macroeconomic conditions may hurt this area even more than the high end, where customers still have money to spend, even though they are cutting back, and mass, which is benefitting from consumers trading down.

The better customer, often a working mom or a Baby Boomer nearing retirement, is cutting discretionary spending on apparel as she deals with lower home values, deflated 401(k)s, job insecurity, tighter credit and the general doom and gloom.

“It’s going to be extremely difficult to come back to the level of consumer purchasing that we used to have prior to this meltdown,” said retail consultant Emanuel Weintraub. “Credit granters have been so badly burned that they are only granting credit to people who they know can pay them back. The problem is not as much a fashion story as a credit story.”

The shakeout that started last spring, when Nautica, O Oscar and Sigrid Olsen all bowed out of the better arena, might be just beginning with exclusive lines, relaunched lines and new lines, such as DKNYC, potentially poised to grow — in a market with a shrinking sales base.

“The weak are going to fall,” said Andrea Goldreyer, better market analyst at The Doneger Group. “Whether the strong get a bigger piece of the pie remains to be seen. Clearly, though, exclusives are eating into the weak players’ businesses.”

Markdowns seem to be starting earlier than ever, as department stores try to clear out merchandise and maintain market share.

“Most retailers are continuing to be optimistic for Q4, the question is how much promotional activity they will allow,” said Dave McTague, executive vice president of partnered brands at Liz Claiborne Inc. “They will capture sales. The question is, at what price?”

Last week, Claiborne cut its 2008 adjusted earnings projections to $1 to $1.10 from $1.40 to $1.50, which was already revised down in August from a range of $1.40 to $1.60. The company’s stock tumbled 5 percent Friday, when the news was announced, to $6.95.

The flagship better-priced Liz Claiborne brand is a wild card for spring. Relaunched with Isaac Mizrahi designing, the line — which has declined to less than $900 million in wholesale volume from the glory days of more than $2 billion in the Nineties — has received raves from retailers, including The Bon-Ton Stores Inc., which said it increased orders on the line by double digits and is expanding the brand’s real estate on its floors.

“What better needs is to have a modern direction, as opposed to the old suited classic that has been in this traditional zone for a very long time,” McTague said. “Newness in product will be critical.”

Claiborne isn’t alone in its pain. Jones Apparel Group Inc., which has several better brands in its portfolio, including Jones New York, Nine West and Anne Klein, lowered its 2008 earnings projection to a range of 93 cents to 98 cents a share, from $1.20 to $1.35. It earned $1.26 a year ago.

“The economic environment continues to deteriorate,” Wesley R. Card, president and chief executive officer, said when the company revised the estimates.

Bankers expect that big markdown requests at the end of the year will lead to weaker Seventh Avenue companies being forced to sell themselves at relatively bargain prices. Their competitors with stronger balance sheets, such as Republic Clothing Group and the Cerberus Capital Management-owned Rafaella, are open to make acquisitions of companies with synergies, though not occupying the exact same market space.

The lightly trafficked better floor is due for the same modernization that the bridge floor is undergoing, said Christa Michalaros, chief executive officer of Rafaella, which relaunched this fall and created a new, slightly pricier better line for spring, called Ellavie.

Other lines also have entered, or reentered, the better category. For fall, DKNYC hit the selling floor, and Adrienne Vittadini relaunched. For spring, Calvin Klein white label is being relaunched by G-III Apparel Group Ltd., and Asara is making the leap from specialty stores into department stores’ less-desired — and easier to enter — doors.

Exclusive brands may be the biggest threat to the livelihoods of national better brands. Tommy Hilfiger entered a publicized partnership with Macy’s Inc. this fall and has gobbled up prime real estate. So far, Tommy Hilfiger’s women’s comparable-store sales are up 23 percent this season, and the company plans to expand into about 50 more Macy’s doors, in addition to the current 525.

“Our business is still continuing to be strong at Macy’s in spite of the crazy news,” said Colleen Kelly, Tommy Hilfiger president of wholesale. “The strategic alliance with Macy’s has been key. We’re much more front and center, and have a great stage for our upgraded product to perform.”

Belk launched the Kristin Davis exclusive better line this fall, gaining prime real estate in those stores.

“It’s become clearer and clearer that our customers want more on our better floor,” H.W. McKay Belk, president and chief merchandising officer, said in May. “This is an opportunity to put something there that’s much stronger. Customers are gravitating to what’s new in the stores. What’s old and hasn’t really changed is not that exciting.”

Businesses offering newness are reporting success. Republic Clothing owns and licenses multiple better-priced brands, including the new Adrienne Vittadini, and its better business was up 22 percent for the year, through the end of September.

“The old guard is still acting like it’s 1995, but no one is buying outfits like that anymore,” said Republic Clothing president Michael Warner. “Business is getting even more item-driven, and the customer is buying things with multipurposes, and that she doesn’t already own.”

Kenneth Cole, which analysts describe as one of the most modern lines on the floor, is also one of the best performing, sources said. Doug Jakubowski, Kenneth Cole New York president of apparel and retail corporate relations, said the brand’s sales grew this fall and it is “garnering more and more real estate” in its 450 doors.

“Kenneth started the company during a recession,” Jakubowski said. “We believe we sit in the right zone. There’s a great perceived value.”

Business is mostly waist up. Cardigans and print cut-and-sew tops with feminine details have been best-sellers for fall, and that will likely continue into spring. Color is also moving merchandise.

Doneger Group’s Goldreyer said the better customer is shopping in all channels and is willing to shop down-market, whereas designer, bridge and contemporary customers aren’t likely to move to the better floor, despite the tough economy. The customer who traditionally shopped the better floor is still shopping, Goldreyer said, but is buying three items, rather than six.

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