Target (NYSE:TGT) is ending its two decades old licensing agreement with apparel maker Cherokee (NASDAQ:CHKE) as it tries to fend off the inroads in sales made by fast fashion shops like H&M, Zara, and Forever 21. But like J.C. Penney (NYSE:JCP) before it, which also sought to make its styles more hip and modern by clearing the racks of stodgy in-house brands, removing the popular line of clothes may be a decision Target comes to regret.
Cherokee was found mostly in Target's kids department and had grown into a $1.1 billion brand for the retailer, according to The Wall Street Journal, one of only 10 brands the retailer has that generates that kind of money. Although the company says the move is a result of wanting to innovate and energize the brands and styles it offers consumers, it could rue the day CEO Brian Cornell decided to kick Cherokee to the curb.
A cautionary tale
One need only look at what happened to J.C. Penney when it got rid of its St. John's Bay and Ambrielle brands to see the risks Target is incurring by ending the licensing agreement. While there were a lot of reasons behind J.C. Penney's near-complete financial implosion several years ago, one that stood out was its decision to go with more national brands instead of in-house lines. When St. John's Bay and the lingerie line were removed, "denim bars" featuring jeans from Arizona, Buffalo, and Levi Strauss, and pricier brands like Nanette Lepore and Michael Graves were brought in.
And the customers fled as a result. Sure, transforming a stodgy business like J.C. Penney into a modern day retailer that looked and functioned more like Apple was also a big problem -- eliminating cash registers and substituting them with employees walking around with iPads confused the heck out of customers -- but it was also the loss of the retailer's popular brands that contributed to customer flight.
When J.C. Penney eventually did its apology tour following ex-CEO Ron Johnson's dismissal, it offered a mea culpa of sorts to customers: We changed, you didn't like it, so we changed back. And if apologies don't work, we'll beg. Four brands that were axed were quickly returned to store shelves.
With most of Johnson's changes undone within weeks of his ouster, the recovery in J.C. Penney's fortunes began in earnest, and it appears to be paying off. Revenues are rising, comparable sales are ahead of rivals like Macy's and Kohl's -- in fact, it's likely J.C. Penney is stealing customers back from its competitors -- and the possibility of sustained profitability in the near future is real.
Boom and bust?
Target is also trying to engineer a turnaround, even though it's nowhere near the financial mess J.C. Penney was. And while its initial efforts look successful, Target remains in danger of causing it to derail.
Second quarter comparable sales at the third largest U.S. retailer were up 2.4%, driven higher by especially strong results in what it calls its "signature categories" -- style, baby, kids, and wellness. In fact, comps there grew three times faster than the company average, and it's probably no small coincidence that Cherokee is represented there. It was also the second straight quarter Target experienced exceptional growth in those categories.
By ending its licensing agreement with Cherokee, Target risks upending the good work it has done to recover from the credit card account breach that caused many of its customers to flee. They've returned to the store because of the efforts management has made to restore consumer trust, but also because they feel they'll find the styles and brands they're accustomed to. Without Cherokee on the racks, there's a danger they'll look elsewhere for their needs.
The separation from Cherokee isn't final yet, as consumers will still be able to find the brand on store shelves until 2017 when the agreement runs out. And Cherokee's Liz Lange line of maternity clothes, which is covered by a separate agreement, isn't affected -- at least not yet.
That means management has time to reconsider. Fast fashion houses have impacted a number of retailers, causing them to develop their own disposable fashion brands (Hollister at Abercrombie & Fitch), or change the entire direction of their company (Gap, which has remodeled its Old Navy stores in the fast fashion mode and will follow suit with both its Gap and Banana Republic stores, too).
But Target's choice to jettison a popular brand of clothes that have been responsible, in part, for its customers' loyalty could become a regrettable change that derails its turnaround and recovery.
Rich Duprey owns shares of J.C. Penney Company. The Motley Fool owns and recommends Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.