Aiming for Plus-Size Growth

By Amy Tsao The rockers of Kiss were in New York City for Fashion Week in February -- but not to party with rake-thin supermodels Naomi and Kate. No, the tongue-waving musicians played at the Fall 2002 collection of plus-size retailer Lane Bryant. Full-figured fashionistas strutted down the runway in lingerie-inspired tops and hip-hugging jeans while the band worked their trademark antics. Think silver thigh-high platform boots and a smashed guitar at the end of the show.

Having a legendary rock band play at a runway show sounds like a typical spectacle in the fashion world's all-important season-collections week. In this case, it was a grab for attention by a company that wants the industry to know it's a force to be reckoned with -- in fashion as well as in retail. Limited Inc. (LTD

), operator of successful clothes chains like Express and Victoria's Secret, had cast aside this same retailer in 2001 because of its lackluster margins. It sold Lane Bryant to Bensalem (Pa.)-based Charming Shoppes (CHRS

), owner of Fashion Bug stores, for $335 million in cash and stock in August.

BIG AMBITIONS. Limited may end up wishing it had hung in there. Some analysts say Charming Shoppes will be an interesting stock to watch in 2002 as the company uses Lane Bryant, already the biggest brand name in plus-size clothes, to become the dominant specialty plus-size retailer.

Its shares, now around $6, could start climbing if the company can deliver on its strategy of being the best in plus-size clothes. "The recent acquisition of Lane Bryant solidifies their position," says Todd Cruse, a stock analyst with Spokane (Wash.)-based ICM Asset Management. "The acquisition also provides them with an additional growth vehicle going forward."

With a combination of Lane Bryant, conservative plus-size chain Catherine's, and trendier Fashion Bug Plus stores, Charming Shoppes may be just the company to revitalize fashion options for larger women. The market is there, waiting to be tapped. Most American women wear a size 14, on the low end of the plus-size dress chart.

"STRONG POSITION." As part of the shift to focus mainly on plus-size fashion, Charming Stores is shutting down a total of 207 stores, and of those, it's converting 44 poorly performing Fashion Bug shops into Lane Bryants. This move brings Lane Bryant, which is now primarily mall-based, to the strip-mall venue. "Over the next two years, operating margins can start to recover. With the addition of Lane Bryant, we can see earnings power of $0.60 to $0.70 cents a share, putting the stock closer to $9," says Brian Tunick, a Bear Stearns retail analyst.

Demographics support the strategy. "As this country ages and the plus-size market grows three times faster than overall women's apparel, Charming Shoppes should be in a strong position," Tunick says. He estimates that the market for plus-size apparel is growing at 9%, vs. a 4% average growth rate for women's apparel overall. According to market researcher NPDFashionworld, women's plus-size clothing sales in 2001 were $17.3 billion, compared with $19.7 billion in 2000, in a tough apparel retail environment where companies were forced to discount heavily. However, unit sales remained strong, increasing to 1.41 billion in 2001, from 1.40 billion in 2000.

Some specialty retailers have caught on to the demand for clothes that fit larger women. Talbots (TLB

), Old Navy (owned by Gap), and even Tommy Hilfiger (TOM

) have plus-size clothes in their lineup. But Charming Shoppes is the market leader in this niche and doesn't have much direct competition. Only one other retailer, United Retail (URGI

), focuses on plus-size apparel, but Charming Shoppes does a brisker business with about five times as much in annual sales.

FILLING A VOID. Its experience in the sector makes Charming Shoppes the best equipped to make plus-size stores work, says Dorrit Bern, its CEO, president, and chairperson. "Even though at Lane Bryant we're providing for the fashion-minded woman, we ask a second and third question: Will it look good, and will it fit?" Bern says plus-size women like to shop as much as anyone else, if not more. "But she has a hard time finding retailers that have stepped up and provided for her," Bern notes. "That's the void we have filled."

Right now, Charming Shoppes' customers can't buy via the Internet, but that capability should be available sometime this year at its Catherine's site. The company hopes to add this function to the Lane Bryant site as well. "We believe the e-commerce opportunity for Lane Bryant is big," Bern says. She says the company is also working on a Web-based shopping strategy for extremely large women -- those who have "trouble leaving the house and getting out."

The company needs to keep its shareholders happy, too, and that will depend on improving Lane Bryant's profitability. Charming Shoppes reported total sales of $1.9 billion for the fiscal year ended February 2, 2002. Same-store sales -- stores open at least one year -- slipped 4% from year-ago levels. Analysts, on average, expect the company to report earnings per share of about $0.19 for 2002 before a restructuring charge, compared with $0.49 in 2001. For the fiscal year ending Feb. 1, 2003, the company is forecasting revenues of $2.45 billion and per-share profits in the range of $0.34 to $0.36, with help from better gross margins and cost savings from the Lane Bryant acquisition.

MASS APPEAL? UBS Warburg analyst Richard Jaffe is doubtful that Charming Shoppes can fix what Limited couldn't. "The challenge of turning around Lane Bryant is daunting," Jaffe says. He notes that undesirable clothes have driven operating margins at the chain from 11% in 1990 to 3% in 2001. It's not easy to successfully inject energy and fun into fashion for women who are bigger "and don't generally want to be that size," says Mike Tesler, marketing instructor at Bentley College and president of Norwell (Mass.)-based consulting firm Retail Concepts.

Still, if the looks pictured on the Lane Bryant Web site and at the Fashion Week fall preview are any indication, the product mix is appealing. Tunick expects to see higher margins at Lane Bryant in 2002, with help from sales of its Venezia brand of pants and jeans, and from its lingerie line. He estimates margins in 2002 will bounce back to about 5.5%.

Should Charming Shoppes get clothes on its racks that consistently fit its customers well, the company could see a great 2002, and the stock would benefit. "The more they do well, the more it will help get plus-size merchandise in stores like Macy's," Tunick says. "They're making an aggressive attempt to say: '[Larger women] can be pretty, sexy, and wear the same things as everyone else does.'" For investors who want a unique presence in the retailing sector, Charming Shoppes could be a good fit. Tsao covers financial markets for BusinessWeek Online in New York