Sep 5, 2007

Sleeper Brand Responds to Retail Distribution Shifts

The Nautica brand of apparel is being re-invigorated for a more growth-oriented retail distribution strategy. The company, owned by VF Corporation, has seen its branded product position weaken considerable as dramatic shifts in retail clothing channels have played out. In particular, overall sales at midtier retailers, Nautica's core channel, fell 1% in the 12 months ended July 31, according to Customer Growth Partners, a retail consulting firm. Sales at luxury retailers, by contrast, increased 11.1%, and sales at discounters jumped 9.2%.

The WSJ reports that Nautica's brand and distribution moves are part of VF's broader strategy to focus on brands with growth potential, amid shrinking demand for middle-market labels, department-store consolidation and a move by these stores to promote their own private-label merchandise -- much of which looks similar to the middle-market labels' clothing. Sales of upscale and high-end brands are growing at a faster clip than moderately priced brands, and they tend to be sold in venues that don't discount as heavily or often as middle-market department stores, which also increases profitability.

A less noticed aspect of Nautica's strategy is it's hints about the emerging strategic importance of resale price management (RPM) as an important key to successful brand repositioning. (WSJ: " well as adding more luxurious fabrics, the "halo" collection [will be priced] an average of 15% to 20% higher..."). The recent Supreme Court ruling in the Leegin case means more and more firms will be leveraging RPM in their efforts.

In the end, we believe we're seeing the tip of an iceberg, and expect that there will be a considerable push by Private Equity firms to buy up and invest in aggressive growth strategies for other sleeper brands across many U.S. retailing sectors.

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