Thursday, November 17, 2011

Mixed Signals

Using a favorite Yogi-ism, it seems that the retail industry is confronted with “déjà vu all over again.”

Most of us would agree that the worst of the retail cycle is behind us. But as we tread wearily through a very sluggish recovery, we are seeing a number of prominent (and some not so prominent) retailers announcing substantial store closings and even liquidations (some of which are reported in this month’s Industry News, and on our Retail RoundUp).

Based on International Council of Shopping Centers data, store closings showed an increase in Q3 this year of 75.9% versus Q3 last year, a clear indication that things aren’t over yet. Of course, Borders was the biggest news, announcing that it was closing its remaining 355 namesake stores as well as 44 Waldenbooks stores, equating to approximately 60% of all square footage that was closed during the quarter. But bookstore closings are only one page of the story.

We’ve observed a number of additional store closing announcements of late, especially in our geographic territory, including the Syms/Filene’s Basement shutdown of 46 store locations. Daddy’s Junky Music, a 39-year old, New England-based chain of 12 units, is another permanent casualty, and so is Priscilla of Boston, the 19-unit, high-end bridal boutique, which operated a store on Newbury Street since 1945. Gap also announced a substantial store reduction of 189 namesake stores, or 21% of its U.S. total, by the end of 2013. This move coincides with a previously announced plan to reduce overall company square footage by 10% between 2007 and 2013. Furthermore, these store closings will result in a 34% decline in the number of the Gap division units during this four-year stretch, going from 1,056 to 700 brick-and-mortar locations.

Speaking of bricks and mortar (and other building supplies), Lowe’s Home Improvement made a rare announcement recently, stating that it will close 20 underperforming home improvement stores, not surprising given the sales slump in the home improvement category since the housing bubble burst back in late 2006. Additionally, Lowe’s said that it will reduce future store growth to 10 to 15 stores annually, down from its previous target of 30 stores per year. Evidence of the pullback is the fact that Lowe’s recently announced it was aborting development plans in Salem and Auburn, Massachusetts.

And say farewell to the Fribble: another effort to shed underperforming stores occurred last month when Friendly’s Ice Cream filed for bankruptcy and abruptly closed 63 stores, more than 10% of the chain’s nearly 500 units. Nearly one-half of the store closings were located in Massachusetts. Also in October, after closing seven stores during the past two years, Saks Fifth Avenue CEO Steve Sadove announced that the company would shutter several more units citing, “I don’t think the U.S. needs more stores.”

The other shoe is dropping in the footwear segment, with recent announcements by Payless ShoeSource and Stride Rite that they are closing 275 and 75 stores respectively. In the apparel category, Christopher & Banks just reported that it will close 100 underperforming stores over the next three months, about 13% of the chain, as part of a restructuring plan which also includes format consolidations.

While none of this is good news, retailers are not generally running away from store expansion, although much of the CAPEX will go to the outlet store sector. Gap is opening 75 new stores this year, mostly in its outlet arm but also in its new Athleta division. Saks is adding five Off Fifth locations and Macy’s announced that it will open three new full-line stores, in addition to the two new Bloomingdale’s outlet stores recently opened, including a store at Wrentham (MA) Village Premium Outlets, and a third Bloomie’s outlet on the way. Ann Taylor is not just changing its name (now Ann Inc.), it’s changing its store format, rolling out 40 new concept stores and conversions in 2011, as well as 14 new LOFT stores and 40 outlet stores.

As one might expect from the current economy, value retailers are virtually all performing well, and most are in a growth mode. Family Dollar, Big Lots, Ocean State Job Lot, and Dollar Tree are all adding stores – and the list goes on.

However, here’s an interesting fact: through Q3 2011, store closings are down 34.6% compared to year-ago levels. The favorable comparison in 2011 results from a difficult front half in 2010 when 79% of the 5,572 store closings for the entire year occurred and when Eastern Massachusetts vacancy happened to peak at 9.7% (see our latest KeyPoint Report for Eastern Massachusetts/Greater Boston).

Nevertheless, the acceleration in store closings during Q3 this year does not bode well for 2012. A number of weak retailers are holding their collective breaths for holiday season sales results, because a poor performance at the end of this difficult year could lead to substantial closings after the New Year. Stay tuned for our January issue!

Bob Sheehan, Vice President of Research

Company News

Burlington, MA Property Management Team promotions: Mario Boiardi has been promoted to Assistant Property Manager. Mario joined KeyPoint Partners in 2009 as a Summer Intern on various management projects, before becoming an Accounts Payable Clerk. Kris Dalen has been promoted to Property Manager. Kris joined the Accounting Team in 2007, moving to Property Management in 2010...Loran Macumber joined the Burlington, MA office as a Construction/Project Manager. Loran's most recent experience was with Jones Lang LaSalle.

Industry News: National

US comparable chain store retail sales for October rose by 3.7% year-over-year as measured by the ICSC's tally of 26 major retail chains, the slowest pace since March, according to the ICSC. Among merchandise categories, Wholesale Clubs rose by 9.0%, followed by Luxury Stores with a 4.5% gain. Discounters gained 3.2%. Apparel was flat, Department Stores rose 1.8%, and Drug Stores rose 2.7%. Among individual retailers, Gap dropped by 6.0% and Limited gained 6.0%; Costco was up 9.0%. Nordstrom was up 5.4%; Target grew by 3.3% and TJX by 3.0%. Macy’s gained 2.2%, Kohls rose by 3.9%; Rite Aid rose 2.9% and Walgreens by 2.6%. See our more extensive list of retail sales results on Page 4...Macy’s plans to spend $400 million to remodel and update its Herald Square store in Manhattan. The store’s space will be expanded by 100,000 s/f,  giving it a total of 1.2 million s/f of selling space. Work will begin in early spring 2012.

Industry News: Accelerating

Capital Group has acquired 15 JCPenney Outlet Stores from JCPenney Co. and will rebrand the units as JC’s 5 Star Outlet. The stores will operate for a transitional period as JCPenney Outlet Stores. Penney will supply the stores with overstocks and end-of-season merchandise, and existing staff and management have been retained…Lord & Taylor plans to open 3 new stores in the coming year, an 80,000 s/f store in Yonkers, NY, a 120,000 s/f store in Rockingham, NH in March, and an 80,000 s/f location in Boca Raton, FlL in fall 2012, bringing the total number of Lord & Taylor stores to 50...SuperValu will remodel 80-90 stores in fiscal 2012. Its Save-A-Lot unit will increase its store count by 80 to 90 stores...Vitamin Shoppe opened 10 stores during the latest quarter, and expects to open 48 stores this fiscal year and 52 locations in fiscal 2012…Dunkin' Donuts has 86 new restaurants planned in the Washington, DC, market by 2020. 15 development agreements were signed over the past year for 64 new restaurants, in addition to 22 previously contracted restaurants…Books-A-Million has been taking over the leases of former Borders stores and will transform 41 of the sites into BAM stores this month. Most locations represent new markets for the bookseller. In addition to opening the 41 outlets, the company is closing 21 locations...Pep Boys exceeded the company’s goal to open 50 stores this year and hit 119 stores, 99 by acquisition. In 2012, Pep Boys plans to add 75 more centers through growth or taking over closed auto repair facilities...Buffalo Wild Wings opened restaurants in Florida, Tennessee, Washington and California, marking the chains 800th location across 45 states…Jamba, Inc. is meeting its 2011 goal to open between 50-70 Jamba Juice locations. As of October 4, there were 752 US locations and 10 international stores…C. Wonder made its retail debut with a 5,000 s/f NYC store.The company is on track to open 3 mall  locations this fall.  An additional 20 locations are planned for 2012. C. Wonder offers apparel, accessories and home-décor items under its own brand..H&R Block will set up kiosks inside 300 Walmart locations, adding to a network of more than 11,000 US offices. Service will be available starting in December...The Great Atlantic & Pacific Tea Co. has secured a $490 million financing package from Yucaipa Cos., Mount Kellett Capital Management and investment funds managed by Goldman Sachs. The package will allow the grocer to emerge from Chapter 11 bankruptcy protection early in 2012. A&P filed for Chapter 11 in December 2010. The agreement is subject to court approval...Wal-Mart opened its smallest-format stores yet in California for the 2011 holiday season. 2 new test stores, one 1,000 s/f, and the other 3,000 s/f, are designed to drive sales through, and are expected to remain open through December 31. Wal-Mart also opened three new Neighborhood Markets in Wichita, KS, each between 30,000- 40,000 s/f…Williams-Sonoma has acquired Rejuvenation Inc., a manufacturer and retailer of authentic reproduction lighting and house parts. 

Industry News: Decelerating

Filene’s Basement has filed for bankruptcy protection for the third time in a decade and will shutter for good after the holiday season. Filene’s Basement is owned by Syms Corp., which purchased the company out of bankruptcy in June 2009. Syms also filed for Chapter 11. The liquidation of stores is expected to run through January 2012, the schedule to be determined as the liquidation of merchandise is completed. Filene’s Basement has about 21 stores. Before Filene’s Basement filed for bankruptcy in 2009, it shut down 11 locations. After the latest round of closings is finished in December, only 20 will remain...Dippin' Dots Inc. filed for Chapter 11 bankruptcy protection. The company has 140 Dippin' Dots retail locations, mostly controlled by franchisees, and agreements with 9,952 small vendors at fairs, festivals and sports games...Christopher & Banks will close about 100 underperforming stores over the next 3 months and will accelerate plans to convert or consolidate a number of existing Christopher & Banks and CJ Banks stores into dual-format stores. The retailer currently operates 761 stores in 45 states.

Industry News: New England

The Book Shack opened in the former Borders space at the Kingston, MA Independence Mall this month. The Book Shack will sell most of its titles at discounts of up to 60%, and carry best-sellers at 10% off list prices. The owners are reaching out to local book clubs, authors and community theater groups to use a 300-seat theater that will occupy part of the 23,000 s/f store.The space has been vacant since Borders closed in August…Bloomingdale's The Outlet Store opened this month at Wrentham (MA) Village Premium Outlets. The 24,000 s/f store is located on the last remaining buildable parcel fronting the outlet mall. The Bloomingdale's will be one of three such stores opening across the country. It is a division of Macy's, which has corporate offices in New York and Cincinnati and operates about 850 department stores...The building at 350 Washington St. in Boston’s Downtown Crossing which houses T.J. Maxx, Marshalls, H&M, and Town Sports International has been sold for $128 million. Real Estate Capital Partners sold the building to Invesco Real Estate Advisors...39-year-old locally-based music store chain Daddy's Junky Music ceased operations this month. At its closing Daddy's counted 12 stores in 4 states, including locations in Manchester, Nashua, Salem and Portsmouth, NH. The company also has stores in Vermont, Massachusetts and Connecticut...Books-A-Million recently opened its first New Hampshire store in North Conway and will open two more this month in Concord and West Lebanon in former Borders spaces. The expansion into New Hampshire is part of an aggressive growth plan by Books-A-Million in the wake of Borders' shutdown. Books-A-Million operates 232 stores in 24 states, and in just a matter of months has opened or will open 41 more stores in 18 states…RCS Real Estate Advisors has been retained by bridal retailer Priscilla of Boston to facilitate the closing of all 20 Priscilla of Boston locations, effective Dec. 31, by negotiating cost-effective lease terminations or locating replacement tenants. The company announced its closing in September...buybuy Baby opened its first Massachusetts location this month, a 33,000 s/f store at 160 Granite St. in Braintree, replacing the empty Linens ‘n Things store. The subsidiary of Bed Bath & Beyond offers merchandise for newborns to toddlers.

October Retail Sales

Commerce Department

The Commerce Department reported that retail sales were up 0.5% compared to September, just above the 0.4% forecast. Excluding auto sales, retail sales shot up 0.6%, three times stronger than expected.

Treasury Yields

Consumer Confidence Index

The Conference Board Consumer Confidence Index®, which had slightly improved in September, declined in October. The Index now stands at 39.8 (1985=100), down from 46.4 in September. The Present Situation Index decreased to 26.3 from 33.3.

Purchasing Managers Index

Manufacturing continued its growth in October as the PMI registered 50.8 percent, a decrease of 0.8 percentage point when compared to September's reading of 51.6 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.