GLG News by Laurence Hellman

Implications: Dillard's has grown, though not necessarily thrived, over the years, largely through acquisitions. The acquired companies and stores were a mixed bag of good and mediocre players; Dillard's became a real melting pot and the diverse roots are still evident in the stores today. The stores are sometimes dark and convoluted with unusual merchandise adjacancies (but heck, the old Marshall Field's merchandised books next to Waterford crystal); management is inbred and appears strategically unsophisticated. Stores are frequently very large with correspondingly low sales per square--you're much more likely to walk into a Dillard's store with sales productivity of $150 per square foot or lower than find one that generates $200 a square foot or higher.  The double whammy of big stores and low productivity isn't helped by the absence of stores in large, dense markets, such as New York, Chicago, or LA.

Analysis:

There is a big plus--Dillard's offers its customers lots of great merchandise and fabulous end-of-season clearance events. Are these enough to carry the company through a very challenging retail cycle?

A trip through a larger Dillard's store the first week of April brought home the strengths and weaknesses of the operation and also confirmed that management is serious about introducing some energy, excitement, and urgency into the stores. Will the company become fleet footed and agile? Probably not, but it will put up a fight.

Dillard's has a great shoe department with sales penetration of about 13% to total, twice that of most department stores and approaching Nordstrom's, the mother lode of all shoe departments. It really sparkled and glowed during my recent visit; display tables of Wellies, for example,  really set the tone.

Unfortunately, the rest of Dillard's center-core businesses don't equal the appeal of shoes. While handbag space is huge and reasonably appealing with large inventories from the usual suspects plus unique product from Jack George's, cosmetics, fashion jewelry, watches, neckwear, and belts just don't excite as they often do at Nordstrom.
 
Men's was appealing with Daniel Cremieux and Polo front and center. In ready-to-wear, a new designer dress department was being introduced. Dana Buchman was being cleared out in sportswear and will be replaced for Fall by Donna Karan. Massive quantities of Ellen Tracy, Austin Reed, BCBG, Alex Marie, Eileen Fisher, Nurture, among others,  filled the floor.  Juniors has been cleaned up, featuring big statements of Kensie Girl, Takara, and prom dresses.

The store was colorful and attractive new-concept full sheet signing called out newness, "Spring Chic", and "The Style of Your Life". Clearly there are changes coming.  Making the stores more appealing and offering stronger genuine customer service cannot hurt. HOWEVER, as recent sales results from a number of top-notch department store and specialty players clearly announce, this is not a good time to stray away from the target customer, especially by trading up too aggressively.

Implications: JC Penney (JCP), currently struggling, along with so many of its competitors, has been working hard to differentiate itself as a dominant player. The recent appointment of Ken Hicks to the JCP Board of Directors is a significant move to reward and retain an unusually talented retail executive. Hicks will address the short term jeopardies and lead the company forward into the future. He rounds out a diverse, and talented, management team. Hicks complements the Board's hard driving, sometimes prickly, Mike Ullman, and super-energized and creative Maxine Clark. This is a terrific Board.

Analysis: Hicks is a very smart retail leader with a unique background. While he didn't go through the ranks as a trainee, assistant buyer, buyer, DMM, GMM, etc. He paid his dues At West Point, McKinsey, May Department Stores as SVP of strategic Planning, traveling night and day with CEO David Farrell and May Merchandising President, Ken Kolker.

Hicks took over the struggling home business at May and taught the merchants and stores how to initiate winning disciplines. His style is low key, ususally patient, and always convincingly analytical. He knows almost everything and is interested in learning the rest.

Earning the loyalty of those who report to him is a high priority for Hicks. This man will lead Penney's into the future and his appointment to the Board is a sagacious move.

Implications: Vera Wang apparel, accessories, and home furnishings  at Kohl's have been discussed, debated,  and analysed for months. Some experts are confident the Vera customer has never heard of Kohl's and the Kohl's customer has never heard of Vera. Well, the goods are now on the selling floor (and on sale at 30% off).  Does the line work?

Analysis: Well, the goods are now on the selling floor. Does the line work?  

Surprise...the answer is yes...and no. We've been shopping Kohl's regularly for years. We've never needed to park farther than  thirty feet from the main door; that's one of the conveniences the Kohl's customer consistently calls out. This week the lot was jammed, shopping carts (or whatever Kohl's calls those vehicles) were scarce, and lots of customers were buzzing about.

"Are you with another retailer or a manufacturer?" a customer asked me (alerted, I suppose by my pen and little tablet).  "If you are, watch out; this line is hot--Chico's beware".  She told me all the shoppers in the store were responding to Vera's appearance on Oprah. "we love this line" the customer confided. And, in truth, customers had armfuls of Vera knits and the jeans were sold out to the piece. The $70 long leather gloves were still on their peg hooks (hmm, for now). The line works, yes and no. We'll detail our Simply Vera observations in the next day or so--especially,  if you tell me you want to hear more.

Implications: The upcoming introduction of Simply Vera is a major initiative by Kohl's to update and energize a slightly tired sportswear vendor/  brand structure. This is a big development in a month chock full of major launches among key retail players: in addition to Vera Wang at Kohl's, we have the entry of Nordstrom into the Boston market; Martha Stewart hitting the selling floor at Macy's and Macy's aggressive new celebrity marketing campaign; Penney's is continuing to roll out Sephora and finalize details for the Spring 2008 launch of American Living. Powerful!   Will Simply Vera duplicate Kohl's success with Chaps or will it miss the mark as one more failed effort, by a major retailer,  to capture the highly sought after younger, more upscale customer?

Analysis: Before fully appreciating the Simply Vera challenge, we must be mindful of the nature of Kohl's feminine sportswear business, which three years ago was ringing up out-the-door average unit retails just a few pennies over $10. That represents lots of units. at 30-40-60% off,  from Sonoma, Croft & Barrows,  Notations, Requirements, Cathy Daniel, Villager, Sag Harbor, and others.

Recently retails and taste levels have increased modestly at Kohl's  through labels such as Chaps, daisy fuentes, Nine & Co, and Elle. Career jackets are on the selling floors ticketed at regular retails of $59.00-99.50.
Vera dresses, coats, and jackets above $100 are certainly top of the line for Kohl's. However, this is nothing like the frequent comparisons with Halston's sad deal with Penney's decades ago when T-stands of $100+ Halston dresses were surrounded by a department filled with $40 product--a disaster.

Kohl's is historically minded, consistent and  thoughtful, with a clear understanding of the sources of its competitive advantages and a dedication to continue  to give it's customers what they want. If Vera Wang is not tops on the list of customer wants, you can bet that Kohl's will not throw out the baby with the bath water, as numerous retailers have done in wooing the younger customer. Kohl's will take its time doing  Vera brand building and carefully roll out the line. I'm eager to see the merchandise and see how it's romanced in the stores. I'm especially eager to see how Kohl's will sell $70 Vera dress shoes in a self service shoe department--but I'm betting they've thought that out.

Implications: Kohl's continues to give the customer what she wants, and she  says "thank you" by driving 12-month comp sales to well above 5%, dwarfing the results of midline competitors.

Customers appreciate the simple amenities such as: parking spaces that are always close to the front door; wide, shiny aisles; generally straightforward promotions; a predictable marketing calendar; colorful cuts with laconic copy; appropriate seasonality; assortments that are fresh and infused with some jive,  and a few desired moderate brands that KSS does better than competitors (e.g., Briggs, Sag Harbor, Notations).

A recent tour of a productive midwest  KSS door that I previously shopped regularly--before a 12 month hiatus--truly surprised me: specific merchandise offerings aside, the store, well trafficked as usual,  was unchanged.
 
It all adds up to convenience! 

Analysis: Kohl's and JC Penney are fierce competitors that, as I have previously called out, track each other closely. Both companies are introducing significant developments,  and they are at the forefront as other key players follow suit and energize the business. This is one of those win-win games for customers: better shopping, better pricing, in-store theater for all.

Kohl's is aggressively launching new product introductions that include: Elle inspired apparel (300 doors in Spring '07), Vanessa Minnillo for Flirt in cosmetics (Fall '07), Tony Hawk footwear (Spring '07), Vera Wang (Very Vera in apparel/accessories and home textiles, beginning in Fall '07), Food Network ('07), Chaps home (May '07),  further development of Casa Cristina in select markets. In addition, there is the New York design office and enhancements to the headquarters campus. Some of these developments will be worked successfully into the assortments, as Chaps has been; others will probably fade away.

What appears to be a given is that the learnings-driven KSS team will hang on to what it does best--offering convenience to the customer.

Implications: 1.  Over the years, Penney has developed  a solid core of proprietary product in ladies' apparel (e.g., Worthington, St. John's Bay), men's (Stafford, SJB), and kids. 

2. These steady, middle-of-the-road private labels very much defined JCP in good years and bad. They are reinforced by moderate brands such as Sag Harbor, Alfred Dunner, Designers Originals, Dockers, Levi's, Van Heusen, Jockey, Izod, and others.

3. Recently, JCP has been on a tear to establish exclusive vendor programs and partnerships in ladies, men's, kids, accessories, home (American Living from Ralph Lauren Global Brand Concepts), cosmetics (partnership with Sephora), ladies and men's  (Claiborne's Liz & Co and Concepts) and intimate apparel (Ambrielle).

Analysis: That leaves JCP with a lot of brand building on its plate. Based on recent efforts by competitors, the challenge is significant. Dillard's went very-private label in intimate apparel and struggled to establish brand recognition and value benchmarks.

Kohl's has been hard pressed to establish its Lauder-produced lines such as American Beauty and Flirt; in all fairness, the Lauder/Kohl's connection is pretty subtle, and Penney/Sephora probably has an edge.

Liz & Co. will very likely work for Penney; the potential is sufficient to upset department store competitors.

American Living is a huge endeavor; unlike the nice job Kohl's has done with Chaps, an established label at launch, JCP is starting from scratch.

Department stores have struggled to build outstanding, productive proprietary brands; the more likely candidates for success in the JCP stable are those such as Liz & Co and Sephora, which come with brand recognition. Exclusivity, while a constantly tempting reward, almost always makes consumer awareness more difficult to achieve.

Implications: 1. Boomers are hitting the highways in luxuriously appointed motor homes and coaches that tip the scales at $400k; meanwhile smaller RVs, boats of all sizes, and classic cars are in great demand.  But  these vehicles can't stay on the road nonstop.

2. Frequently, they're pulled onto gravel-covered  rental storage lots that are surrounded by chain-link fencing. Beautiful finishes are exposed to weather, varmints, and vandals. The rental rates often increase annually.

3. Communities are increasingly tough on RV owners; no one wants driveways, lawns, and streets cluttered with big, beautiful toys. So, where do we turn?

4. Focus groups and consumer satisfaction surveys clearly tell us rental storage--a $19 billion industry in 2005--is generally unsatisfactory.

Analysis: The new news is personally owned storage. Storage condominiums are selling like hot cakes in Colorado, Arizona, California, Florida, and in other markets on the east and west coasts.

A storage condominium generally ranges in size from 300 to 1200 square feet, versus traditional rental storage "lockers" which are rarely larger than 300 square feet. To accommodate RVs and boats, garage doors are 15 feet high with ceilings as high as 20 plus feet. Amenities in these climate-controlled units include open- floor plans, telephone and cable hook-ups, dump stations, restrooms, heat, water, 24/7 access, and state-of-the-art security.

Sounds great--how much? Milestone storage condos, the first offered in St. Louis, MO, are priced at approximately $100 a square foot. Units sell from $30K-$120K. Over time, the cost of owning is significantly less than renting.

Owned storage is a significant new development about which we'll keep readers informed.

Implications: 1. Whole Foods has enjoyed dynamic growth since it was founded in 1980. An "enlightened" and admired company that appeals to the most desirable customer segments, WFMI has been agile and fleet footed and full of surprises (always something up the sleeve) over the years.

2. Acquisitions have played a role in the WFMI growth strategy; in fact there have been 18 acquisitions, over the years. Frequently, key management from the acquired operations were retained to facilitate the assimilation process.

3. However, natural and organic foods competition has increased as has, importantly, the contest for the take home, prepared foods business that WFMI has successfully leveraged. Earnings dropped slightly in the most current quarter and, over the past year, share prices have been hit hard.

Analysis:

The question is: has Whole Foods, in acquiring Wild Oats (OATS) swallowed more than it can chew?

WFMI has made 18 acquisitions in the past. However, these were considerably smaller than the OATS deal. Most involved fewer than 10 stores and were well below $100 million.

The average per-door sales productivity of Wild Oats is about $11.0 million versus $30.0 million for WFMI and sales per square foot at OATS are about half those of WFMI. Wow! That's a daunting challenge.

Of course, OATS opens new markets for WFMI and strengthens existing market positioning. However, let's look at the new markets: Arkansas, Indiana, Oklahoma, Tennessee, and Utah. Ummm. OK. And the markets in which WFMI positioning has been reinforced?  California will have 74 doors versus the present 40 (29 under the Henry's banner) and should become a powerhouse; Texas will add 8 doors, bringing the total to 21 (not quite a powerhouse); the Colorado door count will increase from 7 to 20; Oregon will add 6 doors to the current single location. No additional markets will grow by more than 5 stores.

WFMI is a savvy, innovative operator that has done many more things right than wrong. However, this current development is a big surprise and makes us wonder whether a take charge offensive player has suddenly switched to defense.

Implications: 1. J.C. Penney's recent decision to build Polo Ralph Lauren's American Living into a storewide brand is not unexpected based on the success competitor Kohl's has achieved with the Chaps brand in men's, misses, and kids. 

2. Don't kid yourself--Penney's and Kohl's watch each other like hawks.

3. However, Penney's may face a  bigger challenge getting the line off the ground; Chaps was a viable and reasonably familiar name when Kohl's launched the brand in men's.

Analysis: With out-the-door apparel, average unit retails (AUR) that most likely only slightly exceed those of Kohl's and, are well below those of moderate competitors such as Macy's, Penney is out to increase the average sale, broaden the customer base, and differentiate itself from the competitive pack. These are priorities JCP has identified in the past, frequently with less than stellar results; trade up efforts reached an extreme years ago with Halston. However, we're looking at a different, more strategically grounded Penney operation now.

Hence, the move to leverage American Living into a storewide brand makes sense, especially based on the Kohl's Chaps experience, which started off strong from the first launch ad. Success is hardly guaranteed. Land's End failed to bring Sears to the promised land. May didn't get off the ground with House Beautiful throughout the home store; and this is a big new challenge for RL's Global Brand Concepts.