Wal-Mart Stumbles with Fashion Line

After reporting record sales declines and a dismal outlook for the second fiscal quarter of 2007, Wal-Mart’s marketing department is backpedaling furiously from the company’s venture into fashionable apparel, hoping to regain the customer base that prefers low prices to high fashion. This not only indicates poor apparel sales for the foreseeable future, it also points to Wal-Mart’s continuing struggle (and arguable failure) to compete in its own market.

Fashion Faux Pas Hurts Wal-Mart

Wal-Mart’s struggles in fashion apparel appear to be worsening.

Stacks of unsold clothing are clogging store aisles and pressuring profits. Now, Wal-Mart Stores Inc.’s first designer line, by designer Mark Eisen, has been pulled from several hundred of the more than 3,000 U.S. stores that carried it, according to a person close to the situation. A Wal-Mart spokeswoman confirmed the line had been pulled from some stores but didn’t know how many.

Wal-Mart’s chief financial officer says clearing out stocks of unsold clothing is going to be a chore and could pressure margins all summer. “We’re a little heavy in apparel,” Thomas M. Schoewe said in an interview last week. “It’s all about getting the stores cleaned up right now.”

The flush inventories mark a significant miscue from a year ago, when Karen Stuckey, a Wal-Mart apparel-merchandising executive, said of the addition of Mr. Eisen and the retailer’s new-found fashion focus, “We’re going to rock in apparel.”

The setback suggests Wal-Mart’s apparel problems go deeper than a misfire with ultratrendy attire that led to a sales stumble late last year. At that time, an in-house-designed line of skinny-legged pants and nightclub wear, called Metro7, turned off customers, who went shopping elsewhere.

Wal-Mart’s inventories jumped 10.3% in the fiscal first quarter, ended April 30, to $35.2 billion from a year earlier, driven by unsold apparel, home decor and outdoor products. About $2 billion of the increase represents unsold spring clothing and home goods that are expected to depress profit through the summer, analysts estimate. The Wal-Mart spokeswoman declined to comment on the estimate.

The latest woes involve Wal-Mart’s efforts to bring brand-name designers into its orbit. Wal-Mart is seeking to better compete with Target Corp., J.C. Penney Co. and Kohl’s Corp., which have a reputation for higher-end clothing than what Wal-Mart carries.

A year ago, Wal-Mart signed Mr. Eisen, a former AnnTaylor Stores Corp. design executive, to put some sparkle into its George line of everyday women’s apparel, which although successful outside the U.S. has been weaker here. Mr. Eisen, known for his line’s fit and styling, launched knitwear label Karoo in 2005. The Karoo line sells at high-end retailers such as Bergdorf Goodman, Neiman Marcus and Nordstrom.

Mr. Eisen developed a collection of women’s sportswear within the broader George line called George M.E., for the designer’s initials. It featured $22 cardigans and $70 suede jackets, among other items. Wal-Mart showed the collection at New York’s fashion week last year, gathering positive reviews. But problems surfaced almost immediately. The fall line was supposed to appear in mid-August, but Wal-Mart put the apparel in stores a month early—too soon for many shoppers—to fill gaps in other lines.

Patricia Edwards, a portfolio manager at financial-services firm Wentworth, Hauser & Violich, says little marketing of Mr. Eisen or his line followed the fashion-week launch. Wal-Mart customers who didn’t shop at Neiman Marcus were unlikely to have heard of him, she said. “Wal-Mart is so good at providing things based on price that I’m not certain they’ve yet grasped how to promote items that aren’t solely based on price.”

The Wal-Mart spokeswoman declined to make executives available to comment. Mr. Eisen didn’t return calls seeking comment. A person close to the designer said sales had recently improved, now that the line appears in fewer stores.

The inventory overhang has several analysts paring this year’s profit estimates by as much as five cents a share, citing the effect of working through the excess inventories and weaker sales. Bank of America now expects Wal-Mart to post annual profit of $3.13 a share. About 10% of its revenue comes from apparel.

“When 10% of your business is not doing what you want it to, that’s a lot of drag,” Ms. Edwards says. “It’s going to be a drag until they get it right. The question is, when will they get it right?”

Wal-Mart has a couple of bright spots in its fashion stable. A line of young men’s fashions, called Exsto and introduced in 2006, was expanded to 500 stores from the original 300. The company is planning to make Exsto fashions available in boys’ sizes as part of its back-to-school line, the spokeswoman said. Wal-Mart says George M.E. remains a part of its apparel strategy and that it will announce a freshened line later this year.

It also recently nominated retail-turnaround guru Allen Questrom to its board. Mr. Questrom helped revitalize Penney and Barneys New York Inc. and engineered Federated Department Stores Inc.’s acquisition of Macy’s.

Despite its fashion efforts, Wal-Mart’s customers in polls don’t list the retailer as their first choice for clothing purchases, says Wendy Liebmann, president of consulting firm WSL Strategic Retail. “People who shop Wal-Mart regularly think of Wal-Mart as the No. 2 or No. 3 place they shop most often” for apparel, she says. Customers don’t yet perceive the company as a credible arbiter of fashion, she says.

Wal-Mart’s fashion woes surfaced last year with the in-house line of nightclub wear called Metro7. Its gold lamé vests and skinny-legged pants fell flat with customers, leading to anemic same-store sales last fall just as Wal-Mart was preparing for the holiday sales rush. Wal-Mart initially planned to introduce Metro7 in just 500 stores but increased the number to 1,500 last year in an effort to become known as a fashion source. It pulled the line out of 500 stores earlier this year. Overall, the retailer has roughly 4,000 U.S. Wal-Mart stores.

Complicating a turnaround are continued economic pressures. The rising price of gasoline is damping purchases of home decor and clothing.

Wal-Mart isn’t alone in feeling the pinch of higher energy prices. Retailers including Sears Holdings Corp. and Target had declines in same-store sales, those at stores open at least year, in the first quarter. Department stores emphasizing designer brands have fared better. Penney raised its profit outlook for the year after first-quarter results were buoyed by new launches, and it signed Polo Ralph Lauren Corp. to develop a new brand.

Posted by Alex Goldschmidt on Monday, May 21, 2007

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