Loblaw Takes Retail Fight to U.S. With Joe Fresh Bet
Loblaw Companies Ltd. (L) is stepping up its battle with Wal-Mart (WMT) Stores Inc. and Target (TGT) Corp., this time on the retail giants’ home turf with plans to sell its Joe Fresh clothing label at 700 locations across the U.S.
Canada’s largest grocer will open Joe Fresh outlets inside JC Penney Co. Inc. (JCP) department stores, expanding the clothing label’s U.S. presence from six stand alone stores in New York and New Jersey by spring 2013.
“It’s basically like Target coming up there and in 2013 opening a hundred-and-something stores in old Zellers locations,” said Brian Yarbrough, an analyst with Edward Jones & Co in St. Louis. “If you were to open stand-alone stores it would probably take them 15 years to get that much square footage.”
Joe Fresh’s foray into the U.S., announced as the company reported a drop in second-quarter earnings today, could help offset increased competition in Canada from Target, Yarbrough said by phone. Both stores offer cheap-chic fashion lines appealing to similar consumers.
Wal-Mart is also continuing to put pressure on the Loblaw’s grocery business which generated C$30.7 billion of revenue in 2011. About half of Wal-Mart’s 330 stores have been turned into grocery-carrying Supercenters and more are in the works, according to Bloomberg Industries. In June, Wal-Mart said it would reduce prices on 10,000 products, including about 3,300 grocery products.
“The strategic move into the U.S. in partnering with JC Penney should help offset the medium term pressures in the grocery-store landscape,” said Kenric Tyghe, an analyst with Raymond James in Toronto. Tyghe rates the stock outperform and has a $42 target.
The “store-within-a-store” concept will see Loblaw act as a wholesaler while retaining final say on how Joe Fresh products are displayed and marketed, Vicente Trius, Loblaw president, said on a conference call with analysts.
The concept is part of new JC Penney Chief Executive Officer Ron Johnson’s turnaround strategy. Johnson, who helped develop Target’s brand in the 1990s before joining Apple to help create stores with the highest sales per square foot in the U.S., has lured brands like Levi Strauss and Buffalo to set up shop in his department stores.
JC Penney had a $163 million loss in the first quarter as revenue slid 20 percent, the biggest quarterly decline in more than seven years. Everything from same store sales, to store traffic to purchases fell.
“We believe in the vision from Ron Johnson of creating a specialty department store and we feel very good that in this store-within-a-store concept Joe Fresh fits very well,” Trius said. He added the deal would not result in any capital expenses.
Loblaw fell 1.5 percent to close at $31.45 in Toronto today after reporting second quarter profit fell 19 percent to C$159 million ($156 million) and forecasting it would end the year with profit below last year. The stock is down 18 percent this year. The company has struggled in recent years to improve logistics and its supply chain. Earnings were damped this quarter by a $20 million charge to upgrade computer systems that keeps track of inventory.
Yarbrough of Edward Jones says the logistics investments will pay off and help Loblaw compete with the likes of Wal-Mart. When those costs disappear from the balance sheet he said earnings will rebound, but until then they will continue to weigh on the stock.
“The problem is no one’s giving them respect right now because every year it’s just delayed,” he said. “I don’t think any one believes them at this point.”
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