This column was originally published on RealMoney on Jan. 18 at 1:01 p.m. EST. It's being republished as a bonus for TheStreet.com readers.
In the retail sector, geographic expansion is a common business driver that can often lead to years of strong sales and earnings growth.
Let's say a retailer with only 100 stores is expanding to 500 stores within the next few years.
is adding stores of its three units and is not even close to saturation. Often times this geographic expansion transforms a regional player into a national one.
But another way to reach more customers is by adding a new, untapped sales channel.
represent classic examples of this push, but they are going about it in reverse directions.
Charming Shoppes is getting ready to expand beyond its strong retail franchises and Web sites, by launching its own catalog. Coldwater Creek, on the other hand, is morphing from purely a cataloger to a multichannel retailer with bricks-and-mortar stores and a strong direct-to-consumer business.
The common thread is that both companies should benefit from their efforts.
Charming Shoppes: Preparing to Expand
Americans, as a whole, are a gluttonous bunch. In case you hadn't noticed, there is an obesity epidemic sweeping the nation. That's certainly bad news from a health-care perspective. But it's not so bad if your focus is outfitting the estimated 62% of female Americans that are either overweight or obese.
That's the position in which Bensalem, Pa.-based Charming Shoppes finds itself. The company offers plus-size women's apparel to a broad range of age groups, with varied fashion tastes and income levels, in multiple shopping venues. Charming Shoppes seems well-positioned to meet the demands of this rapidly expanding demographic.
In fact, with its three retail store brands -- Lane Bryant, Fashion Bug and Catherines -- Charming Shoppes is the largest plus-size women's specialty apparel retailer. The company has historically peddled its apparel mostly through its 2,269 retail stores located in 48 states.
But direct-to-consumer channels, which include both Web sites and catalogs, are important to plus-size customers, and even more so for so-called extended sizes over size 28, as these customers generally shop in the comfort of their homes. Case in point: Catalog sales account for nearly 7% of women's large size apparel sales, compared to less than 4% of women's apparel sales.
To date, Charming Shoppes' direct-to-consumer effort has been limited to its various Web sites. And while the company more than doubled its e-commerce sales volume in fiscal 2005 (and management expects significant Internet sales growth in 2006), the catalog channel hasn't yet been used to its full potential. That's a big void, particularly considering that catalogs are the second-largest apparel channel.
New York-based Redcats USA, a division of Pinault-Printemps-Redoute, currently owns the Lane Bryant catalog, and licenses the rights to the name. Analysts peg the Lane Bryant catalog's current annual sales in the ballpark of $400 million. That's good for Pinault; not as meaningful for Charming Shoppes. But the catalog trademark reverts back to Charming Shoppes in October 2007, at which time the company intends to launch its own Lane Bryant catalog.
Preparations are already under way.
Last June, Charming Shoppes forked over $218 million in cash and assumed $40 million of debt for Crosstown Traders, a leading direct marketer of women's apparel and gifts. With 11 catalog titles, Crosstown clearly has the know-how needed for Charming Shoppes' own catalog launch next fall. Even better: roughly 40% of Crosstown's apparel sales are from the plus-size segment.
Dorrit Bern, Charming Shoppes' chairman and CEO, said that the acquisition, "...is a key step in our preparation for the launch of our own catalog." Once the company's catalog, Web site and retail stores all under the same roof, I expect that Charming Shoppes will see huge sales growth. In the meantime, Charming Shoppes will be able to tap Crosstown Traders' customer base of nearly 4 million households, many of whom are plus-size shoppers.
But that's not all. In December, Charming Shoppes signed an agreement with Retail Brand Alliance to assume leases on 75 outlet store locations, its first foray into the outlet market. The new Lane Bryant outlets are expected to open by the end of the year, just in time for the 2006 holiday season.
In short, Charming Shoppes is making some fat profits by outfitting the plus-size demographic.
But Charming Shoppes' stock has some work to do before a low-risk entry point could present itself. I'd like to see several weeks of consolidation, or more, between $12 and $14. Then, a heavy-volume break above $14 would be a buy signal.
Coldwater Creek Looks Hot
Coldwater also offers an angle on women's apparel. In 2004, the U.S. women's apparel market was a whopping $94.5 billion, and more than 90% of those purchases were made in traditional, brick-and-mortar retailers.
So it's a good thing that the folks at Sandpoint, Idaho-based Coldwater Creek have been hard at work growing their base of retail stores. Since the company's founding in 1984, Coldwater sold its apparel, accessories and jewelry -- aimed at women between the ages of 35 and 60 -- from direct sales channels. It began with a catalog, then launched a Web site in 1999.
And those continue to be important sales channels for Coldwater. In fiscal 2004, for example, the 107 million catalogs that the company mailed generated revenue of more than $130 million, or roughly 22% of total sales. The catalog also serves as a brand marketing tool, helping boost sales through other outlets. Online sales, meanwhile, amounted to $162 million, around 28% of the company's revenue.
While direct sales channels are certainly notable, comprising half of fiscal 2004's top line, they're becoming less and less of the total pie. As recently as 2000, for example, catalog and Internet sales made up 90% of Coldwater's revenue; in the fiscal third quarter reported in November, they amounted to roughly 39%.
So what happened? Bearing in mind the important fact that most women shop at brick-and-mortar retailers, Coldwater management strategically -- and wisely -- shifted the company's business model.
In 1999, Coldwater began testing a full-line retail store model. The following year, eight retail stores bore the company's name. By 2003, Coldwater had built 66 stores; it now operates 163 retail stores. While the growth in the retail segment is impressive, it's only just begun.
Coldwater's management believes that there's the opportunity to grow to as many as 500 stores over the next five to seven years. And armed with a huge customer database from its direct sales channels, Coldwater is uniquely positioned to be able to precisely pinpoint customer demand and thereby identify the ideal locations for new stores.
The dramatic shift has not only served as the key driver in Coldwater's business, but it's also improved the company's profitability. As Coldwater buys in significantly larger volumes to stock its growing ensemble of stores, the greater purchasing power helps lower costs. It's also buying a larger percentage of its goods directly from the manufacturer, cutting out the middle man and boosting margins. Finally, as fixed costs are spread across more stores, profitability will continue to improve.
Coldwater has also found success integrating its three sales channels. For example, Web kiosks can be found inside its retail stores, and a store locator is prominently displayed on the company's Web site. Also, returns are accepted through any channel, regardless of where the merchandise was purchased. This multichannel integration provides shoppers with greater flexibility and convenience -- and makes for happier, more loyal customers.
It also helps that the base of possible future customers is getting larger. That is, the upper end of the demographic that Coldwater targets -- women between the ages of 35 and 60 -- is growing as the baby boomer generation ages. Women in the U.S. aged 45 to 64, for example, numbered 32.1 million in 2000. By 2020, that population is expected to swell 33% to 42.7 million, according to the U.S. Census Bureau. A growing target market, of course, bodes well for Coldwater.
As the company continues to execute its strategy of developing three successful, well-integrated sales channels, the business is sure to prosper.
Coldwater shares have been basing since late November. A break above $23, coupled with heavy volume, would provide an ideal entry.
Charles L. Norton, CFA, is a principal of GNI Capital, Inc., an SEC-registered investment advisor that provides investment management expertise for separately-managed equity, fixed income and ETF portfolios and a hedge fund, and is co-portfolio manager of the Vice Fund (VICEX) and the Generation Wave Growth Fund (GWGFX). In addition, Mr. Norton authors a twice-monthly newsletter, Supernova Stocks, which focuses on investments in market-leading stocks with unique and extraordinary growth potential. Mr. Norton had been a vice president in the equity research department of a New York-based hedge fund, where he also managed separate accounts for high net worth clients. Prior to his experience on the buy side, Mr. Norton worked in the investment banking division of Salomon Smith Barney, where he was an analyst in the health care group, reporting directly to the head of the group. While Mr. Norton cannot provide investment advice or recommendations, he appreciates your feedback;
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