Wednesday, November 20, 2013

Too Big To Fail?

Rite Aid, Best Buy, JCPenney, Sears: do they have anything in common? Are they too big to fail?

There probably isn’t a retailer out there that is truly too big to fail, but there are reasons why some hang on longer than others, and some hang on just long enough to ultimately survive. Why? Maybe sheer magnitude is as good a reason as any.

Among those listed above, Rite Aid may have already turned the corner. I used to say that the retail expenditure pie was ultimately only large enough for two players in any one merchandise category to financially thrive. I still stand by that viewpoint, generally - but there are exceptions to every rule.

With CVS and Walgreens battling it out for pharmacy supremacy over the years, Rite Aid was left to dig out of a hole many thought was too deep. Broken inventory and poor store presentation led to declining sales during a period when it was saddled with tremendous debt following the Brooks/Eckerd acquisition in 2007. But in 2012, the chain showed signs of life, with increasing script business and hints of turning a profit. In 2013, the company is expected to net its first profit in years. With an aging US population, increased life expectancy, and the Affordable Care Act, which is expected to provide health care coverage to an additional 27 million people in 2014, Rite Aid may be on the road to recovery.

If Rite Aid has turned the corner, Best Buy may not be far behind. Just a little over a year ago it seemed as if Best Buy was on the verge of succumbing to Amazon, Walmart, and a slew of other online electronics purveyors. Then, about the same time, along came a man named Hubert Joly to take the reins and inject new life into this wounded retail behemoth.  Joly arrived with an effective turnaround plan, including a price-matching policy, reallocation of retail floor space, and retraining of employees. He approached the threat of online competition as an opportunity to strengthen Best Buy’s own online sales performance and become a viable multi-channel retailer. In fiscal 2013, Best Buy reported a second quarter profit of $266 million, a colossal jump from a mere $12 million in the second quarter last year. Online sales showed the most improvement, gaining 10.5%. Chain-wide comp sales declined by a modest 0.6%, but are still much improved from a 3.3% decline last year. While no one should declare that “Best Buy is back” just yet, if stock performance is any indicator, it appears to be well on its way: Best Buy stock has gained 270% thus far this year, making it the best performing stock in the S&P 500.

JCPenney has for the moment lifted itself from the depths of despair (and a potential Chapter 11 filing) and may well be back on the road to mediocrity. Following the disastrous Ron Johnson era, and under the leadership of Myron Ullman, who returns to his former CEO post, that’s probably a best case scenario. The company saw a 0.9% comp store sales gain in October, the first since December 2011. At the same time, online sales grew by 37.6% (don’t get too excited, though - September comps were down 4%). The sales improvement came in part from Penney getting back to its roots and restoring inventory levels of key private label merchandise, something Ron Johnson discarded virtually the minute he arrived.

What is it they say: “You can put lipstick on a pig, but it’s still a pig!”? That’s why I say JCPenney is headed back only as far as mediocrity. Part of the reason is competition, and part of the reason is an aging customer base. Penney’s time has passed, and when a company has 100 years of history behind it, it’s tough to change its image.  I think we’ll know a lot more about Penneys’ potential recovery once we get past the 2013 holiday season.

Which leads us to Sears: I could simply say that “I wouldn’t touch this one with a ten foot pole” - but I won’t. It’s inconceivable, however, that a publicly traded retail chain can have 26 consecutive quarters of declining sales and still be around to talk about it. On the heels of the Orchard Supply spin-off in 2011, and still desperate for cash even after receiving $446.5 million from the Sears Hometown and Outlet Store businesses last year, Sears Holdings announced that  it is now considering a similar move regarding the separation of its Lands’ End and Sears Auto Center businesses. In addition, Sears is off-loading Canadian real estate, including selling a  50% stake in eight Canadian properties for $300 million, ending the leases on four Sears Canada stores, and closing its flagship store in Toronto, a move the netted another $400 million. The question now is how much more Eddie Lampert can slice off before there is nothing left on the bones.  It seems that it’s just a matter of time, but is Sears just hanging on or is it too big to fail?

Are any of these perennial (and perennially troubled) retail dinosaurs  - Rite Aid, Best Buy, JCPenney, Sears - truly too big to fail?

Bob Sheehan, Vice President of Research

Company News

New Employee: Ryan Traynor joined the Burlington, MA office as an Assistant Property Manager. Ryan’s previous property management experience was at The Dolben Company Inc.

National News

October comparable-store sales posted a year-over-year gain of 4.1% based on the International Council of Shopping Center’s tally of 12 retail chains. L Brands (Limited) was up 8.0%, Gap was down 3.0%, Rite Aid was up 2.1%, Walgreen’s rose 5.8%, and Costco gained 3.0%. See our sales report below...American Realty Capital Properties and Cole Real Estate Investments, two of the largest commercial property owners in the country, agreed to a $7.2 billion deal in which American Realty will buy Cole with a mix of cash and stock. The combined company will be one of the largest commercial landlords in the country.

Accelerating News

Vitamin Shoppe will open about 60 new stores in fiscal 2014. The company’s total store count was 640 as of September...Advance Auto Parts will acquire General Parts International, a privately held parts maker. General Parts, which owns the Carquest brand, has 1,246 company operated stores in North America and operates 1,418 independently owned Carquest locations in the US and Canada. The transaction will create the largest automotive aftermarket parts provider in North America. The transaction is subject to approvals and is expected to close by late 2013 or early 2014...Dick's Sporting Goods will spend $10 million converting a former Walmart in Big Flats, south of Syracuse, into a Field & Stream location. Dick’s plans to open 55 Field & Stream locations...Italian eyewear giant Luxottica will invest $250 million in its North American business units over the next three years. Luxottica is one of the world’s largest eyeglass companies, operating as Lenscrafters, Pearle Vision, Sears Optical and Sunglass Hut in the US. Its in-house brands include Ray-Ban, Oakley, Vogue and Oliver Peoples. It also sells premium-priced eyewear through licensing deals with companies like Tiffany, Chanel, Versace, Coach and Prada. Luxottica plans to open hundreds of new Lenscrafters stores, triple the size of Luxottica’s Target Optical retail business and upgrade its Sunglass Hut offerings inside Macy’s stores and shopping malls. The Milan-based company has about 4,800 stores in North America...Keds is launching its first US retail shops in nearly two decades. The company opened its first 150-square-foot Keds Shop at the Natick (MA) Mall this month, which features 45 of its sneaker styles. Keds plans to open five to seven more stores in regional malls this year...Yum! Brands announced the opening of its 40,000th restaurant, a flagship KFC store in India. Yum brands include KFC, Pizza Hut and Taco Bell...Starbucks opened the first ever Teavana tea bar in New York City. A Seattle Teavana will open just before Thanksgiving. Starbucks will add tea bars to its 300 or so existing Teavana stores, and eventually plans 1,000 tea bars...Peet’s Coffee & Tea opened four store locations in the Pittsburgh, PA area. This ushers in the next phase of the company’s biggest retail expansion in its 47-year history which began with 18 store openings in Ohio. Peet’s will open three stores in Pittsburgh and one store in Brentwood...Lands' End will open its first standalone mall store. in the Yorktown Center Mall, Lombard, IL...Cabela’s is opening three new stores, in British Columbia, North Carolina, and Wisconsin. Cabela’s Canada will transform a former Canadian Tire building into a 50,000 s/f store for a fall 2014 opening; construction on a 100,000 s/f store, Cabela’s first in North Carolina, is scheduled to begin next summer, to open in the spring 2015, and construction is scheduled to begin next year for a spring 2015 opening of an 86,000 s/f store, Cabela’s fourth store in Wisconsin. Currently, Cabela’s operates 48 stores across North America with plans to open an additional 19 over the next two years...TJX announced that it aims to open 3,200 stores by the end of fiscal 2014, 50% higher than the current store count of the company...Apple plans to build over 30 new stores in fiscal 2014, with 2/3 of those stores located outside of the US. Apple also plans to remodel 20 stores over the course of the year.

Decelerating News

Build-A-Bear Workshop expects to close an additional 10 to 25 stores in fiscal 2013 and 2014...Blockbuster will shutter its domestic operations, including approximately 300 stores and all distribution centers. Blockbuster franchised and licensed stores in the US will stay open...Edwin Watts Golf Shops filed for Chapter 11 bankruptcy protection in Delaware, with the intention of selling the operating assets of the business.  Edwin Watts operates 90 stores across 15 states.

New England News

Boston-based Gemvara, an online jewelry retailer, opened its first retail store at 129 Newbury St...Market Basket will be coming to The Point, a new development under construction at the intersection of Routes 110 and 119 in Littleton, MA. Other newly confirmed tenants include a Tavern in the Square restaurant and a Hilton Homewood Suites Hotel...Merlin Entertainments Group has commenced construction of a $2.8 million, 44,000 s/f indoor Legoland Discovery Center at the Assembly Row development in Somerville, the first Legoland in New England and the sixth in the US...A 146,000 s/f Walmart store opened last month in St. Albans, VT, marking the final chapter in a lengthy permitting fight to bring the retailer to rural Vermont's northwest corner. Another Walmart is in the works for Derby, VT, but no start date for construction has been set... RadioShack has opened its first Boston area new concept store in Porter Square, Cambridge. RadioShack is opening a select number of these high-touch stores throughout the US. The Cambridge location is the sixth concept store to open since the company began converting to the new format this summer. Other stores are located in New York City, New Jersey and Texas...Harvard Square restaurant UpStairs on the Square will close after 31 years. Originally located on Holyoke Street above the Hasty Pudding theater club, the restaurant moved 11 years ago to 91 Winthrop St. The landlord has decided to sell the building...Stop & Shop Supermarket Co. recently closed on the 152-acre CanalSide Commons in Bourne, MA. The parcel is permitted for 300 homes and 85,000 s/f of retail. Stop & Shop is closing its store at 800 South Franklin St. in Holbrook, MA in December...Kimco Realty Corp. will acquire a 24-property retail portfolio in New England for $270 million.With the addition of this 1.4-million-square-foot, 96% -occupied portfolio, Kimco will gain 17 properties in the Boston metropolitan market with anchor tenants including Whole Foods, Trader Joe’s, Lowes, Kohl’s, Petco, Pier 1 Imports, Aldi Supermarket, CVS and Walgreens. This portfolio represents a significant expansion of the company’s existing portfolio in this area. In addition, the portfolio includes four other Massachusetts shopping centers, two Kings Supermarket-anchored centers in New Jersey, and one Walmart-anchored center in Danbury, CT. Kimco expects this transaction to close during the first quarter of 2014...The former Visitors Information Center at 1200 Hall of Fame Ave. in Springfield, MA, just up the block from the Basketball Hall of Fame, is being remodeled as a make-your-own burger Luxe Burger restaurant. The original Providence Luxe Burger is in the middle of Providence's WaterFire...After nearly 50 years, discount retailer Building #19 Inc. filed for Chapter 11 bankruptcy, seeking court permission to begin liquidation sales. The company was started in 1964 by Jerry Ellis and the late Harry Andler, and named after the Hingham shipyard building where it was founded. Building #19's success at selling items other companies discarded and its cartoonish newspaper ads made it an institution among New Englanders. The company currently has stores in Weymouth, Burlington, Norwood, Natick, Haverhill, New Bedford, Hanover, MA; Pawtucket and Cranston RI; and Manchester, NH...Whole Foods has signed a lease to open 35,000 s/f store at North Shore Commons Shopping Center in Beverly, MA by 2016...Barnes & Noble will close its Chestnut Hill, MA store at the end of this year. Barnes & Noble operates 820 US stores...Cumberland Farms opened a new concept store in the Roxbury neighborhood of Boston, the brand’s first urban location since 1981. The  store offers a range of hot food items, and touch screen kiosks where customers can customize their meals. The company has 600 stores in 11 states.

October 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

Consumers shrugged off the partial government shutdown and spent more on autos, clothing and furniture in October, boosting US retail sales by the most in four months. Retail sales rose 0.4%, up from a flat reading in September. Excluding sales at gas stations, retail spending rose 0.5%.

Source: U.S. Department of Commerce -

Treasury Yields

Treasury Yield Sources:;

Consumer Confidence Index

The Conference Board Consumer Confidence Index®, which had declined moderately in September, decreased sharply in October. The Index now stands at 71.2 (1985=100), down from 80.2 in September. The Present Situation Index decreased to 70.7 from 73.5. The Expectations Index fell to 71.5 from 84.7 last month.

Source: The Conference Board -

Purchasing Managers Index

Manufacturing expanded in October as the PMI™ registered 56.4 percent, an increase of 0.2 percentage point when compared to September's reading of 56.2 percent. 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 -