NEW YORK — Call it the $1 billion club.
Due to successful store growth initiatives, a steadily recovering economy and a strong fashion cycle, a growing number of specialty apparel retailers joined the club by posting significant billion-dollar revenue benchmarks in the most recent fiscal year. Moreover, several other companies in this sector — the most volatile, thanks to its picky core customers — are poised to hit $1 billion in sales this year.
Urban Outfitters Inc., for example, reported early last month that annual sales went over $1 billion for the first time to $1.1 billion, while Aéropostale Inc. watched fiscal-year 2006 revenues top $1.2 billion from $964.2 million the previous year. Meanwhile, American Eagle Outfitters Inc. said revenues rose over $2 billion for the first time last year.
So where are these retailers going, now that they’ve entered the billion-dollar zone? They’re developing new concepts, of course.
“Once [retailers] do get $1 billion in sales there’s really not a lot of room to grow from there,” said Brady Lemos, an analyst at investment research firm Morningstar. “I’m looking for a new concept at that point, and one that makes sense for that company.”
“How ever you slice and dice it, depending on the market segment and how narrow it is, $1 billion [in sales], or thereabouts, seems to be the point where retailers start to look for their next growth vehicle,” said Holly Guthrie, senior vice president at Morgan Keegan & Co.
Indeed, the batch of new specialty retail concepts that are in the works for these retailers means that reaching the next billion isn’t far off and is likely to happen — if the concepts are successful — within the next couple of years. But in the meantime, these retailers also will benefit from meaningful expense leveraging.
For Lemos and Guthrie, the genesis of the new concept should begin before, or at least as a retailer gets close to, reaching the total number of U.S. malls it plans to be in with its core concept.
“We think there are about 1,250 different malls in the U.S. and 800 to 900 are considered quality malls that [specialty retailers] want to get into. Once they reach 800 stores, or 3,000 square feet, that’s $400 a square foot. So that’s $1.2 million a square foot times 800 stores, which gets them to about $1 billion in sales,” Lemos explained.
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The New Concept Driver
Knowing they’re reaching the full, store-base potential for their namesake brands, specialty retailers are attacking the market with new concepts catering to what they see as underserved demographics.
Aéropostale launched in July its second concept, Jimmy’Z, a celebrity-influenced brand aimed toward men and women 18 to 25 years old that currently has 14 stores. Chris Finazzo, chief merchandise officer of Aéropostale, told WWD last year that the company spent two years conceptualizing Jimmy’Z, knowing that the company was approaching $1 billion in sales with 600 to 675 Aéropostale stores, which is about two-thirds of the way toward the company’s eventual goal for Aéropostale stores.
For its part, American Eagle will launch this fall a second concept, a sportswear brand for men and women 25 to 40 years old called Martin + Osa. The store base of its first, namesake concept, however, is nearly saturated at 870. Analysts point to that saturation as a reason why the company was slightly behind the curve in planning its second concept.
But American Eagle already has identified new growth drivers. The retailer is building out its intimates subbrand, named aerie, and is also at work on a third concept that could potentially focus on Baby Boomers, analysts said.
Guthrie speculated that American Eagle’s yet-to-be-revealed third concept could focus on completing the lifestyle of its current and future American Eagle and Martin + Osa customers by offering apartment or home wares.
In the case of Urban Outfitters, the retailer-wholesaler is seeing ongoing traction and positive customer reaction from its three existing concepts: Anthropologie, Free People and Urban Outfitters. In contrast to other specialty retailers, Urban Outfitters didn’t wait until around $1 billion in sales before thinking up new concepts. After opening the first Urban Outfitters store in 1970, wholesale, which includes Free People, was developed in 1984 and Anthropologie opened its first door in 1992.
Many market watchers would agree that a retailer that is always thinking about developing — and that is constantly testing new ideas or concepts in physical stores — probably has a slight advantage over those who wait until a first concept has saturated top-level malls.
Lori Wachs, portfolio manager at Delaware Investments, said, “I haven’t seen $1 billion as the hard and fast number” for retailers to begin formulating new concepts. “I prefer a cleaner story. I would love the core company finding it early on…trying to find that next concept before they reach $1 billion.”
That’s why Wachs likes Urban Outfitters. “They are truly brilliant at figuring out where there’s space in the market,” she said. “It’s not just going to the mall…. When you spend time in their stores, you’re in an apparel experience.”
Recently, Urban Outfitters suggested it’s brewing up a new concept, too. According to analysts, the company may be seeking to cater to customers older than its current Anthropologie brand, which targets women in their early 30s to mid-40s.
“There’s definitely an opportunity in lingerie because there’s no one who really does it the way Europeans do it here in the U.S.,” Guthrie said.
But Urban might have some competition in the lingerie space. Chico’s FAS Inc. began testing in 2004 a lingerie concept when it had around $1 billion in sales. Chico’s is at work on the lingerie concept, Soma by Chico’s, which has 18 stores, and it’s also maturing the White House|Black Market concept it purchased in 2003 while incorporating Fitigues, a high-end brand the company purchased in late January, into operations.
Elsewhere in the specialty market, J. Crew Group is close to hitting the $1 billion sales mark when it reports fourth-quarter results in the next couple of weeks. And Guess Inc. is on track to have sales go over $1 billion for the first time in the current fiscal year. Both companies are hard at work on newer concepts, with J. Crew having launched its Crewcuts kids’ division this month and Guess focused on expanding Marciano and Guess accessories-only stores.
Finish Line Inc. unveiled its first new concept, called Paiva, a high-end athletic concept geared toward women 25 to 40. The company hit $1.31 billion in sales in its latest fiscal year versus $1.17 billion the previous year.
Retailers embarking on their second new concept have plenty of peers who have multiple concepts to look toward for inspiration. When Abercrombie & Fitch Co. reached the $1 billion mark in 1999, it already had launched in 1998 its second concept, abercrombie, which is for kids. Hollister, the retailer’s surf-inspired brand, launched in 2000, just after the company hit $1 billion in sales. A&F, which had sales of $2.78 billion last year, began testing Ruehl in fall 2004. Industry sources say A&F is working on another top-secret concept.
Pacific Sunwear of California Inc., which surpassed the $1 billion revenue mark in 2003, launched its second concept, D.e.m.o., a hip-hop apparel chain, in 1998. The company, with $1.39 billion in sales last year, opened last week its third concept, One Thousand Steps, which focuses on footwear.
Benefits to $1 Billion
By reaching $1 billion in sales, retailers can leverage selling, general and administrative expenses by buying office supplies in bulk, combining merchandise shipments and investing in inventory management software.
“For some retailers, $1 billion [in sales] is important for them to be able to optimize the best [software] system to be able to implement and mark down their inventory optimally,” Wachs noted.
Meanwhile, retailers with multiple concepts also can leverage sourcing and product design capabilities.
To be sure, the biggest SG&A advantage kicks in at around $3 billion in sales. A 2004 WWD analysis found that companies with sales between $500 million and $1 billion had an average SG&A expenses advantage of 240 basis points over smaller competitors. But companies with sales of $1 billion to $3 billion were able to leverage SG&A expenses at least 280 points.
While expense leveraging helps, it’s still more difficult to reach $2 billion in sales after hitting $1 billion, especially if a retailer doesn’t have a new concept.
“I think for a lot of these brands, that’s a really difficult step unless there’s another concept involved,” said Guthrie. “You can build two $1 billion concepts, but a lot of these segments are catering to a subsegment of the total population. They don’t have a lot of the necessary components of breadth and pricing to get to [another] $1 billion in sales” with just one concept.
But with more than one concept, a retailer has more divisions to execute successfully. New concepts don’t always work. Recall Pazo from Chico’s and Zutopia from Wet Seal Inc. as two concepts that failed in the last few years.
Finally, for public companies, management always has to contend with Wall Street. For Morningstar’s Lemos, “Wall Street gets nervous if [retailers] don’t have a new concept coming out.”
Guthrie looks at it a little differently by focusing mostly on the stock’s valuation.
“If the valuation is high, if [the stock is] trading at a premium to its growth rate, yes, the expectations are for them to continue to deliver the same return on equity and return on investment,” she said, adding, “It’s always a delicate dance with Wall Street.”