LIFE AFTER ITURF: DELIA’S HITS THE MALL
Byline: Melanie Kletter
NEW YORK — Delia’s Corp. boomed at its outset, conquered the juniors market in the mid-Nineties, then got bogged down managing a complicated Internet strategy.
The teen trendsetter, no longer flying quite as high in the fast-moving juniors category, is seeking a fresh start. Sobered up by its declining stock and disappearing profits, Delia’s is shedding the bulk of its costly dot.com businesses and gearing up for a big mall store push. In an intense effort to recapture lost momentum, the company is looking to create a manageable, though still multichannel operation that emulates business models successfully executed by such firms as J. Crew, Victoria’s Secret and Pottery Barn.
“I realized in 1998 that the biggest opportunity for us was going to be outside of the direct channel,” Steve Kahn, Delia’s co-founder and chief executive officer, said in an interview at the company’s offices here on Hudson Street. “We had tremendous growth for the first few years and then we hit a wall.”
The eight-year-old firm pioneered the teen catalog sector and was one of the first to tap into the explosive junior market with its hip and trendy fashions. However, the last year has been tough for the company, as it struggled with its ailing iTurf Internet subsidiary and online businesses.
Delia’s spun off iTurf, its network of 10 Internet sites including delias.com, in 1999, only to remerge the two firms late last year. Now, it’s closing iTurf and looking to sell off some of the sites in the network, and has recombined delias.com with the core Delia’s catalog and retail businesses under the Delia’s Corp. umbrella.
This week, the company said it had signed an agreement to sell the assets of TSI Soccer Corp. catalog and Internet businesses to an undisclosed bidder.
In the last year, when the investment and financial community was trying to make sense of iTurf, Delia’s was quietly building its infrastructure. The company shored up top management with the hiring of two additional vice presidents to oversee the retail and direct-to-consumer business and made several investments in its retail business for an expanded rollout, including the expansion of a 400,000-square-foot distribution center in Hanover, Pa. Delia’s also invested more to build up its sourcing and production capabilities, allowing it to have more control over merchandise.
With 31 stores and four outlets opened in the last two years, Delia’s is quickly becoming a bigger player in teen retail. This channel is expected to account for about 25 percent of projected sales of $214 million in 2000, and one-third of sales in 2001, said Delia’s president Evan Guillemin. The company is expected to release sales and earnings results for 2000 in March.
Kahn said the company is looking to open 10 stores this year, and is cautious about expanding too fast, but feels Delia’s has the potential for at least 200 stores. Company executives declined to break out sales figures for the stores, but said the average Delia’s store generates about $400 in annual sales per square foot.
Dorothy Lakner, an analyst at CIBC Oppenheimer, said Delia’s is starting to benefit from the multichannel formula.
“What seems to work best for the Internet are the brands that have stores, catalogs and the Internet, where each channel reinforces the other,” Lakner said. “Certainly, Delia’s throughout all of this remains a strong brand with teenage girls.”
Jeff Klinefelter, who follows the company for US Bancorp Piper Jaffray, said the company is “headed in the right direction.”
“The teen sector continues to grow and build momentum,” Klinefelter said. “The Delia’s brand has been strong for many years, and its brand recognition continues to increase. Getting back to the core business is the right strategy for them.”
AN EXPLOSIVE START
Although just eight years old, Delia’s could almost be considered an old-timer in the junior market, where companies come and go at a dizzying pace. The company burst onto the scene in 1993, before the teen market exploded. The country was just pulling out of a recession and Generation X was moving into the workforce and making way for a more optimistic — and consumer savvy — generation of young people, the children of Baby Boomers.
The company was formed by Kahn and Chris Edgar, two graduates of Yale University who each hold master’s degrees from Ivy League universities, and saw a market with an untapped opportunity. The first catalogs were distributed through a network of on-campus college representatives, but by early 1995, the company changed its primary distribution from college reps to direct mail.
“We started when no one else was there and it was a really exciting time,” Kahn recalled. “Generation Y was just emerging and no one had really started targeting them yet.”
Kahn and Guillemin assert that the firm’s strength has always come from its ability to speak directly to teens. From the beginning, the catalogs aimed to create an entertaining shopping experience that had a sense of humor and seemed more like a magazine than a shopping catalog. It’s continued with this formula. A recent catalog featured photo shoots of girls getting ready to have a party, with catchy phrases such as “Invite your friends over,” and “Move all your house plants to the bathroom. Fill with steam. Pretend you’re in the jungle.”
“Delia’s enables teenagers to begin to explore their identity through fashion,” Kahn said. “This is a powerful thing that a woman plays with her entire life.”
This year, the company expects to ship about 43 million catalogs and it is still the clear market leader in the direct-mail segment for teens. However, following Delia’s explosive entry, many companies tried to jump on the bandwagon with direct mail concepts of their own, including Claire’s, Airshop and MoxieGirl, but nearly all of the other companies have folded their catalog operations. Alloy, Brat and Girlfriends L.A. are among the company competitors in the direct-to-consumer arena.
A NEW BEGINNING
The growth of the retail business is seen as critical to the company’s long-term survival because it will build on the strength of its brand name.
“We have tried different things, but our biggest opportunity has always been our core business,” said Kahn “We are exiting our auxiliary businesses to focus on our Delia’s brand.”
Nonetheless, the company’s sales growth has been stellar. Company sales in 1995 were about $5 million, and in 1996 — the year the firm went public — revenues hit $54 million. By 1999, sales had skyrocketed to $191 million.
Following the tremendous growth of the catalog, many teens were interested in the brand and were asking for stores, company executives said.
“We used to have teens coming up to our corporate headquarters thinking it was a store,” said Guilleman.
The company opened its first store in January 1999 at the Westchester Mall in New York. However, the transition has not always been easy.
“Taking a brand that is established and understanding how to strengthen it in a three-dimensional space requires thinking hard about our customer, product, design and marketing elements,” he said. “Strengthening the brand and extending the brand into a new medium, we need to have something new, and fresh elements. One of our biggest challenges is how to build an organization that has synergy from a consumer standpoint.”
The stores require many things that the catalogs do not and need to offer features that are different than what is in the catalog and on the Web site, he said. For example, accessories and cosmetics have sold better at stores, while it has been harder to develop the shoe business.
In regard to its merchandise, the company sees itself as appealing to teen customers seeking fashion that falls between Limited Too and Wet Seal. Limited Too, a former division of Limited Inc., now has about 400 stores as well as catalog and Internet capabilities, and is considered the premier concept targeting “tweens,” or pre-teens between the ages of 8 and 12. It carries fashion-forward merchandise under its own label that doesn’t get too tight or sexy.
Wet Seal, which also operates Contempo Casuals and other concepts, carries branded and private label apparel that is often slinky and looks more suited for nightclubs than for high school. Other concepts Delia’s is going up against in the mall include Abercrombie & Fitch, Pacific Sunwear and American Eagle, all of which have seen robust growth in the last few years.
The Delia’s retail concept carries apparel that is not too flashy or tight and can be best be described as “basics with a twist,” according to Edgar. At a recent visit to the Delia’s store at Menlo Park Mall in Edison, N.J., the assortment was just transitioning to spring. While many of the teen stores in the mall were highly promotional, Delia’s had few sale sections positioned far in the back.
“We don’t have a lot of sale items because we had a really good holiday season, and we don’t have a lot of leftover inventory,” said Edgar.
The company recently said that holiday sales for the six-week period beginning the week of Thanksgiving were up 23 percent compared to last year at Delia’s direct, which includes the catalog and delias.com, and were up 95 percent for the stores. On a same-store sales basis, Delia’s stores had a low-double-digit sales gain.
The Menlo Park store is clean and well lit, with track lighting coming from the ceiling. The merchandise is set up in easy-to-reach formats and the lively product assortment includes apparel, accessories, shoes, sleepwear and loungewear. The company had many of the major trends in the market right now, including wrap shirts, tropical-themed apparel, T-shirts and tops with embroidery.
There’s also a denim bar along a wall, and novelty items and gifts are sprinkled throughout the store. Home items, such as picture frames, and lunch boxes have been strong, Guillemin noted. The stores also carry items that the catalogs do not, such as candy and more gifts products.
The stores include trendy items such as logo T-shirts and wrap shirts that are fashion-forward but are not super tight or very low cut. Best sellers during the holiday season included basics, such as sweaters and turtlenecks.
Most of the apparel retails in the mid-to-high $20s, with jeans priced at $29.99, similar to the opening price points of moderate department store teen brands such as Paris Blues and Mudd.
The company is using the retail stores to test merchandise for the catalog, an example of how it is concentrating efforts across channels. Due to the length of time required for photography and merchandising, catalogs require longer lead times and more advance planning in terms of merchandise and fashion statement.
The company has also focused more on its own brand of Delia’s merchandise, which currently accounts for about 65 percent of total sales.
“Our own merchandise has consistently been our best sellers,” said Guillemin. Among some of the other brands in the store it carries are Hang Ten and Tag Rag.
The company said it targets “A” malls, and most of the stores are about 3,500 to 4,000 square feet.
Among its current locations are Willowbrook Mall in Wayne, N.J. and Roosevelt Field in Garden City, N.Y, and in far flung places such as Poughkeepsie, N.Y., Newark, Del., and Vernon Hills, Ill. Delia’s also has four outlets.
Delia’s also is hoping that bricks and mortar will help it return to profitability. After reaching profits of 41 cents a share in 1998, the firm reported a loss in 1999 and is expected to have a loss of $1.91 for 2000, due largely to charges related to iTurf.
Its stock has also taking a beating. Delia’s closed today at $3.09 — down from its 52 week high of $17.50, but the company said at this time it is not focusing completely on the stock.
“If you build the business, the stock will take care of itself,” said Kahn.
The company recently put in place a shareholder rights plan, or “poison pill,” but denied that there was any takeover activity. A poison pill plan is designed to protect shareholder interests by making unwanted takeovers costly. Fashionmall.com has reportedly been in discussions to purchase some of the company’s Internet properties, which include gurl.com, TheSpark.com and SparkMatch.com.
The firm also recently authorized a stock repurchase program and eliminated an advertising plan to spend $2.5 million in fiscal 2001 as part of an effort to enhance shareholder value.
“We have put a growth engine in place that we feel will allow us to have sustained growth for a long period of time,” said Kahn, “The more stores we open, the more profitable we will be.”