May 22, 2007 in Business

A bad fit at Wal-Mart

Wall Street Journal The Spokesman-Review
 
Associated Press photo

A woman browses the clothing aisles at a Wal-Mart in Little Rock, Ark.
(Full-size photo)

The closet is full

» Wal-Mart’s inventories jumped 10.3 percent in the fiscal first quarter, ended April 30, to $35.2 billion from a year earlier, driven by unsold apparel, home decor and outdoor products. About $2 billion of the increase represents unsold spring clothing and home goods that are expected to depress profit through the summer, analysts estimate.

Wal-Mart’s struggles in fashion apparel appear to be worsening.

Stacks of unsold clothing are clogging store aisles and pressuring profits. Now, Wal-Mart Stores Inc.’s first designer line, by designer Mark Eisen, has been pulled from several hundred of the more than 3,000 U.S. stores that carried it, according to a person close to the situation. A Wal-Mart spokeswoman confirmed the line had been pulled from some stores but didn’t know how many.

Wal-Mart’s chief financial officer says clearing out stocks of unsold clothing is going to be a chore and could pressure margins all summer. “We’re a little heavy in apparel,” Thomas M. Schoewe said in an interview last week. “It’s all about getting the stores cleaned up right now.”

The flush inventories mark a significant miscue from a year ago, when Karen Stuckey, a Wal-Mart apparel-merchandising executive, said of the addition of Eisen and the retailer’s new-found fashion focus, “We’re going to rock in apparel.”

The setback suggests Wal-Mart’s apparel problems go deeper than a misfire with ultratrendy attire that led to a sales stumble late last year. At that time, an in-house-designed line of skinny-legged pants and nightclub wear, called Metro7, turned off customers, who went shopping elsewhere.

Wal-Mart’s inventories jumped 10.3 percent in the fiscal first quarter, ended April 30, to $35.2 billion from a year earlier, driven by unsold apparel, home decor and outdoor products. About $2 billion of the increase represents unsold spring clothing and home goods that are expected to depress profit through the summer, analysts estimate. The Wal-Mart spokeswoman declined to comment on the estimate.

The latest woes involve Wal-Mart’s efforts to bring brand-name designers into its orbit. Wal-Mart is seeking to better compete with Target Corp., J.C. Penney Co. and Kohl’s Corp., which have a reputation for higher-end clothing than what Wal-Mart carries.

A year ago, Wal-Mart signed Eisen, a former AnnTaylor Stores Corp. design executive, to put some sparkle into its George line of everyday women’s apparel, which although successful outside the U.S. has been weaker here. Eisen, known for his line’s fit and styling, launched knitwear label Karoo in 2005. The Karoo line sells at high-end retailers such as Bergdorf Goodman, Neiman Marcus and Nordstrom.

Eisen developed a collection of women’s sportswear within the broader George line called George M.E., for the designer’s initials. It featured $22 cardigans and $70 suede jackets, among other items. Wal-Mart showed the collection at New York’s fashion week last year, gathering positive reviews. But problems surfaced almost immediately. The fall line was supposed to appear in mid-August, but Wal-Mart put the apparel in stores a month early — too soon for many shoppers — to fill gaps in other lines.

Patricia Edwards, a portfolio manager at financial-services firm Wentworth, Hauser & Violich, says little marketing of Eisen or his line followed the fashion-week launch. Wal-Mart customers who didn’t shop at Neiman Marcus were unlikely to have heard of him, she said. “Wal-Mart is so good at providing things based on price that I’m not certain they’ve yet grasped how to promote items that aren’t solely based on price.”

The Wal-Mart spokeswoman declined to make executives available to comment. Eisen didn’t return calls seeking comment. A person close to the designer said sales had recently improved, now that the line appears in fewer stores.

The inventory overhang has several analysts paring this year’s profit estimates by as much as five cents a share, citing the effect of working through the excess inventories. Bank of America now expects Wal-Mart to post annual profit of $3.13 a share. About 10 percent of its revenue comes from apparel.

“When 10 percent of your business is not doing what you want it to, that’s a lot of drag,” Edwards says. “It’s going to be a drag until they get it right. The question is, when will they get it right?”

Get stories like this in a free daily email


Please keep it civil. Don't post comments that are obscene, defamatory, threatening, off-topic, an infringement of copyright or an invasion of privacy. Read our forum standards and community guidelines.

You must be logged in to post comments. Please log in here or click the comment box below for options.

comments powered by Disqus