SANTA MONICA, Calif. — Target Stores Inc. is part of the mass market retail revolution. In the process, it’s becoming a designer haven.

Call Target the hassle-free way for designers to build huge volume. Industry analysts and observers hold up the deals the mega-retailer has made with Mossimo Giannulli, Michael Graves and recently Stephen Sprouse as models for the future of designers and apparel retailing.

“Any specialty retail or department stores should be taking some serious notice of what Target is doing,” Wachovia Securities retail analyst Joseph Teklits noted of Target’s deal with the Mossimo brand. “It’s a home run in terms of the level of merchandise in the store, by the buzz in the industry and at the consumer level.” Giannulli was among the first to ditch capital intensive inventory, markdown hassles and global production nightmares in favor of direct-to-retail licensing. And he’s glad he did. In his first year since licensing his namesake brand to Target, the gamble has raked in more than $700 million for the chain, according to industry sources.

It’s all reason for Giannulli to smile. Though he wants to set the record straight on one issue: the irksome suggestion the Target deal, signed as a three-year exclusive license, was lucky. Or that it came as a bailout for his troubled wholesale operation.

“There is this notion floating out there that I had no choice. But I pursued Target because I believe this model is the future. This was a premeditated, purposeful vision we believed in,” Giannulli told WWD from his design studio here, an airy, open-trussed space chicly decorated with braided leather rugs and blacked-out Schwinn bicycles stacked like sculpture against a wall.

Unlike the old mega-headquarters in Irvine, Calif., the new digs are tucked into a low row of ivy-covered buildings, rubbing elbows with boutique film production companies. The 3,000-square-foot space, where Giannulli and eight employees dream up product for the style-minded masses, well represents the new pared-down sensibility of Mossimo Inc.

“We aren’t a ‘me too’ company,” Giannulli said. “This last year it was about rolling up our sleeves, putting our heads down and proving to everybody that brand equity could remain.”

Chalk one up for the comeback kid.

Based on sliding-scale royalty percentages, Mossimo Inc. raked in roughly $15 million from Target in the year ending February 2002. That’s nearly double the $8.5 million on volume of $300 million guaranteed in his contract.

Chalk one up for Cherokee Group, too. Ceo Robert Margolis used his connections with Target to broker the deal. A 15 percent finder’s fee on Mossimo revenues added roughly $2.2 million to Cherokee Group’s coffers.

The Van Nuys, Calif.-based licensing company has become an adept matchmaker, hooking major retailers up with broad audience brands. Its first big deal six years ago put the Cherokee brand exclusively into Target domestically. Revenues of Cherokee branded apparel in Target reached $1.4 billion in the first three quarters of 2001. The company is currently working on global licensing deals for Gotcha, BUM Equipment and Candies.

But when talk turns to trailblazing the direct-to-retail licensing channel, Margolis is quick to lob credit into Target’s court.

The Cherokee ceo, who has worked with retail’s global heavy hitters, called former Target veteran Luis Padilla “the most visionary retailer I’ve ever worked with. He was the master architect of the deal both for Mossimo and Cherokee.”

Target’s senior vice president for soft lines merchandising at the time the Mossimo deal was struck, Padilla has since been named executive vice president of Marshall Field’s. A Target spokesperson declined comment on Padilla’s and Target’s behalf.

Although notoriously tight-lipped with the media, Target has nevertheless rolled out a cushy welcome mat for designers. Steven Sprouse will bow a graffiti-inspired collection of clothing and accessories this summer, followed by Todd Oldham’s dorm furnishings for back-to-school. They join Target alums Philippe Starck and Michael Graves in home furnishings and makeup artist Sonia Kashuk in beauty.

As the growing list of illustrious contributors attests, Target is the place to go. “They have designers lining up to work with them. Major fashion names,” said an analyst, who requested anonymity.

Both Giannulli and Margolis field calls from friends, former suppliers and industry acquaintances asking for entree to “Tarjay.”

“I get at least a call a day from people calling to suggest the possibility of doing business with Target,” Margolis said. “We’re very selective. Many people who approach us have labels — not brands.”

Target’s competitors also have been keenly interested in the Mossimo-Target partnership. Jeffrey Klinefelter, a retail analyst with U.S. Bancorp Piper Jaffray, said other major discounters are taking close note because apparel has been a stumbling block for that market. “Apparel is critically important to the mass merchant formula. It turns over. It drives traffic with newness. And it can be very high margin,” he said. “Finally, in the year 2001, what Target has demonstrated is customers will buy first-run fashion from their stores.”

Even department stores, badly in need of reinvention, have begun to look for exclusive, licensed brands to freshen and distinguish their assortment, Margolis said. “We know they’re starting to move in this direction because from time to time our organization is retained to find some specific things.”

Target has pumped significant resources into Mossimo, announcing its newest property in January 2001 with a pricy television spot featuring the designer during the premiere of “Survivor II: The Australian Outback.” The brand is prominently racked on main aisles and marked with poppy red signs bearing Giannulli’s trademarked scrawl. Analysts estimate the line accounts for roughly 30 percent of the chain’s apparel assortment. Among others, Target carries Xhilaration, a private-label contemporary collection. Misses’ brands include Cherokee and Meg Allen, produced by Liz Claiborne Inc.

There are two Mossimo-branded collections: Red Label, an active, youth-oriented line that plays directly into Giannulli’s design strengths, and Black Label, a casual career wear collection aimed at a slightly older demographic.

Red has outperformed Black, Giannulli said, and will be expanded accordingly. He and his staff — five people who have been with him to the brink of bankruptcy and back — design much the way they always have, creating concept boards they present to the retailer. Giannulli flies to Minneapolis each month to meet with the Target team.

“They ask me to push them. They’ll ask if they are going far enough,” said Giannulli. “And in their defense, they know very well what works for them.” Wachovia’s Teklits noted Target and Giannulli had “a challenge from the start to come to common ground on product, but the numbers prove they’ve done it.”

On recent visits to California doors in Manhattan Beach and Culver City, the Black Label line offered nautical-striped sweaters, leather tote bags, black pencil skirts and chevron-striped blouses. Red Label showed fruit-colored zip-hoodies with white piping, bright bikini separates, ruffled tuxedo blouses and pintucked denim skirts.

A Mossimo trenchcoat and sequin-trimmed tote appeared in recent issues of Lucky and In Style.

On a studio tour last month, Giannulli allowed a peek at the latest concept board tricked out with cotton voile tops with Indian embroidery and beading, flounced-hem denim skirts and close-ups of heart-shaped denim pockets. A collage of photographs, swatches and magazine tears provided the direction.

“Hopefully, we’ll get this feel into the stores,” he remarked.

Whatever version arrives in stores, the industry will take close note.

“You talk to anyone in the junior market and they’re shopping Target for inspiration,” observed Mark Brutzkus, a partner in law firm Ezra, Brutzkus, Gubner, which has a strong base of Los Angeles vendors. “Obviously, they’re doing a fantastic job of merchandising.”

Neither Giannulli nor Target would divulge turn rates, brand penetration or growth prospects, but analysts estimated overall revenues will rise 20 to 30 percent next year. Other analysts expressed caution, saying they believe the brand’s second-year performance will better indicate prospects for long-term success.

“Any time you drop a brand down in distribution the consumer still associates it with the previous distribution,” said Mitch Kummetz, senior analyst with A.G. Edwards & Sons. “It’s almost as if they perceive they’re getting a good deal. The perception may change the longer it stays in the lower channel.”

Bob Buchanan, a colleague of Kummetz, questioned whether fashion brands can last beyond two or three years in a mass channel.

“Target is going to be aggressive in rotating brands when they need to,” said Buchanan, citing a discussion he had with Target Stores president Gregg Steinhafel. “He suggested brands have a defined half-life with younger consumers.”

So far, though, Mossimo is alive and well in the youth market. And that, said analysts, is the among the brand’s strengths.

“It’s a cool thing to shop at Target and a cool thing to wear the Mossimo brand,” noted Wachovia’s Teklits.

What’s more, teens are not afraid to shop in the discount channel for apparel, said Klinefelter. “They actually reference Target in surveys we do. So Target has done a lot to drive in youth. And if they get youth, what kind of growth is that for them in the future?”

Deedee Gordon, founder of youth-trend firm Look-Look, said kids cite factors like price, a “no pressure” environment and store accessibility as Target positives. Yet she remains unconvinced Mossimo is the draw it was in the early Nineties.

“Kids like shopping the Target environment. But whether or not it’s for a specific brand they might have worn before is questionable,” she said. “They do buy a lot of basics at Target — T-shirts and socks and fragrances, CDs, accessories. But I don’t know if it’s necessarily something designer.”

Giannulli also refers to the current cachet of cheap-chic shopping. “Kids are smart today. They’re at thrift stores. They pull together a great little act. They’re not going to Macy’s.”

His insight is borne out by a shopper at the Manhattan Beach store — not far from where Mossimo got his initial brainstorm 13 years ago to design neon beach volleyball shorts. Amy Moseley-Dox, 28, wore Mossimo denim capris to a beach party in nearby Hermosa Beach, Calif., not too long ago. “I told my girlfriends what I paid — I remember, it was $24.99 — and they all went out and got them the next day,” she said.

Several analysts surmised the Mossimo brand is stealing business from Old Navy, formerly a youth darling but now seeking its own market niche.

“This deal probably played a role in Old Navy’s deteriorating business,” observed Klinefelter. “They had the youth and they don’t anymore.”

Sonia Thompson, a 38 year-old homemaker who usually shops Gap, Express and Macy’s, complained while shopping at the Manhattan Beach store that things she’s previously bought at Old Navy have “fallen to pieces.” Ostensibly back for more Mossimo jeans (she owns four pairs), Thompson was browsing dressier items.

“If this works,” she said, holding up a black pencil skirt, “I’m going to buy two.”

Value is a particular point of pride with Giannulli. As he is fond of emphasizing, the quality of the product is “equal to or better than its ever been at these price points. So that’s pretty cool.”

The brand encompasses young men’s, junior, kids, men’s, plus-sized and contemporary apparel, women’s swimsuits, women’s activewear, footwear, accessories, jewelry, watches, bath and body, and haircare products. Launches of kids’ bodywear, sun care and luggage are already in works.

How far can Giannulli spread his name and retain credibility?

“A sun umbrella, yes. A grill? That concerns me,” he responded. Architecture is a passion and he hopes to establish himself in the home arena.

He also plans to start talking to Wall Street again as part of a campaign to return his stock to trading on the NYSE. His stock has traded on an OTCBB since delisting in May 2000. “Moss has a tremendous amount of pride,” Teklits observed. “Having a public company named after you that trades on a big board gives you an outlet for proving you’ve made a comeback.”