Challenges for Barneys: Tough CEO Search Ahead As Economy Hits Growth

Barneys New York has double trouble — losing its chief executive while struggling to get its expansion strategy on track in a tough U.S. economy.

The retailer's chief executive officer, Howard Socol, is expected to retire soon, about a year ahead of his original timetable. Finding a seasoned successor to guide the luxury retailer isn't expected to be easy, with no obvious inside candidate and a very shallow talent pool outside.

Sources said Monday Socol, 62, has been growing impatient with Istithmar, an investment arm of the Dubai government, because it has been encroaching on the managerial independence he's been used to at Barneys and other companies he's run. "He's kind of had it," said a retail source.

Istithmar bought Barneys for $942 million last year from Jones New York. The fund is widely considered to have paid a high price for a brand with limited portability due to its cutting-edge image. Jones bought the business for just under $400 million a few years earlier.

Istithmar bought Barneys at the peak of the market, beating out Link Theory Holdings of Tokyo in a bidding battle. Observers said the price represents Socol's success in building up the retailer's reputation.

At the time of the acquisition, Istithmar executives told WWD that overseas expansion, while possible, wasn't a priority because the fund saw plenty of potential to grow in the U.S. Since then, however, the American economy has gone into a tailspin, with weakness in major markets where Barneys has planted new stores, including Las Vegas and San Francisco.

Any new ceo will have to contend with the poor U.S. retail scene, as well as working with a team closely associated with Socol.

Barneys has been curiously quiet, with no official announcement having been made to confirm Socol's imminent departure, which was reported by The New York Times Saturday. Nonetheless, the report has sparked speculation as to who can fill Socol's shoes. No one inside the company has been groomed as a successor, a shortcoming on management's part. Barneys is strong on seasoned buyers, but not deep with manager types.

Outside Barneys, those likely to be checked out first are executives with luxury experience including Burberry's U.S. president Eugenia Ulasewicz; Ron Frasch, president and chief merchandising officer at Saks Fifth Avenue; Jim Gold, president of Bergdorf Goodman; Karen Katz, president of the Neiman Marcus Stores; Caryn Lerner, president of Holt Renfrew in Canada, or Jane Shepherdson, Topshop's former chief. Certain candidates could be restricted by non-compete clauses in their employment contracts.

Still, Barneys could tap someone from outside the luxury sector, as when it hired Socol seven-and-a-half years ago. He spent over 20 years at the Miami-based Burdines department store chain, which last year was merged into Macy's. After Burdines, Socol had a short stint as ceo of J. Crew, but resigned due to differences with then-owner Emily Cinader Woods.

At Barneys, issues between Socol and Istithmar regarding its expansion have flared up. Socol has been orchestrating the expansion, in the last two years opening units in Boston, Dallas, Las Vegas and San Francisco, as well as rolling out the Co-op contemporary chain. There are seven flagships, two smaller stores, 15 Co-ops and 13 outlets. Barneys has an estimated volume of $600 million to $700 million.

The expansions have put pressure on Barneys' relatively small organization.

Internationally, there are a handful of locations with the type of fashion customer Barneys would appeal to, such as Paris and London — although the market there is already saturated with designer retail. Istithmar has a Shanghai office and has been considering Macao for Barneys, while the Middle East also is viewed as potential expansion territory.

But international expansion there poses problems because several important luxury brands that Barneys sells in the States are already sold at Harvey Nichols, Saks Fifth Avenue, Villa Moda, Al-Thayer Group and other stores in the Middle East, precluding distribution to Barneys there.

"Howard welcomes the expansion but I'm not sure he wants to put the first overseas store in the Middle East," said one retail consultant with ties to the region. "Istithmar could put Barneys in Dubai, but it might not be the same as Barneys on Madison Avenue and that could cause differences between Howard and the [Istithmar] management."

"Expansion overseas is not easy. You can have the same box, but you can't have the same merchandise matrix," noted Enrico Morra, ceo of Piazza Sempione, the Milan-based collection that launched its wholesale business in the U.S. by selling first to Barneys.

In the Middle East, for example, Prada is linked to one retailer, and another has the master license to sell Gucci, Morra explained. "Overseas expansion is ambitious and not easy. But it doesn't mean you have to fail. It means you must find a matrix that is more elastic."

"Expansion overseas is not easy. You can have the same box, but you can’t have the same merchandise matrix."

— Enrico Morra, Piazza Sempione

"I was surprised when I heard about Howard. I hope it's not true," said Allen Questrom, who tapped Socol to succeed him at Barneys. "It's hard to imagine Istithmar paying that kind of money for Barneys and having a fissure with Howard so early in the process."

"Howard Socol is very much his own man," added Elaine Hughes, principal at Grayson/Hughes executive search.

"There is a level of frustration that comes when you change management and have a new set of parents. Howard has been here for seven-and-a-half years, and the past [owners] kept to the background," said a retail source close to the company.

Aside from the expansion, Socol is credited with instituting disciplines to a chain that for many years was more into image than driving sales. His favorite expression at the store has been: "Commerce versus cool — there has to be a balance of both."

In the wake of rebuilding a business that went bankrupt while still owned and operated by the founding Pressman family, "Howard Socol stepped back, retrenched, and stuck to vanguard positioning and exclusivity as the hallmarks of the Barneys' experience," said Suzanne Hader, principal at 400twin Luxury Brand Consulting. "It seems to have paid off well for them to date, but my understanding is that the new owners are looking to expand too rapidly, too far afield without the right people in place to ensure the quality will be consistent. When creating a top-of-market luxury experience, you can't cut corners without it having an immediate adverse impact on the brand. The Barneys customer — very sophisticated and in the know — won't take well to being disappointed."

Like other retailers, Barneys is struggling with the weak economy. Its business is driven by the Madison Avenue flagship and generally works best in big cities. Fashion executives said currently, Barneys is doing well in New York, Chicago, Boston and Seattle, but not in Chestnut Hill, Mass.; NorthPark Center in Dallas; Los Angeles, and Las Vegas.

The unit at NorthPark Center has struggled with sluggish traffic since it opened in September 2006.

"Some stores start slower than others," Socol acknowledged in January when queried about Barneys' 88,000-square-foot store in Dallas. "We are doing some new things there," including possibly adding a Fred's restaurant, like the one in the Madison Avenue flagship.

"We always knew this is clearly Neiman Marcus' hometown, and there was going to be a period of time during which [Barneys'] sales would grow," said David Haemisegger, president of NorthPark Management Co. "Their growth rate is on track."

However, Barneys has been working hard to get its expansion on track and new branch stores up to speed. Success hinges on building customer relationships, which takes a long time, and wooing shoppers long loyal to Neiman Marcus, Saks Fifth Avenue and Bloomingdale's.

Some of the stores are in a better position than last year, having recently recruited stronger store managers and personal shoppers. This spring, Barneys got a lift from all the colors and prints in the market, which tend to go over well with Dallas women. Overall, the merchandise mix hasn't been changed much there, according to the retail source close to the company, with the branch still carrying brands Barneys is best known for, such as Lanvin, Balenciaga, Marni, Prada and Givenchy.

The Vegas store has been a disappointment, in part because the entire city has been suffering from decreased tourism and the housing crisis, and because Barneys opened ahead of a lot of other retailers in The Shoppes at The Palazzo, which is on the Strip, and didn't anticipate how low the level of traffic would be.

In Chicago, Barneys is planning a new store to open in spring 2009, replacing the existing 60,000-square-foot unit with a bigger box. A Scottsdale, Ariz., store is also planned.

"My business is good with them and I love Howard," said Diane von Furstenberg. "I'm terribly sad to see him go. He's a wonderful guy, a great retailer, he has a lot of experience and he knows how to work with creative people. It's going to be hard to replace him."

"How is Barneys' new store in Las Vegas? The mall is still new," von Furstenberg said, referring to the retailer's unit at The Shoppes at The Palazzo, which opened in January. "We're doing fine."

Gianni Castiglioni, ceo of Marni, said, "For the past 10 years, we've had and still have a great business relationship with Barneys."

Diane Levbarg, executive vice president of Missoni USA, said she's currently shipping Missoni fall ready-to-wear to Barneys' Las Vegas store. "I wasn't in Las Vegas with rtw for the opening, just the bathing suits," she said. The bright bikinis were prominently displayed near Pucci cover-ups. "They didn't buy enough and sold out." Still, she said her Missoni business isn't so significant in Las Vegas "but I know my New York and Beverly Hills businesses are fabulous."

Source: Women's Wear Daily

Barneys Loves Target: Retailing's Odd Couple Takes Marketing Leap

NEW YORK — Talk about strange bedfellows.

The teaming of Target Corp. and Barneys New York has to be one of the oddest pairings in recent fashion history. The mass market purveyor of everything from diapers and lightbulbs to blenders and dog food will introduce its eco-friendly Rogan for Target's Go International line at Barneys' Madison Avenue flagship on Friday until Sunday, and then at Barneys' Los Angeles store from May 16 to 18. Barneys will limit purchases to three pieces. The line will only be in stock for five days and, after that, shoppers will have to wait for the collection's debut at Target as part of its Go International line.

The arrangement is not without irony — and lots of questions. Barneys sells designer Rogan Gregory's primary line, which features trousers for $230, dresses for $320 and anoraks for $450. Rogan for Target will be priced between $15 and $45. Barneys presents itself as an arbiter of style, selling collections by everyone from Balenciaga to Lanvin at prices that can run into the thousands of dollars for a single piece. Target prides itself on style on the cheap, with a hype machine that often promises more than the stores deliver. Just consider the odor of pizza or pretzels that greets customers as they walk through its doors.

So why is this odd couple getting together?

Target's aspirational low- and moderate-income customers, who are being squeezed by the economic downturn, may be forgoing new clothes in favor of necessities or turning to stores with sharper prices, including Wal-Mart. Target's same-store sales have come under pressure in recent months and it also has to rebuild its apparel business after losing its personification of fashion, Isaac Mizrahi, who's not renewing his contract at the end of the year.

Barneys, meanwhile, is said to be having some difficulty in markets such as Chicago and Houston. And in common with many luxury retailers, it is battling the turbulence created by the weak economy. The retailer also has a new owner — Dubai-based investment fund Istithmar — that is eager to roll out more full-line Barneys stores as well as Co-ops. Some observers have said the Co-ops outside of New York are struggling somewhat, while Barneys tried an aggressive expansion of flagships in the early Nineties, only to end up in Chapter 11 in 1996.

But will Target benefit from Barneys' cachet? And does Barneys really need Target? Many observers question the strategy.

"I think it's going to confuse and not satisfy the customers," Michael Lichtenstein, owner and founder of Group L Consulting, a licensing firm in New York, said about the Barneys-Target deal. "It's one thing to have Karl Lagerfeld do an H&M line. It's exciting, it's news and everyone understands what that means. Even if it's for a short period, it's going to be a hit. This doesn't tell anybody what's happening and why it's happening. It's merely doing something to be different than thinking about what the [Barneys] customer wants. I don't think a Barneys customer wants a Target product."

Erin Armendinger, managing director of the Jay Baker Retailing Initiative at the Wharton School of the University of Pennsylvania, said her reaction when she heard of the arrangement was "sort of perplexed. I think it's really odd. I'm not sure what everybody's getting from this. I don't know why Barneys needs Target. I'm not sure a Barneys customer is going to be a Target customer. It is Target, but at the end of the day, it still is Target. You have to be careful with these partnerships and whose casting what on whom."

Having the products of one designer selling for two different price points in the same store can confuse and alienate customers. "When they're in the same store it's pushing the limits," Armendinger said. "When you have $29 jeans and $250 jeans from the same designer, consumers will start to ask, 'Is that fabric really worth 10 times more than the other fabric?'"

While there seems to be no relief for the ailing economy in sight, Target is also facing the task of replacing a major revenue generator for its clothing business. The chain in January acknowledged that Mizrahi would be leaving to take up the design reins of the Liz Claiborne brand. Mizrahi's line did about $300 million at Target and analysts estimate the retailer will have to replace $400 million to $500 million of lost revenue upon his departure, given that shoppers buying Mizrahi clothes also bought other products while in the store.

Target so far has said its focus going forward will be on the Go International line with young, up-and-coming designers — but that represents sales of only "north of $100 million," said Robert Buchanan, a consultant for Goldman Sachs' Vantage Marketplace subsidiary.

"They've got a hole now in their assortment," said Armendinger, referring to Target. "They added handbags and accessories to the Go International program, but Go has gotten tiring. There's this constant change of [collections], it's like they're saying, 'This is cool. No, this is cool. No, this is cool.' H&M does a better job with really big designers sold for short periods of time and launches that are really spread out. Go is dizzying because at the end of the day you're wondering, 'Who is Target?'"

Bill Dreher, a retail analyst at Deutche Bank, said Target introduces Go designers so frequently because "they want the rotation every six weeks so they get that customer into the store every six weeks. On average, the Target customer goes to the store once a month. By contrast, the Wal-Mart customer visits a Wal-Mart unit once a week. The difference is food" with Wal-Mart's grocery business far more developed than Target's.

Armendinger said that Mizrahi gave Target a consistent image, which built recognition year after year. The retailer is certainly working on a post-Isaac strategy, but hasn't released any details. "They have to be looking at it," she said. "This is a difficult environment for a good company. When a company is losing it a little bit, there's nowhere to hide in this economy."

According to Retail Metrix, analysts' consensus estimate for Target's comp-store sales is a 4.3 percent increase for April. The retailer will offer a reading of April results on Thursday.

Target's financial performance picture hasn't been rosy. Same-store sales fell 4.4 percent in March, while comps in February inched up 0.5 percent. Same-store sales declined 1.1 percent in January. In February, Target's stock fell in the wake of a Citigroup downgrade that was critical of its women's apparel offerings. Deborah Weinswig, an equity analyst at Citigroup Global Markets, said there was a lack of focus in Target's women's fashions, risk in its credit card portfolio and the perception that Wal-Mart is the discount price leader. "On the apparel side, they've kind of lost their way a little bit," Weinswig said. "It's kind of a sea of sameness now. It used to be a very interesting place to shop." Weinswig also said there's been too much focus on Go International "because that's the sexy part" of the business, but not the bread and butter.

Target's slick advertising and designer cachet helped bolster its cheap-chic image, but now the retailer must continue to stay fresh to draw shoppers at a time when driving traffic through stores has been difficult. "The newness factor has probably worn off a little bit, so they just have to continue reinventing themselves," said Tiffany Co, debt analyst at Fitch Ratings.

In its single-minded quest to bring upscale brands to its stores, Target has sometimes lost sight of the bigger picture. An effort to upgrade its skin care offerings led Target to sell brands such as Origins, Bumble and bumble, StriVectin and Clarins by sourcing them from the gray market and without those companies' approval.

Target on Monday said it had agreed to sell an interest in its credit card receivables to J.P. Morgan Chase & Co. for about $3.6 billion. Charge-offs for accounts that are 180 days delinquent are rising and Wall Street continues to be cautious about investing in lending operations. The interest represents approximately 47 percent of the principal amount of Target's outstanding receivables.

According to Buchanan, Target's credit card business this year will account for more than 20 percent of operating profits or $1.15 billion in operating profits before interest expense. The company's total operating profit this year is around $5.4 billion, he said. "Target wants to continue to control the credit card and drive the marketing, but at the same time gain access to somebody else's capital," he said.

"The Target juggernaut is slowing," said Suzanne Hader, principal at 400twin Luxury Brand Consulting. "If they want to continue on this tack, they should look into spinning off a new retail concept where they can distill some excitement around these lines into a smaller format that's more easily adaptable to Manhattan. Barneys is looking for a way to differentiate themselves from Saks Fifth Avenue and Neiman Marcus, so this will help them seem hipper and less stuffy. If that's their aim, there are more effective ways of accomplishing that."

The names of Go guest designers are likely obscure to typical Target shoppers — Luella Bartley, Tara Jarmon, Erin Fetherston, Paul & Joe — but the company recently introduced a Go International private label line, New Next Now, sans the name of a designer, leading some experts to wonder whether the company will add a generic Go label to its permanent roster. New Next Now is less edgy than previous collections, with simple tank tunic dresses, one-shoulder jersey dresses in solid colors and high-collar, ruffle-front shirts.

Those who know Gregory and his partner, Scott Hahn, said they were eager to sell to Target once they were assured the mass retailer was committed to producing an organic collection. Julie Gilhart, Barneys' senior vice president and fashion director, has a passion for the environment and was instrumental in enlisting top designers to create eco-friendly products for the store. She is said to have been keen on launching Rogan for Go International to show support for the mass merchant's nascent green efforts.

"Barneys and Target was kind of serendipitous," said Gregory. "We know it will be a benefit [to our business]. The Target thing came about this time last year. It's nice to be able to offer this true expression of my vision. Target is doing hundreds of thousands of garments. They gave me everything I asked for. I feel privileged to speak to both the high and the low end."

Asked whether Rogan customers will view the Target line as a conflict, Gregory said, "We don't do safari here. It's so much a different product, aesthetically. Every piece in here we make 10 of, whereas Target's minimum is 10,000."

Yet even here the supposedly cutting-edge mass retailer is behind the curve. Wal-Mart has been much more outspoken and proactive about the environment in recent years, selling 100 million energy-efficient compact fluorescent lightbulbs within a year, reducing packaging and using organic cotton in some of its apparel Again, Target's tie-ups with Rogan and Barneys may be as much about hype and hopping onto the bandwagon of an issue that is now in the spotlight as it is about any revenues.

"Clearly what Target is doing with Barneys is all about marketing and branding," said Wendy Liebman, founder and president of WSL Strategic Retail. "To have that opportunity to present the line there for a few minutes....In terms of the New York market, there's the prestige and it's a good marketing tool. For Barneys, this is a way to surprise people. There's all this fast fashion going on; Barneys is saying, 'We can take a little poke at [ourselves] and have fun with it. We can give our Barneys shoppers a chance to get a good value for a few days.' It will create a little bit of anarchy and a little bit of buzz."

Designers who have done a stint with Target were generally positive about the experience, but said it didn't boost sales of their core collections. "It helped my brand to gain exposure in a new market with a new audience," said Behnaz Sarafpour. "It has not had an effect on the selling of my designer collection."

"Since it was only a three-month capsule collection, it did not affect sales from our main collection in any way," said Holly Dunlap, who recently designed a Hollywould shoe and handbag line for Target. "People loved to be able to buy Hollywould products at such a low price, and we were able to reach a wider audience than we can at our usual price point. The products I did for Target were not too similar to our main collection, so there was never any confusion and the difference was kept very clear."

One Go participant said Target pays $100,000 for a designer's efforts — no matter how much revenue the line generates for the retailer. Another designer said, "They pay a designer fee and it's substantial. For the amount of exposure and credibility Target gives you, it's a pretty fair compensation. It's not something you can retire on, but it's a quick-turn project."

Source: Women's Wear Daily