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NEW YORK — Jones Apparel Group’s efforts to revitalize L.E.I. have included changes in management and operations and a major overhaul of the brand’s image, all of which have been unable to stem nearly five years of declining sales.
Now in a move drawing praise from Wall Street and skepticism from the industry, Jones is casting what’s left of L.E.I.’s fortunes exclusively with Wal-Mart, the world’s largest retailer.
Jones revealed it’s decision to move L.E.I. into Wal-Mart for the back-to-school season in conjunction with its release of year-end financial results on Feb. 13. Narrower losses for the quarter, coupled with the L.E.I. news, helped push the vendor’s shares up 7.2 percent to close at $17.15 a share for the day. On Wednesday, Jones’ shares closed at $14.99.
“We are enthusiastic about expanding our existing relationship with Wal-Mart and bringing this dynamic junior lifestyle brand to a broader audience,” Wesley Card, Jones’ president and chief executive officer, said at the time.
The brand’s dynamism, however, has been on the wane since being acquired by Jones. The company acquired L.E.I. — which stands for life, energy and intelligence — in 2002 in a deal worth $385 million. L.E.I. had established itself as a dominant junior brand, and at that time, was generating sales of $248 million. The brand’s primary competitors were Mudd and Paris Blues.
Jones initially allowed the brand to operate as an independent division with its own staff and sales force, a decision that management later acknowledged was a mistake. Sales began to slide as a result of operational inefficiencies that were complicated by increased competition. The task of turning around the brand fell to Jack Gross when he became ceo of Jones’ denim and junior segments in January 2006. Gross brought L.E.I. more formally into Jones’ operations, but a difficult juniors retail environment continued to hamper sales.
Jones made a full-fledged effort to right the ship for the 2007 b-t-s season, overhauling the brand with new packaging, labeling, advertising and a strategy to increase the brand’s Internet presence. To reconnect with the 13- to 17-year-old target audience, the brand veered away from a mature image and adopted a more playful, tongue-in-cheek attitude that included caricatures of girls with star shapes on their faces and American flag-like tongues sticking out.
Gross told WWD at the time that the response to the revamped line among retailers had been “outstanding,” but admitted that turning things around would likely be a gradual process. Those efforts haven’t panned out, and industry and Wall Street sources estimate L.E.I.’s annual sales have fallen to as low as $70 million.
In an interview on Wednesday, Gross said the idea of changing channels for L.E.I. came about after a review he conducted seven months ago of the business strategy for the denim and junior segments.
“The rebranding [of L.E.I.] went very well and the acceptance of the retailers was very good,” said Gross. “However, in reviewing the brands we had, I felt we were overbranded for the same consumer segment.”
He pointed out that the L.E.I. and Glo brands were competing for the same dwindling junior space. Gross also said Jones’ rebranding effort last year for L.E.I. had skewed too far toward the juvenile, and his view of the segment and how Jones will market to it has changed.
“The branding that we had in the national chain channel went a little too youthful,” said Gross. “I believe the junior customer is not 13 to 17, it’s 13 to 24 or 25 years old. We enhanced the branding to encompass the broader age group of the junior consumer.”
Financial analysts favored the Wal-Mart deal based on the sizeable upside potential.
“This opens up a whole new wave of growth for a company that many of us believe has top-line challenges,” said Brad Stephens, a retail analyst for Morgan Keegan & Co. Inc.
Stephens noted there were few opportunities for L.E.I. to grow in its current department store positioning, whereas being in Wal-Mart could help the brand grow into more product categories and, further down the road, expand into Wal-Mart stores in Canada and Mexico. Stephens said the brand now had the opportunity to develop into a $300 million business.
Eric Beder, retail analyst at Brean Murray, Carret & Co., said Wal-Mart’s aggressiveness in bringing in branded apparel to its stores has helped its performance and could do the same for Jones.
“If you’re going to do it, you’ve got to go whole hog,” said Beder. “If you fully commit to the chain, it can be very lucrative.”
At Wal-Mart, L.E.I. will go up against brands such as VF Corp.-owned Riders, Levi Strauss Signature and No Boundaries. The story of the Signature brand in particular serves as an example of the types of problems L.E.I. could potentially encounter. Levi’s introduced the Signature brand in 2002 in a bid to tap into the mass channel market. Moving into both Wal-Mart and Target resulted in sales skyrocketing to $364.6 million by 2005. Then, in 2006, Wal-Mart opted to devote more shelf space to its private label brands and Signature revenues immediately dropped off. Signature revenues fell 13.1 percent in 2006 to $316.8 million and have continued to fall throughout 2007 and into this year.
Gross believes L.E.I. will enter Wal-Mart at an appropriate price point, likely under $20 at retail, to be a success. “I believe L.E.I. can be a backbone brand for Wal-Mart for b-t-s of 2008 and beyond,” he said.
Robert Passikoff, president of Brand Keys, a customer loyalty research consultancy, believes that whether a brand succeeds at Wal-Mart depends heavily on the values of the brand. “The issue is that there are going to be certain brands that will absolutely thrive in an environment like Wal-Mart,” said Passikoff. “Then there are others whose values are not going to be reinforced there.”
Passikoff questioned whether the “life, energy, intelligence” message would translate at Wal-Mart. He also isn’t convinced the brand will carry any name recognition among consumers.
Dick Gilbert, who founded Mudd, said L.E.I. wasn’t the only junior denim brand to experience the pains of the market over the last several years. The brand may have peaked, a problem that was further complicated by the rise of the premium segment.
“I think what happened is premium got strong and then the subpremium, that $80 to $100 zone, came along,” said Gilbert. “The kids are spending more money on their jeans right now.”