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Specialty without The Special

BY CSA STAFF

Gap Inc.’s problems have been well-documented. Between a loss of product cachet, trouble with information systems, an underperforming CEO and poor marketing campaigns, it seems that just about everything has been blamed for the retailer’s problems.

But one wonders, with more than 3,000 stores, perhaps Gap has simply expanded beyond the bounds of its target market. It’s rather ironic really: While many retailers complain (and rightly so) that their technology infrastructure inhibits their growth, Gap, a company with a solid technology infrastructure that would support expansion almost limitlessly, finds itself otherwise limited (no pun intended).

Enter Chico’s, my former favorite stock, and many of my friends’ favorite brand. Chico’s found an underserved niche, and has served it well.

Women of a certain age and size can be assured of finding really interesting products that actually fit them. Even the size numbers have been changed to protect the customer’s self-esteem, so where other retailers sell clothes in size 14, Chico’s touts a size 3.

Over the past few years, the chain grew and comparable-store sales rocketed quarter after quarter. Then along came acquisitions and new businesses, including Chico’s purchase of White House/Black Market and its launch of Soma, selling lingerie to the original banner’s target customers. Chico’s was special, and everyone knew it.

Last year the company opened 150 new stores, the most in its history. But 2006 was unique for Chico’s in other ways, too. Last August, for the first time in 111 months, Chico’s posted negative year-over-year comparable-store sales, and October sales were flat in both Chico’s and White House/Back Market.

The company’s CFO blamed poor sales on “higher price points and more casual styles.” Of course, the company is shifting back to its former price points, even as it plans to open 80-plus stores this year.

Chico’s made big changes on the technology front as well in 2006. In May, Chico’s chose SAP as its “end-to-end solution” to help fuel the company’s growth.

Infrastructure changes are required when a company moves into the rarified air of Tier 1, and as some of Chico’s systems began to groan under the company’s growth, there’s no doubt that this was a smart move.

But a disturbing pattern is emerging. Chico’s is starting to smell a lot like Gap. Catering to a niche market, the retailer still sees untrammeled growth ahead.

The hard question is not technology-related. The real question is: Has Chico’s saturated its target market?

Is there a cap on a specialty retailer’s growth? By definition, does it reach a point when growth is unreasonable? Are its customers getting older and heavier and slipping out of its core demographic?

Our hope, of course, is that Chico’s comes out of its swoon, has a successful system implementation, and returns to dramatic comparable-sales improvements.

However, our fear is that it is walking down the same path as Gap. If it truly has saturated the market, comparable-store sales will languish.

And should business initiatives fail, suggestions will be made that the founders should never have retired, and the company will likely blame declining or flat comparable-store sales on the “distraction caused by a new infrastructure implementation.”

When the SAP deal was announced, some analysts, including those at RSAG, felt this would be a Rubicon for SAP—a mid-sized apparel retail winner headed for Tier 1 that needed a fast implementation—and chose SAP.

We ourselves asked the questions: How rapidly would the system get implemented? Would the company falter during the implementation?

But the bottom line is we’ve changed our assessment. Chico’s success or failure will not be a statement about SAP. It will be a statement about the notion of infinite growth in a finite market.

Technology is an enabler. The best technologies may facilitate growth, but as we said earlier, growth can be limited (still no pun intended). The operation may well be successful. But the patient may still struggle.

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Weekly Retail Fix

BY CSA STAFF

THE NEWS: SAM’S REALIGNS STORE-LEVEL MANAGEMENT

BENTONVILLE, ARK. Sam’s Club is changing the management structure in its stores. In the realignment, approximately 250 positions will be eliminated, Wal-Mart Stores announced last week. The company said it’s replacing five lower level management positions at each Sam’s Club location with three new higher level and higher paying assistant manager positions.

“This is not a cost cutting effort. We expect a slight increase in payroll upon completion of this change,” said Sharon Orlopp, senior vp of Sam’s people division.

THE FIX: Differentiation would better help Sam’s

Since Sam’s decided that its refocus on the business customer was too narrow, it has sought to find ways to make its clubs more attractive to primary shoppers, i.e., women. And that’s a pretty tough row to hoe, as Costco has done a pretty good job at satisfying the club customer in general and BJ’s has been going after female shoppers for several years now, with some success.

Having fewer managers with more direct responsibility could create a tighter knit club-level management and shorten lines of responsibility and accountability. Yet, without differentiating the offering, execution isn’t going to overcome all of Sam’s challenges.

That being said, a store-level management realignment might be overlooked at other retailers, but, this being Wal-Mart, everyone has to make a big deal about it. But that’s the price you pay as the big guy on the block.

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BY CSA STAFF

THE NEWS: TOYS ‘R’ US EARNINGS GAIN 40.1%

WAYNE, N.J. Toys “R” Us today posted net earnings of $199 million for its critical fourth quarter, which meant it turned a profit for the fiscal year ended Feb. 3. But special charges and gains had an impact on its numbers.

Sales for the previous fiscal annum were $142 million, the difference translating into a net earnings increase of 40.1% year over year. For the last fiscal year, Toys “R” Us posted net earnings of $85 million versus a net loss of $384 million for the previous period.

Operating earnings in the fiscal 2006 fourth quarter gained 53.1% to $571 million versus $373 million for the fourth quarter of fiscal 2005. For the last fiscal year, operating earnings were $649 million versus an operating loss of $142 million for the previous period.

THE FIX: Improved shopper experience ups comps

Of course, any observer has to take into consideration special financial circumstances. Fiscal 2006 operating earnings were positively impacted by $96 million from gains on property sales, slightly offset by restructuring and other charges. In fiscal 2005, operating earnings were negatively impacted by $410 million in costs relating to the merger of the company, as well as $58 million of costs and charges relating to contract settlement fees, restructuring and other charges.

Still, sales were trending up at last year’s end. Net sales gained 15.8% to $5.7 billion. In the full fiscal year, net sales advanced to $13 billion, up 15.2%.

Comparable-store sales for the Toys “R” Us’ U.S. division gained 0.6% in fiscal 2006, and that represents the division’s first comps increase in six years. Comps at Babies “R” Us were up 4.8% and those at Toys “R” Us international were up 2.6% for the fiscal year.

Jerry Storch, chairman and ceo of Toys “R” Us, said the company is “pleased with the strides we made in fiscal 2006 to improve at all levels of the organization and reposition the company for profitable growth over the long term.”

He said the company’s new management team has been focusing on executing a strategy that would turn the retailer into a global toy and baby products authority.

“This translated into higher overall sales, positive comparable-store sales, improved gross margins and strong operating earnings growth for the 2006 fiscal year,” Storch asserted. “The key to our strategy has been improving the customer shopping experience in our stores. We are accomplishing this by delivering a more compelling merchandise selection, better service and a cleaner and more comfortable shopping environment.”

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