Rundown: Zac Posen heads to Gap, Target reportedly weighs paid membership, and Tapestry shows promising growth

0:06Hello, everyone, and welcome to the Modern Retail Rundown, where we break down the biggest and most interesting retail headlines of the week. I'm senior reporter Gabby Barco, and I'm here with managing editor, Anna Hensel. Hello, Anna, welcome back. Thank you. It is a tall task to discuss the most interesting retail headlines of the week, but I am confident we will have an interesting discussion today. Exactly. Well, you know, it's subjective. It's curated by us. What we think is the most important. Curated, such a buzzword, yes. Love curating. First up, Gap is bringing on designer Zach Posen as creative director to help revamp their brands, specifically also Old Navy, where he'll be really focused.

0:51Next, we'll look at why Target is testing this new membership program that sounds a lot like Walmart Plus and Prime. And finally, we'll go into Tapestry's unexpectedly positive performance, which is a bright spot in the luxury category right now. So let's kick off with this executive announcement that Gap made this week, just right ahead of Fashion Week. So basically, Zach Posen, American designer, he is coming on as creative director and also taking on the chief creative officer role at Old Navy specifically, which I thought is pretty interesting. You know, to me, that sounds like they are trying to essentially freshen it up or make it a little bit more fashion forward to compete maybe with, you know, Zara, H &M, Shein, all of these fast fashion brands.

1:48He'll also be serving as, end quote, cultural curator and creative partner, speaking of curation. So, yeah, what do you make of this, especially given where Gap is at the moment? You know, they have not been doing that great. We don't know their, you know, post-holiday performance yet, but sales are down year over year in general. Yeah. So like you said, Gap is clearly in need of a refresh. So they brought on this new CEO, Richard Dixon, last year, who previously was an executive at Mattel. So kind of I think the thinking behind that was that there was a lot of cultural interest around the Barbie movie.

2:37He clearly has found some ways to kind of not reinvigorate that brand, but found a way to bring a brand into like new cultural conversations. And so I think that that is what Richard Dixon is trying to do with Gap. And so now he's named Zach Posen as creative director to help him do that. I mean, I think you mentioned the line from the press relief, which is that Zach Posen will serve as a cultural curator, which is interesting. And I think definitely goes to show that, again, the big focus here is to try to help Gap become kind of like part of the cultural conversation again, or like be a little bit buzzier basically.

3:24And so he's going to be creative director for Gap and then also chief creative officer at Old Navy specifically. So it sounds like from the press release, he will have a little bit more of a direct hand in like the merchandising and the product at Old Navy specifically. And so this appointment comes at a time when Gap's brands, particularly Old Navy, are struggling. I mean, sales are down across the board, but Q3 net income was$218 million compared with$282 million the previous year. And then Q3 revenue was$3.77 billion, down about 7 % from $4.04 billion the previous year. So GAAP is clearly in need of some help, and they are hoping that Zach Posen can fix some of those problems.

4:14Yeah. So let's get into, you know, I guess, speculating why Posen. So, you know, for those of you who are unfamiliar, Zach Posen is known for his red carpet designs. He, you know, designs a lot for celebrities and red carpet looks, but his experience with diffusion and affordable lines does go back. I think his Target collection, I don't know if you remember. Designers used to do a lot of these. It dates back to 2010. It was really popular. But he's also worked with David's Bridal. And he was actually previously creative director at Brooks Brothers. So he's familiar with mass market. It's just unclear whether it's going to be a fit for this really, really mainstream struggling brand in this case, like Gap.

5:06Yeah, it's difficult to see how that'll do. Although I think some experts believe that it's going to take more than that, especially because this isn't the first time Gap has made a really splashy, you know, celebrity slash designer announcement. This has been a really long term trend for them. I think it was interesting. So right before this, I went and looked at some of the articles when Target announced back in 2010 that they were doing a line with Zach Posen. and if you really want a blast from the past go and look at just like the clothing that was part of that line it's a very 2010s look um so a lot of nostalgia there but what i thought was interesting reading back to how the target line was zach posen was positioned is like zach posen was really a hot designer at the time and the line was basically about taking his looks um from the runway or, you know, this dress that Zach Posen designed for Natalie Portman.

6:13You know, now he recreated a more affordable version of it for Target. And so it very much was about like, Zach Posen is the hot designer at this time. Here are these affordable runway-esque looks that you can wear as part of this line. And I don't know if he has the same cultural cachet as he used to. And also kind of frankly, with the way that, you know, awards don't hold the same cultural cachet as they used to, like viewership is down for things like the Oscars. And so I don't think that same playbook will work. And so, yeah, a lot of the commentary I saw is, you know, how will his experience fit with a role designed for like mass market appeal and figuring out mass market apparel?

7:03And so I think that it's just a different landscape. And it will be really interesting to see what he does, because also, I mean, this was a factor back in 2010. But, you know, now Gap and especially Old Navy, they have to compete with fast fashion and they especially have to compete with Shein, which has become such a big player. And I am sure that Gap and Zach Posen have a plan, but it's just a different landscape. Shein is constantly refreshing designs. I feel like the trend cycle is a lot shorter. So it'll be interesting to see what he does. Yes. Yeah. And like I mentioned before, Gap is sort of known for this.

7:48I remember when they announced Sarah Jessica Parker as creative director. Talk about a blast from the past. It's very much a 2008 kind of, yeah, moment. But even more recently, I mean, we saw the Yeezy brand and then they did have a partnership that was supposed to be taking off with Telfar Clemens and both of those did not pan out. So, and that's just from 2020. I do wonder whether this is going sort of in the opposite direction of just going back to basics with an all-American designer. Yeah. I think my skepticism here is that it feels, you know, Gap has tried a bunch of different things. They have tried the partnership with Yeezy.

8:32They've tried bringing on high-profile creative directors. They've also tried to refresh some of their brands. A big focus for the Banana Republic brand in the past couple years has been repositioning it as, quote-unquote, a premium lifestyle brand. I think that's because Banana Republic was known as a workwear brand. People are going into the office less, or what they're wearing to the office has changed. So Gap has tried to make Banana Republic a lot more like high end and premium, but sales are still down 11 % there. So I feel like there's so many things Gap has tried. I think the big issue is just like coming up with a new image for all of its brands because it manages quite a few brands.

9:22And then also just coming up with merchandise across the board that like really consistently fits that image. So we'll see what happens. Well, in other mass market news, let's move on to Target and its attempts to also rebound. It's been having a rough couple of quarters. So this week it's been reported by Bloomberg that Target is testing a membership program That sounds pretty similar to Prime or Walmart Plus in the sense that it will be paid and feature more perks than what its current free loyalty program has, which is just standard in-app rewards, all of that. So this is interesting because it seems like a pretty different direction for Target.

10:13So far, it never really played in this paid members space. So I do wonder whether they're going to be able to convert enough people. But there is speculation that this could be integrated into Shipt, which they do own. So that's their delivery service, which would basically make it a typical two-hour delivery type of perks maybe. But there's no sign of what the pricing is going to be. You know, it's hard to tell whether it's going to be the typical$100 a year,$139 is where Prime is at right now. But I feel like they're going to have to really bring enough value in order to get people to actually sign up.

10:59But this is expected to come sometime this year. But again, this is all just being reported according to a source familiar. Yeah, so what do you think this is going to look like, I guess? Do we think it's going to be closer to what Walmart Plus is doing, which is essentially segmenting this one program into a same-day Prime-esque delivery service that is fulfilled out of its stores, which Target already does, right? They do a lot of fulfillment out of stores. Yeah. So I think it'll be really interesting to see what happens. So according to the Bloomberg article, they say, you know, Target is weighing a new paid membership program.

11:42Details on it are light. Like you said, the story says the new program could launch as soon as this year. But it's one of those things, you can't count on it until it happens. I remember when Walmart was getting ready to launch Walmart Plus. It felt like there were so many stories about this is coming, this is coming. And then they had to, you know, they were testing stuff internally. And then I think they ultimately tweaked a little bit of the perks that were offered. We don't really know yet what this will look like. I think that what it could probably look like is store pickup and same-day delivery from stores is something that Target has been investing heavily in.

12:29They've also experimented with some things like add a Starbucks drink onto your in-store pickup order or bring returns along with your in-store pickup order. So I could see them adding on some additional perks to those services for paid loyalty members. And as you mentioned, they also have a SHIFT, another delivery program, which Target acquired SHIFT a few years ago. And SHIFT has delivery deals with other retailers. So you can get other stuff delivered, not just from Target through SHIFT. So I think that there are a lot of areas, you know, that Target can experiment with. I do think, you know, people still prioritize fast delivery.

13:18And so I think that, you know, people could probably be willing to pay a premium for that. But I just think it comes at an interesting time because people are still really dealing with inflation. You know, I know I'm getting fatigued with paying for all of these delivery services. So it's just a matter of, you know, can Target convince people that another membership program is worth it? Yeah, and I think it's interesting, too, because we're coming off of, I believe, Target digital sales are down, of course, compared to the pandemic. But I'm sure they were hoping that would be a little more sticky.

13:57So I wonder whether they're trying to kind of swing back into growing digital sales versus just their in-store. Target's been an interesting case study, I feel like, over the past year because they attract a slightly higher-end shopper. And more of those shoppers are pulling back on discretionary spending. So I think that there are certain categories at Target where sales are up. But it's not, you know, if you're a retailer that sells a lot of things like Target, what you want to be up is sales in high margin categories like clothing, electronics. And interestingly, you know, I think Walmart has been one of the beneficiaries of inflation just because they are a retailer that's a little bit more known for deals.

14:49They've said, you know, that over the course of inflation, they have been able to attract some higher income shoppers who are just looking for more deals now. But there's this interesting quote that you pulled, Gabby, from one of the last earnings calls that I'll just read. And so this was from Target COO John Mulligan. He said, there's tremendous pressure on the consumer's wallet and the impact of very sticky food and beverage inflation when compared to pre-pandemic. food and beverage prices are up on average 25 percent. And that certainly pressured consumers as they're making choices and certainly has forced them to make very tough choices when it comes to discretionary goods.

15:30So, again, all that to say is that people are still feeling the impacts of inflation, especially in categories where they need to spend like food and beverage. And that is just forcing them to make tough choices. So if Target is going to roll out a membership, you know, I think that they would need to position somehow, how is it going to help you save on like food and beverage costs or combat inflation or, you know, the perks for delivery that you will get, like are worth the, however much they charge for this. If it's a hundred dollars, they have to make the case that the perks that you get through this are worth a hundred dollars a year or whatever it ends up being.

16:10Yeah. I think it's also, uh, I think we could maybe comp it to something like where Walmart Plus has tried to differentiate itself because it's hard to tell, you know, whether there's a lot of overlap, but in this case, it's almost like you're asking that customer to replace their, let's say, you know, Prime is probably the most popular example with, let's call it Target Plus or whatever this is going to be called. Um, it's, yeah, it's hard to make that case unless you're going to be presenting really, really unique deals. And we saw that with Walmart Plus, and then more recently with Best Buy, they overhauled their membership program, introducing more tiered models, where they are expecting to get more boosts of signups.

16:59But with Walmart, we saw this past holiday season, they had a lot of exclusive deals for members. The same thing with last summer, they had this sort of like Prime Day-esque shopping event where they also had members-only perks and exclusive shopping windows. So I wonder if, you know, you'll get something like that because delivery alone, I don't know if that's going to do much because you can get things delivered through ship, like you said. Yeah. And I do remember when Walmart Plus launched, there were some things like perks for grocery delivery as well as fuel discounts, which is something that Amazon obviously doesn't really have.

17:44I mean, yes, Amazon has grocery stores, but it doesn't have as big of a in-person grocery business as Walmart does. And so I remember like that was kind of the key differentiator for Walmart. And then, as you mentioned, since then, Walmart has also kind of tried to position its paid membership program in a way that can compete with other things that Amazon offers like Prime Day. So I think with Target, it's just, again, the key is they have to figure out, OK, what can our paid membership program offer that all these other ones don't and still compete with them? So we'll see what happens. Well, let's move on to a company that is doing well coming off of the busy holiday season.

18:33Tapestry, which is the parent company of Coach, Kate Spade, Stuart Weitzman. They reported pretty good results. And one thing we want to get into is that they are growing their Gen Z and millennial customer base, which is like the holy grail for every brand right now. So, but yeah, let's get into the numbers. Ana, what kind of results did we see from Tapestry this quarter? We've discussed this a little bit, but kind of a big question for us is how will luxury continue to do? Obviously, there's inflation right now, but there's talk in the past about how luxury can be kind of quote unquote recession proof, especially among the higher income customers.

19:17So I think that Tapestry earnings this week do provide an interesting window into how luxury could do over the next year. So as you mentioned, Tapestry surpassed analysts' expectations. So they posted revenues of$2.08 billion for the quarter ending December 2023 compared to$2.03 billion during the same time last year. As you mentioned, the parent company operates three brands, Coach, Kate Spade, and Stuart Weitzman. And what was also interesting about earnings is that Coach is really the shining star for tapestry right now. It's pretty much what's driving the bulk of their revenue increase. And with luxury conglomerates like this, I mean, you also have to look at how they're doing in different regions.

20:08So especially sales in China and Europe were up 19 % and 11 % respectively, whereas they were flat in North America. And then just another interesting data point to contrast this to is that when they just reported earnings, Capri, which is the owner of brands like Michael Kors and Versace, they saw sales drop by 5.6 % year over year. So by contrast, tapestry is doing a lot better the interesting wrinkle in all of this of course is that tapestry announced last year that they were going to acquire capri uh and the deal is expected to close sometime this year we don't know exactly when um but tapestry is doing well right now they i think that they think they can you know reinvigorate uh some of the pre-brands that they plan to acquire.

21:01How is luxury going to do this year? I think it depends on how well tapestry does at integrating Capri into its portfolio. But so far, just looking at the tapestry results, it seems like things look pretty good for the next year. Yeah. And I do think it's interesting that China, you know, has kind of rebounded in spending and And Europe also, at least for these brands, while North America remains pretty flat. So I think that speaks to just where the customer is here, at least when it comes to these types of brands. It seems like it's pretty flat still. So it'll be interesting to see whether they'll continue to bet on international to grow, especially for if they do acquire Capri within the next few months.

21:52Other than that, I think there are also very specific bright spots in this, which is that Tapestry was able to attract a specific type of customer, like I mentioned previously, which I think is pretty interesting because you don't necessarily think young when you think of these brands. But I think Coach specifically has done a really good job in the last couple of years of becoming very, you know, a Gen Z-liked brand or loved brand just by being able to kind of update styles, go back to basics, you know, leather goods. So in this case, you can give us the figures. I think they make sense. What was interesting, as we mentioned, Coach in particular is doing really well, but they have one hero product in particular that's driving a ton of their growth and also is really popular with Gen Z or millennials.

22:46So it's their Tabby bag in particular, which I think, I mean, it's like a small leather bag. I don't know how else to describe it, but it's just been really popular. So sales of the Tabby bag nearly doubled over last year. And in particular, executives said these products over-indexed with newer, younger consumers. And Tapestry also said during the quarter that it acquired 2.5 million new customers in North America, about half of which were Gen Z or millennial. So I think that is a big part of why Tapestry is doing well or okay relative to other luxury brands. And it seems like this is a strategy as of late at these multi-brand luxury conglomerates.

23:35Excuse me, that was a mouthful. When you manage multiple brands, sales at some of your brands might be declining or flat, but it can be offset if you have one really stellar brand or like one product that goes viral or just one product that is really popular among a demographic. And I think the Tabby bag is an example of that. yeah uh this bag is uh it's a small uh satchel that has been compared to the fendi fendi baguette so maybe gen z or tiktok at least has uh made that comparison of course it's a fraction of the price it's just a classic design so i can see why it's doing really well and they're probably i'm sure it's gonna have a million different color releases in the next couple of years but yeah I think like you said this consolidation that's happening will also be interesting because we're seeing it across the board right like it seems like every fashion conglomerate wants to be the next LVMH really is ideal but in this case it's like a very American centric brand so yeah I think it should be a pretty big year for that and we'll see whether it rebounds fully at least domestically.

24:51I think so with Tapestry set to acquire Capri Holdings this year, for me, what's on my mind is it's going to be a big year of consolidation and luxury. And there could be some shifting brand preferences as, you know, new companies acquire new brands and kind of they have to figure out where to focus their attention on in their portfolio. well that'll be it from us this week you can come back on saturdays to hear more weekly rundowns of big retail headlines you can also rate and give us a review on apple podcast spotify or wherever you're listening to this thank you for listening and come back next week

25:45Thank you.