Retail

Target's apparel sales are on fire. And that's bad news for everyone else

Key Points
  • Target's apparel business is outperforming other categories.
  • "We are picking up market share from a number of competitors, whether it's department stores or specialty," Target CEO Brian Cornell says in a phone interview with CNBC.
  • Apparel sales are up more than 10% during the latest quarter, which also helps strengthen Target's profit margins.
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While Walmart is finding strength in grocery, Target is finding it in apparel.

The retailer said the apparel category reaped the most "dramatic" market share gains in the latest quarter, when it reported earnings on Wednesday. It said apparel sales were up more than 10%, which also helped strengthen Target's profit margins.

Clearly, Target's efforts to get back to being known as "cheap chic" are working.

In the fashion department, it has refreshed stores to make individual brands look more like their own mini boutiques, with more mannequins and table displays showing off merchandise. It has launched dozens of in-house apparel brands over the past three years, such as "A New Day" for women, "Auden" for lingerie and Goodfellow & Co. for men. They're all reasonably priced, with guys' winter sweaters selling for under $30 and a women's party skirt for $27.99.

Notably, Target is succeeding at a time when others are struggling to sell clothes.

Teen apparel retailer Forever 21 has filed for bankruptcy. And Kohl's, when it reported earnings Tuesday, said women's apparel was its weakest category during the period. Gap's brands, including what had been its fast-growing Old Navy label, are struggling. Dressbarn is wrapping up liquidation sales at its remaining stores. Amazon keeps trying to grow in fashion but has struggled to persuade shoppers to buy more than basic apparel from its site.

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"I think our commitment to our new store operating model, where we have dedicated business owners in that apparel category ... is really driving great results," Target CEO Brian Cornell said on a post-earnings call with analysts. "The combination of the work we've done with our own brand assortment, adding some new national brands like Levi's in select stores, the service that we're delivering in store, and the inspiration we're creating online has really come together."

Cornell went on to call apparel, for Target, "one of the highlights of our quarter if not for the entire year."

And CFO Michael Fiddelke explained that apparel is "really healthy on the margin line" because it is selling more clothes at full prices, even at the end of the season.

During the latest quarter, Target generated some buzz with its "20th Anniversary Collection," which celebrated all of the designers the company has partnered with in the past. Shoppers flocked to Target to scoop up Lilly Pulitzer dresses, Missoni sweaters, Phillip Lim tops and Hunter accessories.

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Cornell said the anniversary collection's drop has been driving footsteps to stores, but overall the collection's contribution to Target's apparel sales gains during the quarter was "really immaterial." That should give investors even more reason to believe Target's existing apparel brands have been, and can keep, pulling their own weight.

"While it is true that such occasions do not make a major contribution to growth, they provide the icing on the cake," GlobalData Retail Managing Director Neil Saunders said about the 20th Anniversary Collection.

"Our data show that where improvements have been made, dwell times, average visitation frequency, cross-category shopping levels and average basket size all rise," Saunders added.

Cornell told CNBC during a phone interview that Target will be slowing its cadence of new apparel brand launches and will be more "surgical moving forward."

"I think we've been on trend for the season," Cornell said. "We know we are gaining significant share in the market. ... We are picking up market share from a number of competitors, whether it's department stores or specialty."

Target shares closed Wednesday up more than 14%, hitting an all-time intraday high of $127.20. The stock has rallied more than 90% this year. Target's market cap is now roughly $64.6 billion.

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