|Up-and-Coming Retailers: Where Are They Now?|
By Kathleen Culliton JUL 11, 2012 11:00 AM
In 2010, we predicted that nine new retailers were going to be game changers in the industry. Now it's 2012 and we're taking a second look.
What We Said Then: Look out Saks Fifth Avenue (SKS). In 2010 the high-end department store struggled to compete with discount retailers and witnessed an 8.5% drop in revenue, while discount stores like T.J. Maxx (TJX) raked it in. But bargain markets couldn’t provide the same sophistication inherent in the Saks persona, leaving a gap in the industry for those still seeking high-quality at recession-friendly prices. But then came Gilt Groupe.
Two years ago, we liked that while Gilt, an online-only retailer, offered discounted designer clothes, shoes, and accessories (stocked by acquiring excess inventory from other well known brands), it also maintained an elite quality with its “invitation only” membership scheme and its time-limited sales. And we liked its growth. Over the course of two years Gilt expanded to included products for men, women, home, and travel, all the while reaching an increasing consumer base in the US and Japan. Its marketing also impressed us. The Gilt presence was strong in the magazine industry; rave reviews came from Vogue, Marie Claire, and InStyle, and Gilt was named the E-tailer of the Year by Footwear News. Its viral success left us with just one question: What about an IPO?
What We Think Now: Gilt continues to shine. In 2011 the company raised $138 million from investors like Goldman Sachs (GS) and General Atlantic, and generated about $500 million in annual revenue. Its current worth is estimated at $1 billion, making Gilt the second most valuable e-commerce company with inventory in the world, after Amazon (AMZN). The influx of income has made major expansion possible, and Gilt Groupe now runs a variety of discount outlets online including Gilt City, Gilt Home, Jetsetter, and Gilt Taste. Founder Alexis Maybank reports spikes in online traffic in emerging markets like South Korea, and sells to about 200 countries. As for the IPO? Maybank told Fox News in April that while Gilt is neither planning nor preparing an IPO offering, she and her team will be taking a good look at the possibility in 2013. Let’s hope the Facebook (FB) debacle hasn’t scared them off.
What We Said Then: The Timberlake line, William Rast, was created in 2005 by Justin Timberlake and his friend “Trace” Ayala, with backing from Portfolio of Progressive Luxury Bands. The idea was to revamp the denim culture brand. In 2009, we liked the marketing of its classic denim line, which used a light touch when incorporating Timberlake into its advertising. This allowed the company to build on JT's popularity without banking on it (and avoid Ashton Kutcher-style humiliations). But we worried that with the average price of William Rast jeans coming in at $165 (2010 dollars), the company might not be able to compete with the wide appeal of Guess? (GES) or Levi’s, who can pull in a cool billion in one year.
What We Think Now: William Rast has continued to evolve and to grow, a must in the fashion world which demands modernity at a heady pace. In 2010, William Rast branched out from its Bloomingdale’s (M) and Nordstrom (JWN) boutiques to open its own stores on the West Coast.
Since then the brand has expanded to include ready-to-wear collections for men and women, an eyewear collection, and a women’s footwear collection. All of which have been well received. In 2011 William Rast received the prestigious 33rd Annual American Image Award. Marketing continues to be a strong point; the brand embraced viral film and social media strategies to spread the word (clearly Timberlake was taking notes during the social network). And company stores still stand in LA and Palm Spring, with new outposts in Miami and San Jose.
What We Said Then: It’s difficult to buy into the suggestion that a good bra will change a woman’s life, but it’s easy to imagine the same woman spending a lot of money to give it a try -- especially when a company comes along like Intimacy, Susan Nethero’s lingerie chain that turned bra-fitting into a science. Despite the strong presence of Victoria’s Secret (LTD), Intimacy thrived in the 2000s due to in part to some highly strategic marketing (Nethero’s guest appearances on Oprah's and Tyra Banks' shows quickly turned Intimacy from a quirky Upper East Side Boutique into a national trend), and in part to the high quality of the product -- high brand bras with twice the size variety offered by Victoria’s Secret and fitted by specialists. Audiences approved. By 2009 Intimacy had expanded to nine stores from a mere two in 2004, with plans to open four more locations in 2010, and 25 outlets by 2014. We didn’t think that the Intimacy’s nine locations would pose a threat to Victoria’s Secret’s 1,043 per se, but we knew a strong niche market when we saw one, as did Intimacy.
What We Think Now: Intimacy is well on its way to achieving its 25-store goal, with 18 locations in the United States, but it’s also facing competition. Former Microsoft (MSFT) employees Aarthi Ramamurthy an
What We Said Then: We liked the Barcelona retailer because of its global appeal and its savvy marketing approach -- creating urgency by offering a limited number of uber-trendy clothes for a limited time -- and its striking ability to identify runway trends and reproduce them on a budget. We didn’t like its US presence: Mango opened in 2006 and had only opened 12 stores (as compared to Spanish competition Zara who had 45). What was the tipping point? For us, it was the announcement of a partnership with JC Penney (JCP) to release under the name MNG by Mango. By 2011 it planned to expand Mango to over 600 stores.
What We Think Now: We still have faith in Mango, but it’s JC Penney we’re worried about. This year the major retailer has done some major restructuring, which has meant bringing in more small retailers for a store-in-store concept to mirror that of its lead competitor Target. But it isn’t going well. JC Penney lost $163 million in its first quarter this year, and are expecting to spend $800 million more on restructuring. And just when it was becoming pretty dependent on investor cash, Fitch Ratings downgraded the company from “Stable” to “Negative."
Mango, however, is going strong. In 2011 Mango signed Kate Moss as the new face of the company, which only served to further enhance the brand’s Americana identity. Today Mango has over 8,600 employees and over 300 outposts within the United States. Sportswear International reports that turnover for online sales reacher 36 million euros in 2011, a 72% increase from 2010. Mango employs 11,000 workers worldwide and owns more than 2,400 outlets in 107 countries. In 2012, the brand will enter Myanmar and Pakistan, as well as amping up its efforts in Russia and China.
What We Said Then: When we last reported on Rue21 (RUE), it was a phoenix among spring chickens. Rising from the ashes of bankruptcy in 2002, it re-emerged as tween-to-teen retailer specializing in prep and 1980s nostalgia. What most immediately impressed us was the “dazzling” IPO offering in November of 2009 when shares priced at $19 in the morning hit $24.30 by end of day. And while we worried about the competition from market giant Old Navy (GPS), we liked that Rue21 store sales held up strong after the IPO, rising 13.5% in one quarter. We also approved of its steady growth which increased net sales 40.7% from $97.5 million in 2008 to $137.1 million in 2009. When last we reported, it had even bigger plans for 2010, including an agenda to add 100 stores. What we saw for the brand was clear skies.
What We Think Now: Rue21 continues to fly high. Reports from the company’s annual shareholders meeting show both strong growth and big goals. In 2011 Rue21 opened 120 new stores, bringing the tally to 755 locations total, and by 2014 CEO Robert Fisch hopes that number will reach 1,000. The steady growth in 2011 is documented quite clearly in the numbers; net income increased 28.8% to $39 million during the fiscal year, and in the first quarter of 2012 net income rose another 20.6%. Fisch also confirmed that the Rue21 will commence in an E-commerce initiative, strengthening its position further by offering Web sales for the first time.
True Religion |
What We Said Then: First of all, we enjoyed the puns. Call it heavenly or a divine force -- when True Religion Brand Jeans (TRLG) hit the markets in 2002, it came with a mission. CEO and chairman Jeffrey Lubell founded the high-end denim brand to sell in top market department stores like Bloomingdale’s (M), Saks Fifth Avenue (SKS), and Nordstrom (JWN). We also liked the star power on display; the company embraced super-model chic, casting Gisele as their spokesmodel and pricing its jeans high enough to raise eyebrows (one pair might cost as much as $650). We also liked the timing. As True Religion blossomed into a fashion phenom, competitors like Diesel SpA and Molvena struggled with leadership issues in the midst of enormous expansion plans in 2009. Meanwhile, True Religion opened 24 new stores and reported growth in every segment except for the US wholesale. And while shares had highs and lows, in early January it had just begun to stabilize.
What We Think Now: True Religion has settled nicely among the elites of retail and reports healthy growth that its leading competitors cannot. As of March 31, the company owned and operated 109 retail stores in the United States, five in the UK, four in Germany, four in Canada, four in Japan, and one in the Netherlands. At the end of 2011, its cash balance, without debt, was $200 million. The company is "bursting at the seams with cash," according to Forbes reporter Abram Brown. What distinguishes the brand from the competition? Margins. According to Sean Williams at Daily Finance, True Religion doesn't have to discount its merchandise to sell it, unlike Abercrombie & Fitch (ANF) and Urban Outfitters (URBN). And despite recession wariness, its gross margin has actually increased. Either True Religion is benefiting from an excellent management team and the continued quality marketing of a high-demand product, or it is just truly blessed.
What We Said Then: The Williamsburg-born Brooklyn Industries opened in 2001 offering the hippest of the hip in hipster clothing and accessories (not including rags, of course). Founded by New Yorker Lexy Funk and her Turkish-born husband Vahap Avsar, the store had both authenticity and broad appeal. Its Brooklyn image, bolstered by a commitment to ecology, was easily marketable online and quickly grew nationwide to include a thriving website and 12 stores in three states. We liked how deftly the company balanced artistry and commercialism, and we liked Funk, the adventurous entrepreneur who wasn’t afraid to speak her mind. When controversy hit after the discovery that Brooklyn Industry manufactured one-third of its clothing in China, Funk was well-spoken in her defense; she said that the company's Chinese partners had been well vetted and practiced ethical business. If we had one concern about Funk, it was that she held no degree in business. Would a former professional photographer be able to handle the rigors of expansion in a tumultuous economy?
What We Think Now: Brooklyn Industries, ever the trendsetter, is still mixing things up. This May, it opened its 14th store in Greenpoint, Brooklyn, built from only six sheets of sheetrock, recycled shipping pallets, and found vintage tables and chairs. Wind power is the store's sole source of power. The company's latest marketing scheme is also turning heads. Inspired by Spike Lee’s Jungle Fever, storefronts are now asking passerbys the big questions -- for example, “How do you think about race?” Some find it off-putting, but it does keep the Brooklyn in Brooklyn Industries. On the finance side, Funk is also preparing to make big changes. Funk recently reported to Crain’s that Brooklyn Industries' latest innovation will be revamping fast fashion, the business model that made H&M and Forever 21 Gap Inc.’s (GPS) worst nightmare. "When you think fast fashion, you think of cheap designs copied from the runway," said Funk, "We want to innovate with original designs but do it in a fast manner." Her plan of action is simple: Get production back to New York and get products on the shelves fast. Considering that fast-fashion annual revenues increased 18% from 2006 to 2010 (compared to Gap’s measly 2%), Funk can probably expect to see big rewards if she can keep New York costs down.
What We Said Then: We called it the Nike (NKE) of the millennium, only with less running, jumping, and sweating -- and with more sun salutations and Ayn Rand quotations. Lululemon (LULU) earned quick success by accurately identifying a lifestyle and then taking charge to shape it. The zen-meets-cool yoga trend exploded just as Lulu came out with its first 119 stores across North America. Lululemon took the Apple path: It offered superior products and thoroughly prepared employees to be truly helpful and well-informed. The company also amped up its image by offering free yoga classes, which helped offset consumer skepticism about the high prices. What we liked about Lululemon was how successfully it branded itself for those who wanted both health and chic -- because frankly, who doesn’t?
What We Think Now: As a company, Lululemon remains healthy and chic. Although the company has currently experienced some setbacks on the market (it reported a disappointing earnings estimate on June 6, and stocks promptly dropped 8.8%) market analysts encourage a rosier picture. The dip in profits might portend an oncoming entry into the sporting good arena, reported analyst Brian Sozzi to the Wall Street Journal. A field dominated by Nike and Under Armour Inc. (UA) might soon have a newcomer with whom they must contend. And since the company’s revenue has more than doubled over two years, with predictions coming in at $1.34 billion in revenue for 2012, you have to figure a company that can sell that many $112 yoga pants won’t really struggle to get sneakers off the shelves.
What We Said Then: For some, the recession was a blessing. Ted Rubin, the head of marketing for budget makeup company E.L.F told Minyanville, “[Before the downturn] people would whisper about using E.L.F. They’d say, ‘Yeah, I use E.L.F. lip gloss, but I’m a M.A.C. buyer.’ Now, cheap is chic, and everybody is looking for ways to save a buck.” We liked E.L.F.’s simple gimmick of one buck makeup; it had strong appeal in an industry where a foundation compact could easily sell for $50. The clientele also liked this pricing. Target (TGT) and K-Mart shoppers reveled in the affordability and word-of-mouth propelled E.L.F into a household name. Social networking platforms like Facebook, Twitter, and YouTube (GOOG) quickly became the cornerstone of marketing; in 2010, the company had 40,000 Twitter followers and 30,000 Facebook fans between its various sites. We also liked E.L.F’s online-only business model, which allowed them to reach international boom markets like China and India at a reasonable cost. We agreed that as Rubin put it, “Value will be at the heart of commerce for a long time to come despite upticks in the economy. Brands that ignore this new paradigm do so at their own risk."
What We Think Now: The recession might have ended, but it looks like bargain shopping is out of the closet for good. E.L.F. continues to thrive, thanks largely in part to CMO Rubin’s efforts on social media. Rubin is also a regular speaker on how to revamp a company’s social media presence, thanks largely to his success in promoting E.L.F. Recent developments in marketing include the “Beauty at All Ages” competition, which offered clients the opportunity to intersect even further with E.L.F. by becoming its next spokesmodel. According to sources at the company, thousands of women applied for the job. Clearly the E.L.F. stigma is a thing of the past. Growth has remained strong. The company began with a catalogue of 13 products -- today it offers over 300, including products in its new sectors E.L.F. Studio for makeup professionals, the more natural E.L.F. Minerals, E.L.F. Essentials, E.L.F. Bath & Body, and E.L.F. Element. E.L.F. products are currently sold in 17 countries.