Monday, January 30, 2017

The End of an Era: Are We Getting There?

With all the commotion about department store closings these days, it’s a wonder anyone can sleep at night. Okay, that may be an exaggeration: maybe it’s just mall owners that can’t sleep!

For the most part, Macy’s, Sears, and JCPenney are all trying to survive “the Amazon effect.” Shoppers have shifted allegiance significantly toward online shopping and department stores are now scrambling to keep up. Unfortunately for them Amazon saw this trend much sooner and may have an insurmountable lead. All three chains have announced many store closings in recent years, and regional shopping center landlords should not get comfortable anytime soon.

In hindsight, we should have seen this coming long ago. In our May 2014 issue of KeyPoints we cited Green Street Advisors, which indicated that nearly half of enclosed and open-air regional malls were anchored by Sears and JCPenney. It also noted that one-quarter of Sears and JCPenney-anchored malls had mall shop sales productivity of less than $300 per square foot, an established benchmark in determining the long-term viability of malls.

Although we have recently heard about a combined total of 218 Macy’s and Sears/Kmart store closings in the coming year, we have not yet seen a number announced for JCPenney. But its CEO stated just this month that it is planning to close some of its 1,014 stores soon. Although he didn’t say how many, Cowen and Company analyst Oliver Chen said that Penney’s could ultimately chop its count by some 30%.

Looking at our own backyard, what does all of this mean for the future of malls in Eastern Massachusetts? For A-level properties, it likely doesn’t mean much; I include in that bunch the “Big Four”: Natick Mall, North Shore Mall, South Shore Mall, and Burlington Mall. All Nordstrom-anchored, all with a fashion-heavy mix, these are “want-based” centers, to use a phrase coined by shopping center designer Yaromir Steiner several years ago. By Steiner’s definition, want-based centers are those that include experiential and aspirational tenants. These four malls fit that description. Although all are anchored by at least two of the aforementioned troubled department store firms, their long-term viability should not be questioned. Cambridgeside Galleria, although anchored by both Macy’s and Sears, also is on solid ground, serving a densely populated urban market and maintaining a close-to-full occupancy level.

At the other end of the spectrum, we find regionals malls such as Silver City Galleria in Taunton, which includes a vacant JCPenney store, unoccupied since 2015, and will be losing Macy’s in the next couple of months. It’s surprising that Sears remains open there - reportedly a poor performing store. Don’t be surprised, however, if that’s the next shoe to drop. Consequently, mall shops will feel the impact of reduced foot traffic, leading to the strong possibility that overall occupancy levels will decrease further, ultimately leading to mall demise. Swansea Mall is another problem shopping center anchored by Macy’s and a vacant Sears store. It was recently announced that the Sears space there is a potential site for the Swansea town hall.

Then there are those regional shopping centers holding tentative positions in the market. Let’s talk about Emerald Square in North Attleboro. In the past decade, it has seen market share erode as a result of competitive developments including Patriot Place, Mansfield Crossing and Legacy Place, which all constrain the customer draw from the north. Emerald Square is reportedly a marginal performer and Macy’s is vastly overstored there, operating two anchor positions that combine for 305,000 square feet. Other anchors include Sears and JCPenney, which does not bode well for fashion retailing in a mall setting. If you’re forming a watch list, this is one to keep an eye on. Another mall that requires a finger on the pulse is Westgate Mall in Brockton. With the closing of the Macy’s store imminent, this center will be left with Sears as the only department store anchor. It remains to be seen if Sears and the mall shops can withstand the loss of foot traffic and still remain viable.

One mall owner should be given some credit for its remerchandising efforts: Pyramid Companies has reinvented the former Independence Mall in Kingston, currently known as the Kingston Collection, as largely an entertainment venue. But Macy’s continues to operate there, and nothing has been done with a vacant Sears unit. At Auburn Mall, Simon is finally planning primarily a medical office use replacement for the vacant Macy’s Home Store. But Macy’s and Sears remain anchors, and questions remain regarding their future.

Until we see a store closing list for JCPenney, it will be difficult to accurately assess the damage these potential vacancies will have on malls. There are six still operating in Eastern Massachusetts. The region already includes vacant Penney stores in Hanover and Taunton, and in Natick a third is being retrofitted to include Wegmans and additional space.

As we wait for the next closing announcements, it’s understandable why mall owners remain on edge – and may continue to lose sleep - as we start a new year.
Bob Sheehan, Vice President of Research
BSheehan@KeyPointPartners.com



KeyPoint Partners Company News

New Business: The Leasing team has been awarded the contract to lease front-of-store space inside Ahold USA retail division stores, which include Stop & Shop, Giant Food of Landover, Giant Food Stores of Carlisle and Martin’s in 11 states. Rob Grady, Don Mace, and Michael Branton will handle the assignments. Available spaces range from 200 to 1,000 s/f. Single store or multiple store opportunities are available, all uses will be considered. Complete information can be found at KeyPointPartners.com/AholdUSA...The Property Management team has added Brookside Shops, a 97,000 s/f lifestyle center on Great Road in Acton, MA to its portfolio. Tenants at the center include Trader Joe’s, Eastern Mountain Sports, Elizabeth Grady, Pier One Imports and Staples. Clarion Partners, LLC awarded the assignment...New Employees: Patrick Busa has joined the Burlington, MA office as an Assistant Property Manager. Pat has prior experience at Summit Realty Partners/Winslow Property Management. Danielle Munro joins the Burlington Office as an Accounts Payable Data Entry Clerk.

National News

Americans ramped up auto buying and holiday shopping in December. The Commerce Department says retail sales rose a seasonally adjusted 0.6%, following a small 0.2% gain in November. Excluding autos and gas, overall sales were flat. Online retailers reported better sales; consumer confidence has soared after the election, reaching the highest levels in nearly a decade; and average hourly pay rose 2.9% from a year earlier, the most in seven years. Among retailers reporting monthly comp-store sales, L Brands was down 1.0%, Gap was up 4.0%, and Costco was up 3.0%. See our sales reports below.

Accelerating

Walgreens Boots Alliance and Rite Aid have entered into an agreement to sell 865 Rite Aid stores and certain assets related to store operations to Fred’s for $950 million. The transaction is subject to FTC approval, approval and completion of the acquisition of Rite Aid by Walgreens Boots Alliance, and other closing conditions. The agreement is in response to concerns by the FTC in its review of the proposed acquisition. Under the terms of the agreement, Fred’s Pharmacy will acquire 865 Rite Aid stores and certain assets related to store operations upon completion of the divestiture. Fred’s Pharmacy will continue to operate the acquired stores under the Rite Aid banner during a transition period. If the FTC requires divestiture of more than the 865 Rite Aid stores currently contemplated by the purchase agreement and Walgreens Boots Alliance agrees to sell the stores, the purchase agreement requires Fred’s to purchase the additional stores. Specific locations will be announced upon FTC approval of the Walgreens Boots Alliance and Rite Aid merger. The transaction now has an expected closing date of early 2017... Boscov’s Department Store will open a new location at Millcreek Mall, Erie, PA, the chain’s 46th…GNC closed 4,464 of its US owned and franchised locations on December 28 to revamp the brand, reopening December 29 as One New GNC. As part of the rebranding, GNC will offer the same price in stores and on GNC.com, replacing the system that included multiple price structures, and will introduce new brands and products in the coming year... The Tile Shop opened its first store in Washington, DC, and its 12th location in the Chicago metro area. The Tile Shop currently operates 123 stores in 31 states...Amazon will open a bookstore at the Time Warner Center in Manhattan in the spring, the 8th store the company has opened or announced. Stores in Portland, San Diego and Seattle are open now, and Amazon is working on stores in Chicago; Dedham and Lynnfield, MA; and Paramus, NJ... Party City Holdco Inc. has entered into an agreement to acquire a master franchise group representing 18 franchise stores in Louisiana, Alabama, Mississippi and Florida. Party City’s retail operations include over 900 retail party supply stores (including approximately 160 franchise stores) throughout North America operating under Party City and Halloween City…Aéropostale is re-opening more than 500 USA stores this month. In February, Aéropostale will kick off its 2017 marketing campaign, designed to showcase the brand’s transformation under its new owners. Aéropostale filed for Chapter 11 bankruptcy protection in May 2016, and closed stores as it appeared headed for liquidation. But in September, a consortium led by Authentic Brands Group acquired the chain... Sprouts Farmers Market is slated to open 11 new US locations in the second quarter of 2017, and plans to grow its footprint by at least 35 locations in 2017. The retailer currently operates 252 stores and has said that its long-term goal is to operate 1,200 stores... There will be 59 new, expanded, and relocated Walmart and Sam’s Clubs locations in 2017. Wal-Mart currently has 11,593 stores in 28 countries…Bob’s Discount Furniture will open its first  West Coast store early next year in in San Bernardino, CA. A jump to the West Coast is the biggest geographic leap for the 78-store CT-based retailer, which has expanded from the Northeast into Washington, Baltimore, Philadelphia and Chicago... L.L.Bean will open its fourth store in Virginia, scheduled  for the summer of 2017 at The Shops at Stonefield in Charlottesville. This will be Bean’s 32nd retail store outside of Maine... Whole Foods announced the first Northeast location for its 365 by Whole Foods Market value concept, at 300 Ashland, a mixed-use development in Brooklyn, NY. A date was not announced. Whole Foods debuted the 365 format in 2016, and has opened 3 to date…Belk continues to open new stores as it shutters underperforming ones: The retailer announced plans to open 2 new locations this year in Kentucky and Georgia. Belk has closed stores in VA, NC, SC, and FL and opened a store in Texas. Belk currently operates 293 stores in 16 southeastern states... Pep Boys has acquired Just Brakes LLC, a chain with 134 US stores, bringing the number of Pep Boys locations to more than 900…Eloquii, an online apparel retailer for women sizes 14-28, plans to test a “concept shop” in Arlington, VA,  scheduled to open in March…Warby Parker plans to open 25 retail locations this year, bringing its total store count to about 70.

Decelerating News

CBL & Associates Properties Inc. closed on the sale of three enclosed malls for $32.25 million to Hull Property Group. The 1.67 million s/f portfolio includes Randolph Mall in Asheboro, NC; Regency Mall in Racine, WI; and Walnut Square in Dalton, GA. The three malls contain about 498,000 s/f of inline space. CBL owns, holds interests in or manages 136 properties, including 84 regional malls/open-air centers, in 31 states... Yoga-themed retail start-up Yogasmoga filed for Chapter 11 bankruptcy following a dispute with a major investor. The filing followed an involuntary Chapter 7 bankruptcy petition filed against the company in November by three creditors claimed to be owed $3.2 million. Launched in 2013 as an e-commerce site, Yogasmoga opened 2 locations in 2015, and 10 in 2016. The company is headquartered in NYC, with production and retail operations in CA and MA…The Limited has closed all its brick-and-mortar stores. The company says it will continue to operate online only. Limited had around 250 stores going into the holidays, but with recent closings the number of stores is down to 235... Sears Holdings Corp. is selling its Craftsman tools brand. The retailer has reached an agreement to sell Craftsman to Stanley Black & Decker for a net present value of about $900 million, including future royalty payments. Sears also said it planned to close 104 stores, including 78 Kmart stores and 26 Sears stores, during the next few months. The new store closings came about a week after the retailer announced separate plans to close 30 Kmart stores and 16 Sears stores. The latest round of closings will leave the company with fewer than 1,500 stores by early 2017…Macy’s will close 68 stores (out of a current total of 730 Macy’s stores), with 3 closed mid-year, 63 to be closed in early spring 2017 and 2 be closed in mid-2017. 3 other locations were sold, or are to be sold, and are being leased back. The store closures are part of the approximately 100 closings Macy’s announced in August 2016. The retailer said it intends to opportunistically close approximately 30 additional stores over the next few years as leases or operating covenants expire or sale transactions are completed...American Apparel will close all 110 of its retail stores and its Los Angeles headquarters. Gildan Activewear has acquired the brand for $88 million...BCBG Max Azria Group Inc. will close stores and restructure as the company copes with a debt burden and a shift of consumers to online. The chain operates more than 570 boutiques worldwide, including more than 175 in the US... Save-A-Lot will close all 13 of its existing stores in California and Nevada and the distribution center servicing them, saying the discounter will be better served by investing in areas where its brand is already established. Save-A-Lot has 1,400 stores from Colorado to the East.

New England News

Target will open a 21,000 s/f store in Cambridge’s Central Square in March, and a 48,000 s/f “flexible format” store in in Redstone Shopping Center, Stoneham, MA next July... After 20 years at 279 Great Road in Acton, Willow Books will be going out of business. A store-wide liquidation sale began Jan. 12.

RETAIL SALES REPORT





























Notes: figures gathered from individual company websites, press releases, and Federal filings.  Not all companies report all figures; results not reported will be marked “n/r”. Quarterly results will be updated when available; quarterly figures are shown in italics. Figures from companies not calculated to one decimal point automatically received an ending digit of 0.

COMMERCE DEPARTMENT MONTHLY SALES

US retail sales increased by 0.6% in December from a revised 0.2% pace in November, roughly in line with expectations, the Commerce Department said. Strong auto sales, which were at a record level in 2016, helped lift overall retail sales.

Source: U.S. Department of Commerce - commerce.gov

TREASURY YIELDS


















Treasury Yield Sources:  federalreserve.gov; ustreas.gov

CONSUMER CONFIDENCE INDEX

The Conference Board Consumer Confidence Index®, which had increased considerably in November, posted another gain in December. The Index now stands at 113.7 (1985=100), up from 109.4 in November. The Expectations Index increased sharply from 94.4 to 105.5, but the Present Situation Index decreased from 132.0 last month to 126.1.

Source: The Conference Board - www.conference-board.org

PURCHASING MANAGERS INDEX

Manufacturing expanded in December as the PMI® registered 54.7 percent, an increase of 1.5 percentage points from the November reading of 53.2 percent, indicating growth in manufacturing for the fourth consecutive month and a new high reading for the year. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

Source: Institute for Supply Management - Manufacturing Report on Business - www.ism.ws