Is Stability in the Air?

A funny thing happened recently, which at least suggested – mildly – that, in the retail world, the worst may be over.

Last week Target announced that it expects a modest increase in same-store sales and boosted its Q2 earnings forecast. If the trend holds, it will be the first quarterly gain in comp-store sales in more than a year. Particularly encouraging is the added announcement that second-quarter earnings are expected to come in above the high end of its previous forecast. The improvement in the business has been attributed to an increase in customer traffic and newly introduced merchandise - lines but generally it has been broad-based, with nothing in particular driving the gains.

Also, just when everyone thought Wal-Mart had become a sleeping giant, it has shown life again, and is preparing to take on Amazon head to head. Wal-Mart’s comparable sales have increased now for 11 consecutive quarters and most recently gained 1.4 percent in Q1. Additionally, comparable store traffic has increased 3 percent on a two-year stacked basis. In the meantime, its acquisition of Jet.com has upped its e-commerce game and brought in new talent to improve digital operations. It’s no coincidence that Q1 online sales rose a phenomenal 63 percent. The fact that comp store sales have increased in light of the online sales boom is quite noteworthy. If omnichannel retailing is the future, then its 4,200 store count should be a huge advantage over Amazon. It’s quite apparent that even Amazon recognizes the need for a brick-and-mortar presence by virtue of its 465-store acquisition of Whole Foods Market.

Best Buy is another retailer that has stabilized its business, experiencing modest same-store sales increases the past three years following four years of declines. The company was more responsive than most retailers in dealing with the “Amazon effect” through its price matching policy and aggressive push to enhance bestbuy.com. While Best Buy now considers itself as a multi-channel retailer and no longer a pure brick-and-mortar retailer, the fact remains that its stores are here to stay.

The Best Buy turnaround may not have been so pronounced had it not benefitted from recent bankruptcies such as Radio Shack and hhgregg, among others. At the same time the consumer-electronics industry as a whole is growing less than 3% a year as interest in big ticket items such as flat screen TVs has waned.

While Kohl’s has experienced declines in comp store sales for the past five quarters, it did indicate that profit growth in Q1 was attributed in part to increases in store traffic. In the first quarter this year, same-store sales were down 2.7% - not as bad as analysts had predicted. Kohl’s will be one of the more interesting retailers to keep an eye on during the balance of 2017 based on the recent upheaval among department stores on the whole. Its predominantly non-mall location strategy probably puts Kohl’s in a better position to turn its comp store sales trend around compared to chains like Macy’s, JC Penney, and Sears, which continue to be impacted by the loss of traffic as more mall-based chains close stores.

There are also a number of brick-and-mortar categories that have avoided any serious impact from the shift toward online retailing. Off-price retailers, dollar stores, auto supply, and cosmetics all continue to perform admirably in the face of an ever-growing digital world.

There may be a hint of hope that the scale is starting to balance itself. However, no one should declare that the skies are clearing – we may find we’re just in the eye of the hurricane!

Bob Sheehan, Vice President of Research

BSheehan@KeyPointPartners.com

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KeyPoint Partners Company News

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National Retail News

Retail sales fell for the second straight month, according to the National Retail Federation. Sales slipped 0.1% in June after being unchanged in May. Sales in June were driven by online and other non-store sales. Building materials and furniture also reported gains, perhaps reflecting a stronger housing market. The US Commerce Department said June retail sales fell 0.2%, weighed down by declines in receipts at service stations, clothing stores and supermarkets.  Among retailers still reporting monthly sales, L Brands was down 9.0% and Costco was up 6.0%. See our sales reports below...Walgreens Boots Alliance has announced a new Rite Aid deal, effectively ending its nearly two-year quest to acquire the chain. The divestiture agreement with Fred’s Pharmacy, whereby Fred’s would buy 865 stores, is also terminated. The move comes after Walgreens struggled to win FTC approval of the deal. Under the new agreement, Walgreens will acquire 2,186 of Rite Aid’s 4,523 stores and 3 distribution centers for $5.175 billion in cash. Rite Aid will receive a $325 million termination fee. The 2,186 stores included in the new agreement are primarily located in the Northeast, Mid-Atlantic and Southeast.  Under the terms of the agreement, Rite Aid will provide certain transition services to Walgreens for up to three years after the closing, which is expected to occur within the next six months. Upon closing, Walgreens will begin acquiring the Rite Aid stores and related assets on a phased basis over roughly six months, and convert acquired stores to the Walgreens brand over time.

Accelerating Retail News

Tire Discounters will enter the Huntsville, AL market later this year, the 6th state in the company’s territory. Tire Discounters has more than 100 stores…Sprint will add 78 new locations throughout Southern CA by the end of the year. Earlier this month it revealed plans to open more than 5 dozen new stores in New England...Sears opened its first Sears Appliances & Mattresses freestanding store concept in Pharr, TX. The 20,000 s/f store features interactive displays of top home appliances brands in kitchen vignettes…Menswear brand Indochino continues its expansion from the Web into physical retail with stores opening in 4 major US markets this summer. Indochino opened its first permanent brick-and-mortar location in 2015. The four new stores will take the company’s total retail number to 17 across North America...Williams Sonoma will open the largest version yet of its new dual-concept format, a 7,000 s/f store, at University Village in Seattle, WA which combines an assortment of food from local businesses, as well as the Williams Sonoma Home line of home furnishings...Lidl is adding more US locations on top of its first 10 openings. This month the company will open 2 stores in Virginia and 2 in North Carolina. The new openings will give Lidl 14 US stores, with plans to expand to 100 within the year. Lidl operates more than 10,000 stores in 28 countries...ThredUp, an online thrift store that counts some 20 million users has opened a store at Tanger Outlets, in San Marcos, TX. The company plans to add 4 additional locations by year end. It is targeting traditional malls, outlet centers, and main street shopping districts nationwide. ThredUp boasts items across more than 35,000 brands at prices that it says are up to 90% off the original retail value... Private equity firm Sycamore Partners has announced plans to acquire Staples for $10.25 per share for cash in a deal valued at about $6.9 billion. The transaction is subject to customary closing conditions, and is expected to close no later than December, 2017. The closing is not subject to a financing condition. Staples has has closed over 300 stores since 2011, and recently announced plans to close some 70 locations by yearend. Sycamore’s investment portfolio currently includes Belk, Coldwater Creek, Hot Topic, Nine West Holdings, and Talbots... BIBIBOP Asian Grill is opening 14 new locations across four metropolitan areas: LA, Chicago, Cleveland, and DC, including neighboring communities in Maryland. The expansion, to be completed by late summer, more than doubles the current number of BIBIBOP Asian Grill restaurants, with 13 of the new locations being converted from previous ShopHouse restaurants owned by Chipotle, and one newly constructed... Camping World, which acquired the assets of Gander Mountain and boating division Overton’s in a bankruptcy auction in May, plans to operate 57 locations, assuming details can be worked out with landlords and leases agreed to, under the new brand of Gander Outdoors. The stores will feature a mix of Gander Outdoors, Overton’s and Camping World products and services. The company also plans to open 45 new stores during the next two years…Whole Foods Market has broken ground on a small-format 365 store in Weehawken, NJ, the first store under that banner in the state. The 33,000 s/f  store is slated to open in fall 2018. Whole Foods has rolled out four 365 locations to date. Whole Foods operates 17 full-size stores in NJ...Plus-size fashion brand Eloquii will open a store in Arlington, Va., followed by a location in downtown Chicago, and one in Columbus, OH, which will open in September. The openings follow Eloquii’s first venture into brick-and-mortar, a fter starting with a pop-up it opened in March. The company expects to open upwards of 40 stores in the next 3-4 years... BBX Capital Corp. has acquired candy retailer It’Sugar for approximately $57 million. BBX plans to expand It’Sugar, which currently operates 95 locations in 26 states, by opening new stores in high-traffic leisure locations...Pedego Electric Bikes opened its 100th retail store, in Simsbury, CT…PetSmart  opened 18 new stores in its fiscal quarter ending May 1...CycleBar opened its 100th store this month, and is on pace to have 150 studios open in 2017, with over 200 additional US locations in development through single and multi-unit agreements.

Decelerating Retail News

Sears Holdings is closing 43 more US stores, in addition to the 265 closings already announced this year...Premium denim brand True Religion Apparel Inc. has filed for Chapter 11 bankruptcy protection and signed a restructuring agreement with the majority of its lenders. True Religion operates some 140 stores in 33 states and  markets and also sells its products in some 500 department store and specialty stores in North America and South America...Gymboree is closing 350 stores as its works to restructure in bankruptcy. The company will have more than 900 locations after the stores are shut down. Gymboree filed for bankruptcy protection in June...Alfred Angelo Bridal appears to have closed all its 60 stores nationwide. An eviction lawsuit is also pending against the company’s Delray Beach, FL headquarters. The company has filed for Chapter 7 bankruptcy protection.

New England Retail News

Boston’s Restaurant & Sports Bar is opening a 3,000 s/f restaurant on Boylston St. near Berklee College of Music in the Fenway neighborhood…Reliant Medical Group  will open its first office in a former retail space in Milford, where it is consolidating two offices into a former Sports Authority in the Milford Lowe’s plaza in November. Reliant is also consolidating its Millbury and Auburn offices into a former Macy’s Home store in the Auburn Mall. The moves are part of a plan to relocate to or open at least 9 new clinical sites in Central MA... Downtown Crossing’s long-dormant Barnes & Noble storefront will see new life after the closing of a $63.25M deal for the building. Eastern Consolidated brokered a sale to Chicago-based L3 Capital and LaSalle Investment Management. The building is branded as DTX 399 and will undergo a major facelift beginning this summer...Comcast will open a 4,000 s/f  Apple Store-like retail store in Allston, MA called the Xfinity Store, to open later this year. The store provides interactive ways for customers to learn about Comcast services, automated bill pay kiosks, and equipment swaps. Comcast has 9 Xfinity Stores in the area...Boston shoe and apparel retailer The Tannery has filed for Chapter 7 bankruptcy in federal court in Boston. The 40-year-old company, which recently shut down a store in Harvard Square, also operates an outlet at 711 Boylston St...Stop & Shop will shutter its existing 25,000 s/f store at 471 Salem St. in Medford this summer, and Target will open a 32,000 s/f store at the site next year. Stop & Shop will renovate its second Medford location, a 45,000 s/f store at 760 Fellsway. The Medford store will be Target’s 6th Boston small-format store.

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 fell 0.2% last month the Commerce Department said. Excluding automobiles, gasoline, building materials and food services, retail sales slipped 0.1% after being unchanged in May.

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 decreased in May, increased moderately in June. The Index now stands at 118.9 (1985=100), up from 117.6 in May. The Present Situation Index increased from 140.6 to 146.3, while the Expectations Index declined from 102.3 last month to 100.6.

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

PURCHASING MANAGERS INDEX

Manufacturing expanded in June as the PMI® registered 57.8 percent, an increase of 2.9 percentage points from the May reading of 54.9 percent and its highest level since August 2014, when it registered 57.9 percent. This indicates growth in manufacturing for the 10th consecutive month. 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