Nautica brand losing ground

NEW YORK (Fortune) -- Nautica, the sportswear brand with the seafaring theme, is facing the prospect of reduced selling space for its products at some large department stores, Fortune has learned.

The moves by Dillard's and Macy's underscore the challenges facing manufacturers following a wave of department store consolidation that has shifted the balance of power away from the national brands these stores once coveted.

Department stores like Macy's are favoring private labels like Alfani and Charter Club over brands like Nautica.

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The big chains such as Macy's (Charts, Fortune 500), which was formed through the 2005 merger of Federated Department Stores and the May Company, have increasingly replaced branded goods with private label and demanded exclusive deals from suppliers.

Fortune has learned that Dillard's (Charts, Fortune 500), the country's second largest department store chain behind Macy's in terms of sales, plans to stop carrying the Nautica men's sportswear collection - the khakis, dress shirts and sweaters that have long served as the brand's cornerstone. Dillard's will replace the products with its own private label beginning early next year, sources said.

Eric Wiseman, the president and soon-to-be chief executive of Nautica parent VF Corp. (Charts, Fortune 500), confirmed the pullback, but said Dillard's will continue to carry some merchandise under the Nautica name, including women's clothing and home goods. He said the men's sportswear sold at Dillard's accounted for less than 10 percent of the brand's overall sales.

VF does not break out sales for specific brands, but Nautica makes up the bulk of its sportswear revenue, which totaled $685 million last year, according to regulatory filings.

Dillard's spokeswoman Julie Bull said it was the company's policy not to comment on its relationships with suppliers.

Also pressuring Nautica is Macy's announcement last week that it will become the exclusive retailer of Tommy Hilfiger merchandise. Macy's is expected to give Tommy additional floor space and heavily advertise the brand to spur sales, moves that could mean less room for Nautica goods in Macy's aisles, industry executives said.

"You've got Polo Ralph Lauren (Charts) on one side of the aisle and Tommy Hilfiger on the other," said an apparel executive at another firm. "Nautica is going to get squeezed."

Macy's spokesman Jim Sluzewski said the company has no plans to cutback its Nautica offerings. "Nautica is a very strong brand for Macy's and continues to be a very important resource for us," he said. "It will continue to have significant space in our stores."

Wiseman said he had no indication that Macy's was planning any changes to its Nautica line up, but he acknowledged the fierce competition. "We have to earn every bit of floor space we have in Macy's," he said. "And so does Tommy Hilfiger. It's not a fait accompli that Tommy will get renewed life from this deal."

For years, Polo, Tommy and Nautica were the Big Three of men's sportswear, but only Polo has held its own in the face of growing competition from upstarts, especially urban labels like Sean John and Rocawear.

Once synonymous with the preppy country club lifestyle, Tommy Hilfiger stumbled when it tried to appeal to an inner city crowd. The company, which was bought by the private equity firm Apax Partners in 2005, has dramatically scaled back its presence in the U.S. to focus on Europe, where sales are growing.

As for Nautica, the brand lost touch with its classic roots by veering too sleek and then too rugged in its styles. VF, a $6.2 billion apparel maker that includes brands such as Lee jeans and the North Face, acquired Nautica in 2003 and has tried to refocus the label on its nautical heritage. VF upgraded the quality of Nautica button down shirts by doubling the thread count and added more designer touches like pin-stripes to its navy wool-blend blazers. A women's line was reintroduced in 2006, followed by accessories and a fragrance.

Despite those efforts, sales have been choppy. Revenue for the Nautica brand slid 10 percent in the third quarter, partially as a result of a calendar shift that pushed some orders into the fourth quarter, but also because of sluggish department store sales.

One big problem is that Nautica, unlike some other brands that have built their own boutiques, still relies on department stores for the bulk of sales. Nautica has 122 U.S. outlet centers and 199 stores overseas, but currently operates no full-priced stores here.

Department stores have lost share in recent years, as shoppers turned to trendy specialty stores and discounters. Compounding the problem was a wave of consolidation that caused retailers like Macy's to close scores of overlapping stores, eliminating some $3 billion in sales, according to some estimates.

At the same time, these stores increased the amount of private label goods on their shelves, further displacing some national brands. Private label goods are designed and made specifically for a retailer under a brand that cannot be found elsewhere, such as Macy's Alfani and Charter Club names. Retailers like private label, because the merchandise tends to carry higher margins than do branded goods.

Apparel manufacturers who are unhappy with the new arrangements have few options. After Macy's, with $27 billion in sales, the next largest department store is Dillard's with $7.8 billion, followed by several even smaller regional players such as Bon-Ton and Belk.

One possible solution for a brand like Nautica is to cut a deal with J.C. Penney (Charts, Fortune 500) or Kohl's (Charts, Fortune 500), both of which are considered lower priced options to the traditional, more mid-tier department store chains.

But few companies are willing to risk angering Macy's with such a deal, as Liz Claiborne did when it rolled out a new line of lower priced clothing at J.C. Penney last spring. Macy's, which says it wants to sell more exclusive brands, cutback orders of the Liz Claiborne line sold in its stores.

Wiseman said Nautica has no plans to sell to J.C. Penney or Kohl's. "We're staying with the department stores," he said.

In the meantime, the brand is undergoing another strategic review, the second since it was acquired by VF. "We are revisiting our strategy," Wiseman said, "and asking, 'Where do we go from here?'"