Thursday, January 19, 2012

Sears: The Beginning of the End?

Possibly - but predicting “the end” for Sears Holdings may still be a bit premature, even though we’ve been harping on Sears as a bumbling, stumbling retailer for a number of years now. During the past three decades or so, between futile efforts to create new store concepts (remember “the Softer Side”?) and the inexplicable hiring of a new CEO without one iota of retail experience, Sears has somehow managed to weather the storm. But it appears the “too big to fail” persona that Sears evokes may be facing some resistance at the moment.

The recent announcement of the closings of 100 to 120 Sears Holdings stores only adds to the lowlights of the ever-turbulent Eddie Lampert era. As I write this, a nice rebound of nearly 8% in Sears Holdings stock price was spoiled by the announcement that CIT Group is halting Sears loans to vendors. To add to the pain, Sears announced that its Executive VP of Apparel and Home had left the company after only a two-year stint. There’s no question that Sears continues down the wrong merchandising path, a fact which is reflected unquestionably in its stock value, which has plummeted 82% in the past five years, and nearly 60% in just the past 12 months.

Eddie Lampert brought in Lou D'Ambrosio early last year as Sears’ new CEO. At the time D'Ambrosio was fresh off a six-month stint as a consultant to the Sears Holdings Board of Directors on strategic and operational initiatives. Since his arrival, a number a changes and announcements have occurred:

• The introduction of two new clothing lines, the Kardashian Collection and the Sofia Vergara line
• A power play based on threatening to move its headquarters out-of-state in order to obtain tax concessions from the State of Illinois
• The layoffs of about 700 appliance reps at Kmart stores
• A spin-off of Orchard Supply, a specialty store division of 87 units, into its own independent company
• The distribution of its Craftsman and DieHard brands to Costco
• Marketing space in existing stores to other retailers
• Distributing 5,000 iPads and 1,100 iPod Touches to salespersons in an effort to better control inventory and track customer orders
• The announced closing of up to 120 stores

Time will tell if any of these initiatives translate to the bottom line, but so far the bleeding continues, with a Q3 loss of $421 million compared to only $218 million for the same period in 2010.

It’s evident that Lampert and D’Ambrosio are thinking small these days - as in smaller stores. Total store count for the company has actually increased since FY 2005, with the addition of 195 units through the end of FY 2010. However, the only segment of the company to add stores was the Specialty Store component, both in the US and Canada, which gained 335 units during that time frame. Large format stores, including both Kmart and Sears, declined by 140 units. The partial list of store closings announced last month were entirely large format stores. An annual scorecard of store counts is shown below:

Could it be that Sears Holdings’ end goal is to focus on its Craftsman, Kenmore, and Diehard brands, ultimately phasing out large-format stores in lieu of a small store strategy to promote these core brands? It is certainly plausible. At the same time, about two weeks ago Sears set us up for another disappointing quarter - the all-important Q4. Through December 27th, Kmart comp store sales were down 4.4% quarter-to-date and Sears Domestic sales were down 6.0%. That performance, coupled with continued margin pressure, is expected to produce EBITA less than half of last year’s amount.

With total sales last year of more than $35 billion, a store count above 4,000 units, and an employment base of more than 300,000 workers, it is unreasonable to think that Sears Holdings will follow the path of Circuit City, Borders, and Linens ‘n Things (among many others) by liquidating anytime soon. Sears Holdings remains a top 10 retailer and is surpassed only by Walmart among department store firms. We don’t recall such a top ten retailer ever going out of business. Yet we also believe that the latest wave of store closings, a mere 2% or so of its store count, is far from the last; if the slight bleeding turns into major hemorrhaging, who knows what might happen next?

Bob Sheehan, Vice President of Research
BSheehan@KeyPointPartners.com
[Please see our article Sears Goofing Up Again? in the March 2011 issue]

Company News

New Employee: Matthew Crowley has joined the Middleboro, MA Office from the Internship Program at Endicott College. Matthew is a Business Administration major and will be working on various projects...New Business: The Leasing Team has added the following new assignments: North Kingstown Crossing, North Kingstown, RI; Foodmaster Plaza, Whitman, MA; 1728 Mass. Ave., Lexington, MA; 21 Main St.,  Maynard, MA;  Mt. Wayte Plaza, Framingham, MA; and 47 Middlesex Turnpike, Burlington, MA.

Industry News: National

US comparable chain store retail sales for December rose by 3.5% year-over-year as measured by the ICSC's tally of 25 major retail chains, the slowest pace since March, according to the ICSC. Among merchandise categories, Luxury Stores led with an with a 8.0% gain, followed by Wholesale Clubs with a rise of 7.0%. Department Stores rose by 3.4%, Discounters gained 3.1%, Apparel gained 2.9%, and Drug Stores rose 1.3%. Among individual retailers, Gap dropped by 4.0% and Limited gained 7.0%; Costco was up 7.0%. Nordstrom was up 8.7% and Saks gained 5.8%; Target grew by 1.6% and TJX by 8.0%. Macy’s gained 6.2%, JCPenney rose a modest 0.3%, and Kohls fell by 0.1%; Rite Aid rose 3.6%, and Walgreens by 0.4%. See our extensive list of retail sales results on Page 4.

Industry News: Accelerating

Dunkin' Donuts plans to double its US locations over the next 20 years. The chain currently operates 7,000 stores nationwide…Dollar General Corp. plans to open 625 new stores in 2012, including its first stores in CA and MA. Dollar General will open stores in 38 states that it already has locations in, and plans to remodel or relocate 550 stores…Giant Food Stores will acquire 16 Genuardi’s stores from Safeway Inc. for $106 million to expand in the Philadelphia area. The outlets will be converted to Giant Foods after completion of the transaction, which is expected to take place in the first half of 2012. Giant operates in Pennsylvania, Maryland, Virginia and West Virginia and has more than 180 outlets…Yogurt chain Red Mango awarded agreements for more than 70 new domestic locations, expanded the chain from 102 to 151 stores, and added Connecticut, South Dakota, and Tennessee to the roster for stores in development…MovieStop plans to double its store count over the next 2 years. MovieStop runs 49 stores on the East Coast, and hopes to have around 100 stores within the next 2 years...DSW Inc. will open 35 to 40 stores in 2012, up from an initial plan of 15 to 20 stores...Jamba Juice will open 40 to 50 new US locations in fiscal 2012. At the end of the fiscal year, Jamba Juice had 750 locations, of which 443 were franchised...Target plans to install Apple mini-boutiques in 25 locations this year, featuring a wider assortment of Apple products than is currently available at Target. Target has already initiated The Shops at Target: the retail giant has tapped five specialty stores to create limited-edition collections housed in a shop-in-shop environment at Targets nationwide. The first go-round features The Webster, The Candy Store, Polka Dog Bakery, Cos Bar, and Privet House.

Industry News: Decelerating

Sears Holdings Corp. will close 100 to 120 stores, about 3% of its 3,560 US stores.To date Sears has announced 79 of the closings: 41 Sears and 38 KMarts...A&P has filed a motion with the US Bankruptcy Court seeking to close an additional 14 stores in NY, NJ, CT, and PA. A&P has sold or closed about 60 locations during the past year...Delhaize Group will close 113 Food Lion, seven Bloom and six Bottom Dollar Food locations in the US. The remaining 42 Bloom shops as well as 22 Bottom Dollar Food stores will be turned into Food Lion outlets. Delhaize ended 2011 with 3,408 stores.

Industry News: New England

Trader Joe's will open a store at Patriot Place this year, between Christmas Tree Shops and Staples. The 16,000 s/f store will be Trader Joe's 18th MA location, and the only one within a 15-mile radius of Foxboro...A Bloomingdale's Outlet will be among the 100 stores opening this spring at the Merrimack Premium Outlets. The Merrimack store will be one of 5 new Bloomingdale's Outlets across the country. The 25,000 s/f Outlet will  anchor the outlet center, slated to open in June…Boston’s Back Bay welcomes 2 new Ann Taylor stores as the women’s retailer tests a new concept: the boutiques are “inspired by a stylish modern contemporary home and are meant to make a customer’s shopping experiences more intimate and chic”. One shop opened in December on Newbury Street, the other will open in March at the Prudential Center. The concept will ultimately replace all Ann Taylor locations throughout the country. Ann Taylor has 373 stores…Nordstrom will open its first CT Nordstrom Rack, a  35,000 s/f store in the West Farm Shopping Center on New Britain Ave. Nordstrom has 104 Rack outlets in the US, in addition to its 116 full-line stores…The Atrium Mall in Chestnut Hill is losing two more tenants: toy shop Creatoyvity and Pottery Barn Kids are closing their doors within the next few weeks, reducing the number of retailers to less than two dozen from a high of about 50. Over the past two years, Borders, Williams- Sonoma, Abercrombie & Fitch, Tiffany & Co., and White House Black Market all closed. J. Crew and Ross-Simons are expected to move across Route 9 to the Chestnut Hill Mall in the spring. Simon Property Group has hired Eastdil Secured to market the 205,000 s/f Atrium …The Old Connecticut Path Marketplace in Framingham has changed hands for $23.2 million. Equity One Inc. bought the Saxonville shopping center, which is anchored by Super Stop & Shop, from National Development Associates of New England. The 80,198 s/f hopping plaza is also home to Firefly’s Bodacious Bar-B-Que and Fifth Ave Liquors...Firehouse Subs will open 69 locations in the Boston area, and a location has been set for the first one, at 545 Boylston St. Firehouse Subs has 450 restaurants in 29 states…Friendly’s Ice Cream closed another 37 stores, including 10 in Massachusetts, as it emerged from bankruptcy protection. The chain has now closed about 100 shops since filing for bankruptcy protection in October, about 20% of its locations...Potbelly Sandwich Works will open a restaurant at Logan Airport. There are over 230 Potbelly locations in Chicago, Washington, D.C., Michigan, Dallas, Wisconsin, and Minnesota...Outdoor gear retailer Moosejaw Mountaineering, known for its X-ray app which lets viewers see its catalog models “nearly naked”, will open a 4,500 s/f store at the Promenade at Natick Mall in March. Moosejaw has seven stores in Michigan and Chicago…Jerry Remy’s Sports Bar & Grill, scheduled to open in May of this year at Commonwealth Landing, the 5.5 acre, five-story headquarters of the former Quaker Fabric company in Fall River, is now scheduled to open in late summer. Fall River will mark the fourth Jerry Remy’s in Massachusetts, and the first outside of Boston...Not Your Average Joe’s will open its 16th location, in Seekonk, MA, this month. NYAJoe’s operates restaurants in Hyannis, Newburyport, Medford, Randolph and in Leesburg, Va. and is currently developing a Maryland location...Frozen yogurt chain Zinga opened this month in Kenmore Square, the first of several planned for Boston. Zinga has development agreements signed for more than 160 US shops…Love Culture will open at the CambridgeSide Galleria this month, with another store to follow at the Natick Mall. The company operates 50 stores in 24 states. It opened its first MA location at Legacy Place in Dedham in 2010, and plans 30 locations this year and 100 stores within the next 3 years...AMC Theatres will open a 12-screen state-of-the-art movie complex in Assembly Row in Somerville’s Assembly Square, the first major tenant announced for the development. A new AMC Theatre is also slated to move in to the former Macy’s space at the Chestnut Hill (MA) Mall. The new 7-screen state-of-the-art theatre will replace the current 5-screen AMC at Chestnut Hill.

December Retail Sales

Commerce Department Monthly Sales

US retail sales grew in December at their slowest pace in seven months but finished 2011 with a year-over-year rise of 6.4%, the Commerce Department said. December sales rose 0.1% after a revised 0.4% increase in November. Sales excluding autos, gasoline and building materials fell 0.1% in December.

Treasury Yields

Consumer Confidence Index

The Conference Board Consumer Confidence Index®, which had improved in November, increased further in December. The Index now stands at 64.5 (1985=100), up from 55.2 in November.

Purchasing Managers Index

Manufacturing continued its growth in December as the PMI registered 53.9 percent, an increase of 1.2 percentage points when compared to November's reading of 52.7 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.