The Apparel Top 50: A Rising Tide

As the economy recovers and trade barriers disappear, the masters of strategic positioning maintain their lofty positions in the upper echelon of the apparel business.

Behind the Ranking
The Apparel Top 50 is a ranking of the most profitable apparel firms whose stock is publicly traded on U.S. markets, and whose sales are greater than $100 million annually. For the purpose of this ranking, profitability is measured by the level of net income as a percentage of sales. l Apparel's goal is to recognize the financial performance of the market's most influential firms that are primarily focused on the apparel business, including design, product development, sourcing and distribution. l As with its other editorial content, Apparel welcomes feedback about The Apparel Top 50. (Contact associate editor Michael Cole at [email protected].)

Capitalizing on an improving economy and an environment less restrained by quotas and other trade barriers, this year's Apparel Top 50 companies have tapped gold through multichannel marketing, sound allocation and assortment, brand building and a focus on customer loyalty to achieve profitability.

Starting with Chico's FAS, which has ranked No. 1 on our profitability list for the past three years, our latest Top 50 report explores some of the strategies fueling recent growth.

Chico's knows profitability
From modest beginnings, Chico's, the vertically integrated retailer of high-end women's clothing and accessories, has created a successful business model now envied by others throughout the industry.

Founded in Fort Myers, FL, in 1983, Chico's, which just eclipsed $1 billion in annual sales, began, humbly enough, as a Mexican-themed folk art shop and boutique for its South Florida clientele.

Speaking at a retail analyst presentation in April, Chico's CFO and COO Charlie Kleman revisited the retailer's dramatic evolution: "When we went public [in 1993], we were an all-resort-wear all-cotton-casual company," he said. "That worked well until the mid '90s, but we had to reinvent ourselves. We accomplished that with new fabrics and new designs, a new cut and new fits. All of them arrived in June of 1997, and that's when the brand really took off."

Since then, annual same-store sales have grown in double-digit percentages every year, even through the stagnant economic times. Chico's and its two recently added branded concepts, White House/Black Market and Soma, are targeting middle-to-high-income women ages 25-55. The enterprise, with 688 stores as of this writing, is particularly going after the older, growing and increasingly attractive baby-boomer market. Its clothes are made mainly from natural fabrics that include cotton, linen and silk.

The Chico's assortment is divided into three primary segments composed of the core Travelers' collection, novelties and seasonal novelties. Travelers has been a best seller since 1998, and is customized for 30 different body styles. The two novelties categories feature fresh styles in response to the latest trends, and are rarely reintroduced once they are sold out. "Our customers demand newness every day, and so we just keep replenishing new styles into the store all the time," Kleman said. "We buy generally 8,000- to 10,000-[piece] lots, so each of our stores gets five to eight units. And when they're gone, they're gone forever."

Along with its strategy to constantly freshen its stores' merchandise, Chico's also attempts to create unique shopping environments through store differentiation. For example, one 150-year-old, 1,474-square-foot shop in Sonoma, CA, maintains the motif consistent with its origins as a 19th century drug store.

"Our stores are not cookie cutter, and that's important to our brand," said Kleman, who noted that many stores are often mistaken as independent specialty stores. "Our customer wants to think she's at a brand new Chico's everywhere she goes, and we want that store to fit into the community. That's why you'll see different shapes, sizes and looks."

An oft-overlooked linchpin of Chico's growth, according to Kleman, has been its "Passport" frequent-shopper club program, now 5 million members strong. Upon purchasing $500 in merchandise, shoppers become members for life with benefits including a 5 percent in-store discount and free shipping of merchandise ordered from its catalogs. First offered in 1991, the Passport club was abandoned in 1995 and then reintroduced in 1999. Chico's expanded its multichannel offering the following year, launching its catalogs and web site in 2000.

Today, 93 percent of Chico's sales are Passport-related, according to Kleman. "Our brand is not cut like any others," he said. "It's sized from 0-3. It takes a customer awhile to learn that brand and understand it, but once she does, she becomes very loyal to it. If we need to improve traffic, we drop a postcard and can get 20 percent of those shoppers to come in. When you have as many as we do to draw from, that becomes very powerful."

With a loyal customer base captured on the Chico's end, the company is focusing on expanding its brand portfolio. In 2003, it acquired White House/Black Market, with a younger target customer of ages 25-50 (vs. 35-55 for Chico's). Kleman said intimate apparel retailer Soma, launched last year, is an extension of the Chico's brand and is marketed to "graduates" of other similar brands, such as Victoria's Secret.
"We believe we have unique and growing brands and huge and growing niche markets," Kleman said. "The baby-boomer market is going to be a monstrous market that grows by leaps and bounds over the next 10 years, and we believe we're in the middle of that. The best is yet to come."

The rest of the best
Apparel briefly profiles the 30 most profitable firms of this year's Top 50, touching on recent highlights:

2. Columbia Sportswear: The Portland, OR outdoor apparel and footwear producer, which is the No. 1 skiwear seller in the United States, eclipsed $1 billion in sales, increasing revenue 15 percent over 2003. The company credits its sourcing team, including overseas management, for its important role in powering perennially strong net margins. Taking on new terrain in its branding endeavors, the company announced in May a licensed agreement with World Wide Cycle Supply Inc., which will produce a line of Columbia Sportswear bikes.

3. American Eagle Outfitters: Moving up from No. 33 on last year's Top 50, the teen-oriented retailer climbs the farthest among companies appearing on the list in the past two years. Improved results have been attributed to strong denim sales and a return to its roots -- the high-school market -- after venturing away to target the college-age consumer in recent times.

4. Urban Outfitters: Sales have skyrocketed during the past five fiscal years, from $295.3 million in 2001 up to $828 million in 2005. The 35-year-old company, with 140 stores, targets two consumer markets through its Anthropologie and Urban Outfitters chains. Anthropologie aims for the 30- to 45-year-old consumer, while Urban Outfitters is geared to a younger market of men and women.

5. Abercrombie and Fitch: The company sets its sights on offering higher-priced brands with the addition of the Ezra Fitch line, featuring cashmere sweaters, woven shirts and denim goods at more than $100, and the opening of its first Ruehl stores, inspired by the artsy Greenwich Village culture. Abercrombie is also targeting U.S. growth through its Hollister surfwear stores. The evolving corporation's overall sales exceeded $2 billion ($37 million through e-commerce) in 2004, but $8 million in expenses for the settlement of three diversity lawsuits impacted earnings. The company responded to the lawsuits by announcing diversity initiatives.

6. Timberland: The venerable producer of classic outdoors apparel and footwear has leveraged a renowned design center in London to expand its apparel product offering. Apparel and accessories sales improved 8 percent, from $300 million to $333 million during its most recent fiscal year as its company-owned branded retail locations expanded by 70, up to 623 stores.

7. Cintas: The Cincinnati-based company has been the leading uniform supplier atop The Apparel Top 50 in recent years. The company has more than 500,000 companies as clients (including Delta Air Lines), with 5 million wearing its uniforms. Flame-resistant clothing is among the company's offerings.

8. bebe: The trendy women's retailer, known for its edgy styles and long celebrity clientele list (including Britney Spears), moves from No. 21 to No. 8 on The Apparel Top 50, and could climb higher in 2006, as earnings grow during this fiscal year. Store count recently surpassed 200, fueled by a trend favoring boutique apparel sales, according to some analysts. On the multichannel front, the company, which targets 18- to 35-year-old women, recently unveiled a revamped web site and launched its first catalog.

9. Aeropostale: Targeting 11- to 18-year-old male and female shoppers, the fast-growing mall-based retailer, which began in 1987, has improved its sales from $160 million in 1999 to a record $964 million during the past fiscal year while offering exclusively its own line of apparel.

10. Pacific Sunwear of California: The growing retailer of surfwear (PacSun) has branched into hip-hop fashions (d.e.m.o.); in addition to its appearance on this list, Pacific Sunwear was also named an Apparel All-Star last year, nominated for its successful performance amid dramatic expansion.

11. VF Corp.: See sidebar on page 30.

12. Nike: Its most recent fiscal year was capped by venerable CEO and founder Phil Knight stepping down as CEO, handing the reigns to William Perez. On the apparel side, the company is scrambling to keep pace with Under Armour. It is licensing its own line of undergarments to Major League Baseball.

13. Limited Brands: Owner of the Victoria's Secret and Express brands, the shopping mall mainstay is clearly becoming more intimate-apparel focused. Its lingerie and beauty products now make up more than 70 percent of sales vs. 30 percent 10 years ago.

14. Gap Inc.: Much of the firm's recent growth has been fueled by its Old Navy brand. It reports Old Navy is the first brand to reach $1 billion in sales in less than four years.

15. Tommy Hilfiger: This purveyor of several men's, women's and children's lines gained even more visibility with the unveiling in June of a reality TV series ("The Cut"), searching for the design world's version of the apprentice. Longtime chairman and one of the original founders, Joel Horowitz, will step down this October.

16. Kenneth Cole Productions: Though known mainly for its shoes, the company is expanding its apparel presence, increasing to five main brands with the recent licensing of Bongo and creation of its Tribeca label. It also licenses its name to hosiery.

17. Liz Claiborne Inc.: As a sourcing power and pioneer, the company staunchly defends free trade and is a main advocate of production in China. Among its rising brands (it offers more than 35) is the Juicy Couture line for men, women and children.

18. Jos. A. Bank Clothiers: The men's retailer celebrates its 100th birthday in 2005 with store expansion throughout the country and significant growth in Internet and catalog sales. It was recently ranked No. 52 of 100 on Business Week's list of "Hot Growth Companies."

19. Jones Apparel Group: See sidebar on page 32.

20. Quiksilver: The Huntington Beach, CA, producer of youth surf apparel is riding a wave of 39 percent sales growth with new retail concepts including Hawk Clothing, inspired by skateboarder Tony Hawk.

21. Too Corp.: Relative newcomer to the Top 50, the company spun off from Limited Brands to become an independent publicly traded company in 1999. The retailer's mission is to capture the 'tween market through concept stores, including the recently launched Justice.

22. Tied 22] Cutter and Buck: This leading provider of men's golf apparel returns to the upper echelon of The Apparel Top 50 after missing the list altogether last year.
    Tied 22] Christopher & Banks: The moderately priced, 650-store women's retailer recently expanded its brand through acquisition of the upscale Acorn chain of stores.

23. Hot Topic: The national mall-based specialty retailer's flagship Hot Topic concept has hit a home run in reaching the hearts of its target market of pre-teens, teens and young men and women ages 12-22 with rock-and-roll fashion and funky accessories that are in a niche all their own. Added to that is the success of its Torrid concept stores, targeting the plus-sized market of women ages 15-29 with fashion-forward apparel. The firm expects to end the year with a total of 657 Hot Topic and 121 Torrid stores, up 110 stores over last year.

24. Carter's: The Atlanta-based children's wear producer recently grabbed the attention of the apparel world with the announcement of its acquisition of 110-year-old OshKosh B'Gosh. Carter's purchased the Wisconsin-based company for $312 million. The companies are still sorting out their future direction.

25. Polo Ralph Lauren: Traditionally preferring licensing arrangements, the company is beginning to take more control of some of its brands. Last July, it completed the acquisition of certain assets of RL Childrenswear Company LLC, its licensee for children's wear in the United States, Canada and Mexico.

26. Talbots: The 1,000-plus store chain flirted briefly with more fashionable women's styles before returning to a focus on its core classic designs.

27. Cache: The company operates two separate store concepts for women, with the Cache store concept targeting women between the ages of 25 and 45, and Lillie Rubin stores offering a line of social occasion apparel targeting women between the ages of 35 and 55. The company prides itself on sourcing mainly from U.S. manufacturers.

28. Reebok International: The producer of athletic apparel and footwear steals the spotlight by locking in arrangements to exclusively outfit NBA and NFL players, and subsequently basks in the exposure of those deals.

29. Coldwater Creek: Catalog sales propel this provider of classic clothing.

30. Ashworth: The 18-year-old manufacturer of golf wear ascends quickly up the Top 50 leader board, predominantly through an overseas sourcing-focused strategy.

MICHAEL COLE is associate editor of Apparel and may be reached at 803-771-7500, ext. 3032, or [email protected].

VF's McDonald: Consumers More Selective in Apparel Choices
Mackey McDonald, chairman and CEO of VF Corp. (No. 11 on The Apparel Top 50), has guided VF's transition from a manufacturing-centric organization into a global lifestyle brand enterprise. This past May, he realigned VF into two major branches -- "Global Brands," focused on brand development and marketing; and "Global Operations," focused on sourcing, manufacturing, distribution, operations and IS/IT functions.
In an interview with Apparel last month at VF's Greensboro, NC, headquarters, McDonald shared these thoughts on the big picture of VF's strategy and focus.

Apparel: What are some things you've learned from all of your acquisitions that will make future growth that much smoother?
MCDONALD: Some people refer to the "old VF" and the "new VF," and I think we have changed in some ways, and in some ways we have retained the strengths this company's had for over 100 years. The best thing about VF today is the fact that we have been able to incorporate some new strategies and new ways of growing our business but been able to retain the strengths that we have had out of the past, which are also extremely important to us. We've done that by having very experienced senior management with the company for a long time, in important leadership roles, but also bringing in new people who have new ideas and concepts and who have really brought a lot to the table in helping us grow our businesses.

As a result of that combination, we've developed a new, energized way of growing some of our core businesses that are more category businesses that have dominated the jeans category and intimate apparel category for many years. We have more new initiatives going on in those businesses than ever before to attract new customers, develop new retail channels and develop new geographic markets. But we've also really moved into the lifestyle brands -- building some of our internal brands into lifestyle brands but also acquiring lifestyle brands from outside.

That's been an important part of the growth story because consumers today don't need to just replace the apparel in their closets. They have all of these iPods and computer games and Xboxes and those things that are eating up more of their disposable income, so they're more selective in their apparel choices. They only buy apparel when truly there's either an emotional attachment to the brand or there's a rational improvement or innovation that they get excited about. We're trying to make sure that we have both of those going for us -- that our brands are emotionally involved with the consumers and their lifestyle, and also we're continuing to bring new innovation and new rational improvements to the product so that there's a reason to buy.

As a result of that, we've targeted a number of categories where we feel that there is a lot of opportunity to have an emotional attachment. Outdoors is a good example of that type of category, where people get very involved in their activities as part of their lifestyle. Whether it's climbing mountains or skateboarding or surfing, there's a real emotional attachment to the brands that represent those lifestyles. And even though there is a strong emotional attachment, we also try to make sure we're giving them functional improvement for that rational attachment. Take The North Face, for example. People are emotional about that brand, they love what it represents -- the exploration, the rugged outdoors. Some people don't ever climb Mt. Everest, but we're all outdoors and are involved in some form of physical activity outside. As The North Face studies that, they identify needs that aren't being met. For example, people don't have time to go on long camping trips and long expeditions. They usually are just going out for a day to climb or exercise or maybe it's even a jog, and as a result they need protection, but they can't carry a heavy load, so they want really lightweight apparel. So The North Face developed the Flight series, which uses very lightweight fabrics and products but is extremely protective, so we give them both. That's the type of thing we need to grow our business.

Apparel: So a key to some of this is maintaining strengths from the past and that experience as well as bringing in new people and new concepts?
MCDONALD: There's a key element to that that I think we've been able to take advantage of as we acquire lifestyle brands. Quite often the people who develop lifestyle brands are entrepreneurs -- they live the lifestyle, they're emotionally involved and attached to it, and as a result, there's just some real energy behind the brands and businesses. But quite often there's not the science behind the business -- from the disciplines to plan and source and engineer the products in the best possible way, to financial controls to operational disciplines. We're able to bring things from a science standpoint to the art of building brands, and as a result, we're able to really bring some strengths to those businesses.

Apparel:How do you manage to bring in these brands that have such different characters and teams with their own cultures? How do you walk that delicate balance of making them a part of VF and not stealing their character?
MCDONALD: That's very important. Quite often the culture that surrounds a brand is one of the reasons why it's successful. You can acquire the brand, but if you destroy the culture, then you really don't have what you thought you were going to have when you bought it. When we look at acquisitions, we would like to keep the leadership and the inspiration behind the brand -- the people who are developing and building the brand. It's not always the case. In some cases, there's a situation where you get a brand and that's not intact. But that's what we prefer to do. We want to keep that management team, wherever they're located. We want keep that intact, keep that culture. They wear what they wear to work, and if you go around and visit our different marketing units, you'll find very different looks, and we love that and encourage that. Some of them have their surf boards there in their office, ready to run out -- I'm sure after work -- but they're ready to go. So a lot of the support activities and other things we will centralize more and we will provide support, but those are the more transactional-type things. It's not the things that really touch the consumer or touch the retailer or develop or design the product. That's left very autonomous, so those groups are empowered to do the things that really operate the business. We provide a lot of the infrastructure, the support, the sourcing capabilities and those things. That keeps those cultures intact but allows us to get a lot more efficient.

Apparel: Speaking of cultures and people and management teams, you made a major announcement in May about broad-based organizational changes. When you think about these individuals you've recently promoted, what are some qualities they possess, and what prompted VF to put them in these new roles?
MCDONALD: First of all, to say a little about my style and VF's style -- it's a very collaborative style. The thing I find most important about what I do, and I think it's one of the reasons I am where I am today, is I always try to understand my weaknesses as well as my strengths and to surround myself with people who support my weaknesses, not ones that praise my strengths. That's difficult to do because it leads to a more cantankerous group of people who are not always agreeing with everything you want to do, so we have a lot of internal debate and discussion, but it's a very healthy way to arrive at the right decisions and conclusions. We have a very diversified group of people. Some have been here a long time, some of them are relatively new, but very diverse -- in their thinking, in their background, where they're coming from. Some are very optimistic, some pessimistic, and you need those different styles and different backgrounds. That's the kind of team and spirit we want in place. At the same time, you have to be able to, eventually, reach a conclusion and move in the same direction together. So you also have to have people who have different backgrounds and opinions, but who can adopt the vision and strategy of the group and move forward with it. That's the kind of environment we work in. In looking for people to fill positions, leadership is obviously the most critical thing. We live in such volatile times that you cannot have a few people making decisions about a company. You've got to have people throughout the organization that are willing to step up and take the risk that comes through being a leader.

-- Kathleen DesMarteau, Apparel

Editor's Note: For more from this interview with VF's Mackey McDonald, see this month's "Featured News, FYI & Products" section at www.apparelmag.com.

Jones' Quest: Evolving with Its Consumers
Peter Boneparth, president and CEO of Jones Apparel Group, opened his keynote address at the Retail Systems expo earlier this year by noting: "Our consumer of today is as confusing as she ever was. But now we have the technology to know about her."

Describing how Jones has expanded its brand, Boneparth said the consumer has a proliferation of choice, wants that choice immediately and has a closer connection with brands, on both a rational and emotional level. "She is bombarded with decisions, and is looking for a total brand experience," said Boneparth. "As a company our mission is to evolve in line with where the consumer is evolving."

The No. 20 company on The Apparel Top 50, Jones Apparel is shipping more than 400 million units per year, many to Federated and Kohl's, for whom it is the largest apparel supplier, said Boneparth.

Boneparth said Jones Apparel has orchestrated a research push through web analytics and focus groups in the past three years to understand the consumer on an intimate level. "We're able to get information back quicker than ever before," he said. "And we don't ask what, we ask why."
Emphasizing brand importance, he noted that two recent Jones acquisitions, of Anne Klein and Barney's, may have seemed risky on the surface but were critical to balancing its portfolio. In the case of Anne Klein, which offers high-priced and relatively low-volume merchandise, the acquisition opened the door to a newly created discount "Anne Klein AK" brand. The Barney's deal gave Barney's the robust merchandising technology system it desperately needed, while providing Jones with a luxury brand that would serve as a gateway for consumers to the company's other brands, he said.

Boneparth outlined 14 points that have powered Jones' overall business success. The list, punctuated by several branding initiatives, also identified the importance of balanced marketing to brand awareness. In pursuit of this objective, Jones Apparel has taken some of its national marketing campaigns down to a grassroots level, Boneparth said. For instance, fashion shows at select country clubs were instrumental in launching the Jones Signature line. "This was all done not just to sell her something but to make her feel part of it," Boneparth said.
Another major consideration in Jones Apparel's business plan is what Boneparth calls "keeping pace."

"Speed is clearly critical," Boneparth said, pointing to the importance of fast-tracking product delivery. To help speed its performance, the firm is implementing a PLM system from UGS, integrated with CAD. The CEO described a recent demand by Federated that required Jones Apparel to offer more of the top 20 percent of its top-selling product and less of its bottom-selling 20 percent. "When you have 400 million units, technology helps make that possible [to sort out]," said Boneparth.

A Nod to Sara Lee
Though not appearing in the Top 50 because it does not report net income for its apparel division, Sara Lee, the diverse multibrand food, beverage, household products and apparel firm, is worthy of honorable mention.

Sara Lee Branded Apparel, the corporation's largest division, produces bras, underwear, hosiery, socks and activewear under brand names including Hanes, L'eggs, Playtex and Wonderbra, among others. The division is reportedly the top seller of bras in the United States.
Sara Lee reported sales of approximately $6.5 billion and operating income of $549 million within its branded apparel division for its last fiscal year, ending June 2004. For all its divisions Sara Lee reported sales of $19.57 billion, resulting in a net income of $1.27 billion.

As part of a plan to better position the corporation for long-term growth, Sara Lee announced in February that it may spin off its apparel business into an independent, publicly traded company. One month earlier, the corporation announced it would explore the sale of its $1.8-billion European apparel business.