Collaborating with hot designers has been a mainstay for Target Corporation (NYSE:TGT) and Macy’s Inc. (NYSE:M) the last few years and has mostly helped drive traffic with notable successes and a few failures. Kohl’s Corporation (NYSE:KSS) is also getting into the collaboration fray.
Macy’s Inc. (NYSE:M) and Target Corporation (NYSE:TGT) both have spring collections from new young designers, MADE Fashion Week for Impulse collection for Macy’s and Kate Young x Target following on the heels of its successful Prabal Gurang for Target line. Target is also collaborating with FeedUSA for a collection in late June, and Kohl’s has teamed up with Derek Lam for a 58 piece spring collection and Narciso Rodriguez coming this fall.
Why all the fashion fuss?
Retailers are increasingly competing not only with each other and Wal-Mart Stores Inc. (NYSE:WMT), (collaborating with an LA blogger on a clothing line) but also with eBay Inc. (NASDAQ:EBAY) and Amazon.com, Inc. (NASDAQ:AMZN) Fashion, which are being promoted on commercial television.
Since Target’s huge success with Missoni for Target (think afghans knitted by Granny), which sold out at stores and crashed Target’s website within hours, retailers are falling over themselves to catch lightning in a bottle again.
Brian Sozzi, an independent retail analyst and frequent CNBC guest, told the LA Times that these collaborations are a win-win and that the stigma around lower end retailers has gone away with consumers still craving affordable designer clothes. It’s not a sure thing, however, as sales of Target’s Designer Collection for the 2012 Holidays were underwhelming with the Neiman-Marcus collaboration resulting in 70% markdowns.
Ebay itself is being used as a measuring tape of how successful these launches are with the most popular items showing up within hours marked up considerably. Interestingly, Derek Lam’s first fashion collaboration was with eBay last winter.
Who’s doing it best?
We know who’s been doing it the longest, and that’s Target Corporation (NYSE:TGT), which started with Michael Graves in 1999. For a big-box retailer Target has been surprisingly experimental, even creating an indie designer Shops Within Shops. While it was a dud like the Neiman-Marcus fiasco, Target is quick to cut its losses and move on.
Its latest collaboration with Prabal Gurang sold out almost as quickly as the Missoni items. Target has really pioneered and refined the collaboration concept, teaming up with Gilt Groupe a few years ago to create a flash sale.
Target is attracting millennials who once wouldn’t go into a Target, much less a Wal-Mart. That’s its strength and its strategy, also downsizing urban Targets to appeal to young apartment dwellers.
Target is trading at a 14.77 P/E with a 2.00% yield. It has 1,784 stores in the US and has been opening stores in Canada with twenty in Toronto on March 19. Target is close to a 52 week high, but its PEG hasn’t stretched out too badly, only to 1.24. For a mass merchandiser Target has a good five year EPS growth rate of 11.53%.
Imitation is the sincerest form of competition
Macy’s Inc. (NYSE:M) was late to the party on designer collaboration but has been doing well with it if the stock price is any indication. Of course, this isn’t the only reason Macy’s has been doing well; the resurgence of the aspirational middle-income consumer and its localization stratagem have surely helped. Macy’s climbed from under $10 in 2009 to a multi-year high of $42.47 on March 13.
While Macy’s and Macy’s owned Bloomingdale’s haven’t drawn the Black Friday-like crowds to its collaborations, they’re not hurting. Frankly, it didn’t need the driver as much as Target Corporation (NYSE:TGT), but with Macy’s only up 5% over the last year Macy’s needs to play its A game.
At a 12.83 P/E and 1.90% yield Macy’s may be undervalued in comparison to Target. The PEG at .91 indicates this as well. Macy’s also earns an impressive 39.56% gross margin.
Kohl’s is the department store laggard, only up 0.02% in a year, but it has the biggest yield at 2.80% and lowest P/E of 11.64. It’s seen as less fashion forward than Macy’s or even Target. Analysts aren’t very optimistic, giving Kohl’s a 6% five year EPS growth rate.
Kohl’s used to be an up and coming retailer, and this Macy’s Inc. (NYSE:M) wannabe image they’re saddled with is concerning for shareholders. Hopefully, these two collaborations they’ve planned for this year amp up their allure for aspirational fashionistas. If J.C. Penney manages to succeed in their agora/bazaar stores within stores concept this would be most damaging to Kohl’s.
Kohl’s reported worsening revenues and earnings year over year when it reported Q4 2012 results on Feb 28. For full year 2012 net income was only $1 billion compared to $1.3 billion for 2011. Shareholders may want to consider lightening up on Kohl’s on upticks.
E-Tail is getting into the game
Finally, there’s eBay, which is a better buy for its PayPal than its auction component. It too has a collaboration in place for spring with the Council of Fashion Designers of America for its third annual “You Can’t Fake Fashion” handbags this year, featuring 90 designers with limited edition handbags on its auction site, but this doesn’t move the needle for them.
PayPal is leading the advance in mobile payments even as the auction site is losing long time sellers. EBay also has the highest P/E of these four names at 25.18 with no yield. Its PEG isn’t out of line at 1.26 for a tech e-tailer. However, it’s pulled back 12% from its 52 week high, mostly due to concerns that big credit card companies like Mastercard are planning a digital wallet fee that would obviously impact eBay.
When companies like Discover were playing nice there was good reason to get in eBay, but this fee would reduce annual EPS by two cents according to analysts. EBay also competes with Google and Intuit in this mobile wallet space.
The final takeaway
Target Corporation (NYSE:TGT) still seems to have mastered designer collaboration and all things being equal is the best bet. Macy’s Inc. (NYSE:M) runs a close second on valuation. EBay and Kohl’s have issues going forward that should make investors take pause. Designer collaborations help Target bring in a desired demographic they need, but it’s just not enough for these others.
The article How Collaboration Is Pumping up the Volume for Fashion Retailers originally appeared on Fool.com and is written by AnnaLisa Kraft.
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