Express Bets on Bras to Lift Margins

The Limited unit is delving into the hugely profitable world of intimate apparel to support a turnaround.
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For some specialty retailers, the next fashion trend may have little to do with clothing that anybody actually sees.

Underwear marched into 400

Express

stores last week after a test in a handful of locations this past spring yielded fruitful results. Express, a unit of

Limited

(LTD)

, is the latest specialty retailer to delve into the hugely profitable world of intimate apparel, which has long been a bastion for department stores. By doing so, Express has a chance to boost profitability and generate more loyal customers -- two goals that would greatly aid a turnaround already under way.

Although shunned by the 1960s-era feminists, who routinely burned the lacy garments in protest of female oppression, bras are making a comeback. Last year, they were the fastest-growing category in the nearly $10.9 billion intimate apparel market, as tracked by

NPD Group

. The

Wonderbra

, a push-up bra that creates instant cleavage, did much to reignite our love affair with underwear when it was introduced by

Sara Lee

(SLE)

in 1994, says Mary Howell, a director of the

Intimate Apparel Council

, part of the

American Apparel Manufacturers Association

.

"It's become much more fashion-oriented," Howell says. "Stores are offering one-stop shopping and allowing women to create their whole ensemble from underwear to outerwear."

Express' underwear initiative has its origins with sister company

Victoria's Secret

, owned by

Intimate Brands

(IBI)

, which in turn is 84% owned by Express parent Limited. Victoria's Secret's racy success spurred specialty retailers to get into the lingerie business. For instance,

Gap

(GPS) - Get Report

has opened five

Gap Body

stores, which sell bras, panties and sleepwear.

"Underwear is a good way to image a brand," Michael Weiss, Express' chief executive, said in an interview during a meeting Wednesday with investors. Weiss said he intends to make underwear a secondary reference point, next to Express' longtime staple jeans, for the young, female customers Express is trying to reach.

So far that customer -- whom he describes as just graduating from college, working at her first job and with a taste for fashion that outstrips her pocketbook -- seems to be biting. A New York Express location on Madison Avenue and 51st Street has seen underwear sales rise to 8% of the store's total sales since it began testing the garments last spring, a store manager says.

The

Calvin Klein

-inspired minimalist look of the cotton tank tops, thongs, panties and bras in gray and white is in stark contrast to the more plush appeal of Victoria's Secret.

"Victoria's Secret is an older sexiness," Weiss said. "Express is a younger sexiness."

That's an important distinction, since Limited has cannibalized itself into a corner in the past. At one point Express and other Limited units,

Lerner New York

and the namesake

Limited

chain carried such similar merchandise that customers stopped caring and sales tanked.

By January 1997, Weiss -- who had helped develop Express in the early '80s, went on to become its president and then left in '95 to become a vice chairman with the parent company -- was brought back to stem the losses.

Charged with helping Express regain its edgy, fashion-conscious look, Weiss set about remodeling stores (302 will be refurbished by year-end); closing unprofitable stores (50 have been shuttered, leaving the chain at a more svelte 698 units); and creating 100 new design, merchandising and sourcing positions.

His efforts are showing. Walking into an Express store today is a different experience than it was a year ago when the presentation was muddled. Now, there's little question where you are, or who the customer is.

The numbers reflect these changes. Tuesday Limited said it expects to earn 26 cents per share for the second quarter ended July 31, compared with 13 cents a year ago. Analyst surveyed by

First Call

had expected the company to earn 19 cents a share.

Wednesday

Salomon Smith Barney

analyst Maura Hunter Byrne upgraded Limited to a buy from a outperform based on improvements at Express, Lerner and Lane Bryant. The Limited division is still struggling. Salomon hasn't performed recent underwriting for Limited.

And Limited's stock closed Friday off 9/16 at 45 3/16, near its 52-week-high of 50 5/8.

Despite those strides, Express still has a way to go before it reaches the profitability of its peers. Its operating margins equal 8% of sales, compared with 10% to 15% at most specialty retailers.

Lingerie could help Express expand those margins. It "tends to be a great margin business," says Kindra Hix, an analyst with

Banc of America Securities

, who rates Limited a buy. Her firm has performed underwriting for the company.

That's partly due to the fact that underwear is still less promotional than other apparel items. Since many styles tend to be basic and timeless, retailers don't have to fret about being left with last year's goods, which minimizes markdowns.

And since women tend to stick with a brand once they find one they like, underwear creates devoted customers, says Elliott Ettenberg, chairman and chief executive of

Customer Strategies Worldwide

, which hasn't consulted for Limited.

"Women stay with a product for years," Ettenberg says, recalling his experience working on the advertising campaign for Wonderbra when he was at a different firm in the mid-'90s. "Every few years, Wonderbra would bring out a new collection. Women would be lost. They'd call up and say: 'I finally found something that fits me and now you change it and I have to start all over again.'"

If specialty stores can win customers away from their favorite department store brands, the payoff for that itty-bitty piece of cotton and Lycra could be quite attractive. No wonder Express is focusing on "inner" strength.