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How Target is dismantling Macy's, Kohl's, J.C. Penney and Sears

Brian Sozzi
Editor-at-Large

Target (TGT) is proving that it is America’s new department store. And that should terrify the executive teams at department stores such as Macy’s (M), Kohl’s (KSS), J.C. Penney (JCP) and Sears (what’s left of it) whose jobs for decades was to simply sell apparel and accessories to consumers.

Lured in by Target’s expanded grocery departments, remodeled stores and buy online, pick up in-store service, shoppers are clearly wandering over to the retailer’s apparel department. Target said Wednesday that same-store sales of apparel skyrocketed 10% in the third quarter — apparel comps rose a solid 5% in the second quarter.

Target’s apparel business represents more than 20% of its annual sales. It’s the company’s third largest segment, behind food and beauty and essentials.

For some perspective on Target’s market share gains in apparel, remember that Kohl’s notched a terrible 0.4% same-store sales increase in the third quarter. Executives blamed pockets of weakness in its apparel assortment for the lackluster showing, notably women’s apparel. Over at J.C. Penney, same-store sales crashed 9.3% on the back of continued sluggish apparel sales.

Better shopping experience

Target finds itself having success in apparel for several reasons, not solely due to people coming in to buy groceries. Remember, apparel is generally a discretionary purchase that people have to be enticed to make. For starters, Target has significantly increased the number of mannequins it uses in the apparel department to show off new styles. Moreover, Target has invested in diverse-looking mannequins to entice a broader set of shoppers.

ORANGE, CA - NOVEMBER 17: An increased number of mannequins feature clothing and shoes throughout the remodeled Target store in Orange, California, on Friday, November 17, 2017. (Photo by Jeff Gritchen/Digital First Media/Orange County Register via Getty Images)

In many respects, Target’s apparel department — flush with larger dressing rooms and brighter lighting — are easier and more inviting to shop than a department store. And, the prices tend to be cheaper.

“[Target’s apparel comp] speaks to the strength of TGT’s merchandising, particularly as other apparel retailers are struggling,” says Nomura Instinet analyst Michael Baker.

Beyond that, the company is just flat out selling better wares. The company has greatly expanded the number of private label clothing offerings and inked stronger deals with national brands like Levi’s and Champion.

Speculation is running rampant that Target is in the running to add Nike to its stores now that the sneaker giant has pulled itself off Amazon. The addition of Nike would deal a major blow to Macy’s, Kohl’s and J.C. Penney, which for years have been the main outlets for the sportswear brand.

Strength in apparel — which is one of Target’s higher margin businesses — has continued to power it to strong quarters this year.

Target shares spiked 14% in early trading today to a record high following much stronger than expected earnings. Earnings highlights included:

  • Total sales: $18.7 billion vs. $18.22 billion estimate

  • Earnings per share: $1.36 vs. $1.19 estimate (Target guidance: $1.04 to $1.24 a share)

  • Same-store sales: 4.5% increase vs. 3.5% estimated increase (Target guidance: up 3.4%)

  • Gross profit margin: 29.8% vs. 29% estimate

  • Full-year earnings guidance: $6.25 to $6.45 vs. estimate $6.18 a share (Target prior guidance: $5.90 to $6.20 a share)

At this point, perhaps the department stores should take a page from Target and invite Kroger into their stores. Clearly they could use the traffic from people stocking up on food each week... and maybe buying a new sweater in the process.

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow him on Twitter @BrianSozzi

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