WWD.com/retail-news/retail-features/target-s-apparel-success-intensifies-challenges-from-rivals-533862/
government-trade
government-trade

Target’s Apparel Success Intensifies Challenges From Rivals

Target has set the pace in mass market fashion with designer partnerships, smartly executed store brands and limited-edition offerings.

View Slideshow

BOSTON — On a recent evening, the hip Los Angeles boutique Intuition arranged giant red lamps and billowing white curtains into a bull’s-eye, turning the nightclub Social Hollywood into a replica of Target Stores’ logo for the Targét Couture launch party.

The pricey line of studded jeans, quilted leather satchels and $3,000 diamond pendants riffing on the bull’s-eye won’t be sold in any of the $52.6 billion Minneapolis retailer’s stores. It is the idea and exclusive property of Intuition owner Jaye Hersh, who got rare permission to use the logo for free.

The mere existence of Targét Couture — and the starlets partying and being photographed in it — is testament to how much fashion credibility the retailer commands. Through groundbreaking designer partnerships, smartly executed house brands and limited-edition “luxury” offerings, Target has set the pace in mass market apparel.

And it shows in the bottom line. The company, reporting results for the categories for the first time in memory, said apparel and accessories pulled in $11.6 billion, or about 22 percent of sales in fiscal 2005.

However, being the leader invites competitive scrutiny. In the last 18 months, Wal-Mart, J.C. Penney and Kohl’s have begun copying Target’s best practices and capitalizing on niches — such as urban fashions — the retailer has not focused on. Even Old Navy, a mall-based specialty player, has seen its market share clipped by Target and has been taking copious notes on its rival, said an Old Navy executive who asked not to be identified.

Some research suggests that the competition’s moves are beginning to squeeze Target. The big question — one that has already trimmed Target’s stock price in recent months — is how Wal-Mart’s improving ability to sell more stylish apparel and other high-margin goods might affect its main rival.

Still, some see continued smooth sailing for Target. Goldman Sachs analyst Adrianne Shapira believes the retailer has carved out a “highly differentiated and defensible niche” as the “new accessible department store, combining upscale trends and image with discount-store productivity and growth.”

In an April research note, she noted that Wal-Mart’s and Target’s stock prices historically rise on the same tide. “It is not a zero-sum game,” she wrote. “Proprietary data shows both gaining share in home and apparel concurrently.”

Since selling Marshall Field’s and Mervyns in 2004, Target has had stellar numbers. The retailer’s same-store store sales gains have eclipsed Wal-Mart’s in 31 of the last 32 months. Earnings last year swelled 20.1 percent to $4.3 billion, carried along by a 12.3 percent sales increase.

Target also has been more efficient at generating profit than Wal-Mart, largely because the company’s reputation for style allows it to sell more high-margin apparel, decor and electronics. Target’s net earnings were about 4.5 percent of sales in 2005, while Wal-Mart’s were an estimated 3.5 percent.

Nonetheless, there have been recent signs that pressure on Target is rising. The retailer’s first-quarter earnings included a healthy 5.1 percent comp gain, but nonetheless missed Wall Street’s earnings consensus by a penny. The stock closed Friday at $48.85 in New York Stock Exchange trading, close to its 52-week low of $48.10.

Target’s management blamed rising labor costs, increased capital expenditures from costly expansions in California and the Northeast, and miscues in Global Bazaar, an offering of furniture and home decor that’s one of the retailer’s major spring events.

Target, one of retailing’s most guarded operators, did not comment for this story.

Several Wall Street analysts, including Merrill Lynch’s Virginia Genereux, who downgraded the stock to “neutral,” suggested that the first-quarter miss may be an early indication Target will have difficulty making its numbers for the rest of the year. The retailer faces difficult same-store sales comparisons; for four months last year, which comp increases exceeded 8 percent.

Industry experts agree it is imperative for Target to keep apparel and accessories humming.

Target executives have called apparel a “cash machine,” wrote Sanford Bernstein analyst Emme Kozloff in a December research note after she met with the retailer’s top brass.

“The secret to their success is they are doing a remarkably good job in women’s ready-to-wear,” said Michael Collins, managing partner with Bain & Co. management consultants. “Target has realized for a while that women’s apparel is the reason for the shopping trip in a surprisingly large percentage of occasions. It’s very high-transaction and creates lots of cross-shopping opportunities.” He estimated that 10 percent of the time, core female shoppers visit Target expressly to buy clothing for themselves.

The retailer is also pouring resources into categories that complement apparel and appeal to its core, style-conscious female shopper. Target revamped its beauty department, tossing some mass market brands, such as Calgon, in favor of a mix of European specialty products that approximate a department store offering. At holiday, Target tested diamond jewelry as part of a package of limited-edition “luxury” items. The initial foray was so successful that the company made diamonds a permanent addition, said a jewelry department associate.

Target’s biggest asset, particularly in apparel, is its agility.

“One of our greatest strengths is our trend leadership,” Target Corp. president Gregg Steinhafel told analysts in October. “We anticipate what guests want next.”

Target has expanded Isaac Mizrahi, arguably its most successful brand launch of the past three years, while quietly plucking Cynthia Rowley’s Swell from its floors. Mizrahi is represented not only in sportswear, but also in luggage, shoes, swimwear, home decor, linens and pet accessories. The buzz — and cash flow — generated by the Target deal has helped reinvigorate Mizrahi’s career.

Target has a strong swimwear program, a business captured by offering department-store styling combined with the separates purchasing option of specialty stores. Tops and bottoms sell for $10 to $18 apiece, compared with the $30 to $60 per piece common at department and specialty stores.

Each January, a huge program of bikini separates is set at the front of the floors, and the retailer renews deliveries every four to six weeks throughout spring. The business appears to be among Target’s strongest junior categories, based on anecdotal evidence from shoppers and the ever larger amount of space allotted to it. The arrival in recent seasons of Mizrahi swim suggests the retailer is going after mom as well as her daughter.

Steinhafel said in February that Target has seen a demand for affordable performance swimwear. It recently debuted C9 by Champion tank suits, at $29.99, in its activewear department.

After identifying a need to capture more teen spending, Target merchants developed “Go International,” a program of trendy, limited-edition designs from international designers. Target management said the first launch, Luella Bartley, was well received, although Bartley’s selection puzzled some experts, since the London designer is not well known outside fashion circles.

The retailer’s second selection, Parisian designer Tara Jarmon, also is not well known. Her offering feels like a paraphrase of Bartley’s — heavy on the cropped jackets, miniskirts and vintage-y prints, but with a frillier sensibility. Target has said it will debut two new “Go International” designers in the third and fourth quarters.

The company uses these small, trendy lines to add pizzazz. Because Target stocks conservatively, when a line falls short — as did the 30-day Fiorucci showcase at holiday, said Goldman Sachs’ Shapira — the company’s exposure is relatively small. Target executives have repeatedly said they would rather miss additional sales because of scarce inventory than be stuck taking large markdowns.

The Target Sourcing Services division is one of the most sophisticated operations of its type in retail, buying about half of its private label apparel directly from overseas factories. The process eliminates middleman costs and has been one of the major reasons Target has dramatically expanded its gross margins.

Isaac Mizrahi, Mossimo, Genuine Kids by Oshkosh, Tykes by Carters and Eddie Bauer (non-apparel merchandise) are among the brands for which Target handles all sourcing.

To collapse the time between spotting a hot trend and stocking the finished goods, the retailer has put fashion garments on a six- to eight-week sourcing fast track. “We are willing to pay a premium for speed,” Steinhafel told analysts in October. “Speed is life” is a corporate catchphrase at Target.

The company has said its tightly controlled cost structure will not allow it to duplicate the two- to three-week leads of true fast-fashion players like H&M and Zara. However, because Wal-Mart and other competitors have bolstered in-house design and overseas sourcing capabilities, the advantages Target has enjoyed “are not as easy to leverage now,” said Richard Hastings, retail analyst and vice president at New York retail consultant Bernard Sands. “Apparel is a very profitable, high-margin category, and everybody wants a piece. There is the resurgence of J.C. Penney; Wal-Mart’s Metro 7 is alive and kicking, and Kohl’s is getting much more aggressive in the contemporary urban hip-hop area.”

Hastings also is concerned that Target’s stores, with their immaculate housekeeping and precise presentations, are missing the boho-sloppy energy of the marketplace.

“The look today is very blended, slightly sloppy, lots of attitude,” he said, citing Abercrombie & Fitch for capturing the ethos well. “Target is very linear. Its colors are too coordinated.”

Retail has a cautionary tale about the perils of becoming too neat. Gap’s decline began when consumers decided its pristine, white-box stores were homogenous and bland.

Gary Stibel, founder and chief executive officer of marketing firm New England Consulting Co., which counts Wal-Mart as a client, said his firm recently conducted research for A.C. Nielsen indicating “some erosion in the destination shopping of Target’s core consumer base. It’s the first time we’ve seen that in a long time at Target, and it’s often the first sign of a problem.”

Big Research, a Columbus, Ohio, data firm that surveys 7,000 consumers monthly for its Consumer Intentions and Actions survey, also has seen some softness in Target’s data.

In April, 32 percent of all Target shoppers polled planned to spend less on women’s casual apparel over the next three months. Only 9.8 percent said they would spend more. Target ranked fourth behind Wal-Mart, J.C. Penney and Kohl’s when survey participants were asked where they shopped most often for women’s clothing.

“Where Target is really bringing people in is HBA [health and beauty aids]. They have one of their largest shares there, 23.1 percent,” said Big Research vice president Phil Rist. “That’s their challenge — converting people going in for shampoo to spend more time in the other aisles.”

Shapira said Target could gain from department store consolidation by becoming “an apparel resource [for] consumers left behind when Federated takes May stores upscale.”

In fact, there are signs that, in apparel, Target is thinking more like a department store.

Speaking to analysts in October, Target Corp. chairman and ceo Bob Ulrich described the core customer as “a Macy’s or Marshall Field’s kind of guest clientele.”

Target has begun using “Sale through Saturday” signs throughout the stores, alerting shoppers to follow certain buying cadences. As department stores do, Target presents markdowns as a percentage off — racks say 30 percent off, for instance — rather than following Wal-Mart’s practice of listing the final price on racks.

The retailer has signed deals to bring department store brands into intimates, a department being overhauled to better emphasize sleepwear, hosiery and foundations. “Assets by Sarah Blakely,” a mass market version of the Spanx shapewear line sold at department stores, is on the way in, as is hosiery under “Solutions by Hanes.”

Then there’s the gradual escalation of prices. The Luella Bartley collection was priced an average 77 percent above Isaac Mizrahi, itself considered part of the mid-price “better” tier, according to Goldman Sachs research. At holiday, Target sold $99.99 cashmere sweaters.

“We are benchmarking ourselves to the continued elevation of our brands and products,” Target Sourcing Services president Stacia Andersen told students at a Harvard Business School conference in March.

Target also appears to be expanding its use of consignment, a department store practice for categories such as fine jewelry. Target defines the activity in its annual report as not paying for or purchasing merchandise until it’s sold to a shopper. Sales conducted this way shot up 244 percent, to $872 million in 2005 from $357 million in 2004.

Finally, there’s the question of Target’s momentum, particularly compared with Wal-Mart’s. While Target orchestrated several spectacular marketing stunts last year — acrobats wearing the fall collection leaped from a Rockefeller Center building, and The New Yorker magazine bobbed with artsy bull’s-eyes after the retailer commissioned an entire issue’s worth of advertising — some Wall Street analysts say Wal-Mart has the better story right now.

Considerable attention is being paid to Metro 7 and slick new advertising campaigns created by Wal-Mart chief marketing officer John Fleming, a 19-year veteran of Target. Wall Street also appears favorably disposed to Eduardo Castro-Wright, president and ceo of the Wal-Mart Stores Division in the U.S., who, after turning Wal-Mart de Mexico into that country’s dominant retailer, is now working on inventory control, cleaner stores and other initiatives in the flagship U.S. division.

Citigroup analyst Deborah Weinswig issued a report in April theorizing that Wal-Mart’s stock price will improve in the second half of the year. While Wal-Mart is redoubling efforts to sell a positive story to the media, Washington and Wall Street, Target remains guarded about exactly how it aims to top its stellar performance of 2005. “It’s hard to find fault with what Target is doing,” Weinswig said in an interview, although she also wondered if “Target is really thinking outside the box.”

And that may ultimately prove problematic. Being in “neutral is nonexistent,” said New England Consulting Group’s Stibel. “If they are continuing to do what they’ve been doing — however good — they are slipping into reverse unknowingly.”

View Slideshow