Friday, November 21, 2014

While Sears Holdings Self Destructs, Who Benefits?

Limb by limb, Eddie Lampert continues to tear his company apart. This year, it’s been the spin-off of Lands End, a proposed 200-300 store REIT, and a rights offering of up to 40,000,000 common shares of Sears Canada. It’s getting hard to decipher whether Sears Holdings is in the retail business or the banking business. But even as Mr. Lampert attempts to “save” his company, the bleeding hasn’t let up.

Imagine: when Sears and Kmart merged in 2005, the companies created the third largest retail firm in the country.  At the time, the two retailers operated 3,500 stores. It was the epitome of two bad retail operators creating one bigger bad retail company. Who among us doesn’t remember hearing that announcement and wondering WHY? To prove the point, I compiled historical sales information from the first full merger year forward.

If I can tweak a movie phrase used by Harry Doyle (Bob Uecker) in the movie Major League, it’s easy to see that annual revenue figures have been trending “juuust a bit down.” In 2006, Sears Holdings reported total revenue of $ 53.0 billion - and that figure has been declining every year since. The chart below shows that in 2013, the stripped-down version of the company generated $36.2 billion.

Now, some contrarians might say that the company is generating that revenue with a much smaller store count. Actually, the vast majority of the store reduction came via the Sears Hardware spin-off in 2012, affecting 1,238 units. But does it really matter anyway? The declining comp store sales trend tells the whole story - this chain is dying a slow death. Just take a look at net income from continuing operations during the last three years, which show consecutive losses of $1.4 billion, $930 million, and $3.1 billion.

A number of Sears Holdings competitors can’t have the self-destruction come fast enough. Both hardline and softline retailers have benefitted from the meltdown. For example, Sears still remains America’s top appliance seller (believe it or not) a position it has held for decades. According to a recent Bloomberg article, Sears had 28% of the major appliance market in the U.S. last year. However, that could drop to 10% as stores continue to close and shoppers continue to look elsewhere. Gary Balter, an analyst at Credit Suisse Group AG in New York, recently noted that if Lowe’s picks up just one quarter of the share Sears loses, it would be the top appliance seller by the end of 2016. Home Depot and Best Buy are also benefiting from the shift in shopper loyalty. Softline retailers that have taken market share largely include Kohl’s, Target, and Wal-Mart. All three retailers have faced the same economic turmoil that Sears and Kmart have experienced in recent years, but have found ways to grow earnings despite the road blocks.

In February 2014, in his annual letter to stockholders, Mr. Lampert states: “While our financial results remain challenged, 2013 may have been the year that justifies why so many people across Sears Holdings have been working for several years on our transformation from a traditional, store-based retailer to a membership company that serves its members across an integrated retail platform. Furthermore, if the way the entire American retail industry ended 2013 is any indication, I believe 2014 may well be a year in which Sears Holdings begins to clearly demonstrate the advantages of this transformation.”

Sears Holdings first half results through August 2, 2014 show an operating loss of $889 million, compared to the 26-week loss of $298 million last year. I can only imagine what Mr. Lampert will say in his next letter to shareholders!

Bob Sheehan, Vice President of Research

Company News

New Business: Leasing assignments: Route 1 Marketplace, Peabody, MA - Don Mace is handling the leasing; Uxbridge Shopping Center, Uxbridge, MA, and a restaurant space at the Enterprise Center, a new mixed-use development in Brockton, MA - Michael Branton is handling these. Employee News: Sarah Frisone joined the Burlington, MA office as an Assistant Property Manager. Don MacPhee joined the Burlington, MA office as a Property Manager. Dean Hickey joined the Brookline, MA office as a Property Manager. Noah Hano joined the Burlington, MA office as Vice President of Investment Sales. Noah had been doing acquisitions for KS Partners, and before that performed a similar function for The Beal Company.

National News

October comparable-store sales posted a year-over-year gain of 4.1% based on the ICSC’s final tally of 11 retail chains that report monthly sales. L Brands was up 6.0%, Gap was flat, Rite Aid was up 5.1%, Walgreen’s rose 1.7%, and Costco gained 6.0%. See our sales report below...Simon Property Group Inc., the biggest US mall owner, has accumulated a 3.6% stake in rival Macerich Co. Simon bought 5.71 million shares of Macerich this year and may request that Macerich waive its excess share provision, which restricts stock ownership to 5%...Walgreen laid off about 16 in-house real estate managers in a cost-cutting move, bringing in Texas brokerage SRS Real Estate Partners to handle the company's growing store portfolio.

Accelerating News

Cabela’s Inc. plans to open 13-15 stores per year for the next several years, with two specific openings planned in Texas and Kentucky...Lowe's will open two smaller-footprint Manhattan locations in the second half of 2015. Both stores will be approximately 30,000 s/f...IHOP expects to develop between 55 and 60 new franchised US restaurants in 2015... Applebee’s expects to develop between 33 and 38 new franchised US restaurants in 2015..RedBrick Pizza plans to expand by more than 50 locations in 4 states over the next 3 years. The first five locations initially will be corporate-owned, but will be available for sale to franchise prospects.  RedBrick Pizza currently operates 13 franchised locations primarily in California and Florida...TBC Corp. says its Midas subsidiary is on pace to open 25 locations in 2014. The brand, which has 1,300 North American locations, plans to have 1,400 locations throughout North America by 2018...Starbucks plans 1,650 net new store openings in 2015...Fresh to Order, a 15-unit “fast fine” restaurant chain,  plans to grow by eight to 10 stores in 2015. Beyond that, the goal is to average 12 new stores a year, reaching about 70 stores in 5 years. Targeted territories include Texas and the Washington, DC area. Fresh to Order’s mission is to provide” incredible food and service” in less than 10 minutes for around $10...Nordstrom plans to open a 35,250 s/f store Nordstrom Rack at Crossroads at Eatontown in Eatontown, NJ in fall 2015, the fifth Nordstrom Rack in the state...The new Walmart Neighborhood Market that opened this month in Greenbrier, AR is the 5,000th Walmart store in the US...Edens acquired publicly traded development firm AmREIT for $763 million. AmREIT owns and manages 28 shopping centers, totaling some 1.7 million square feet, in affluent urban areas of the South. Top tenants in the portfolio include CVS, H-E-B, Kroger, Publix and Safeway...Wendy’s remains on track to “reimage” 200 Company-operated restaurants and expects 175 to 200 franchise-operated restaurants to open in 2014...Whole Foods Market plans to open 38 to 42 stores, including five to six relocations, in fiscal 2015. The company currently has 401 stores and expects to cross the 500-store mark in fiscal 2017. Longer term, the company sees potential for 1,200 stores in the US...Delhaize Group will sell Bottom Dollar Food's 66 store locations and associated lease liabilities to Aldi Inc., thereby exiting the US food retail discount segment. The deal is expected to close in the first quarter of 2015 subject to customary closing conditions.  Aldi plans to open 650 new US stores, bringing its total to almost 2,000 by the end of 2018...With the opening of a new store in Mexico City, Skechers hit the 1,000 store mark...Westfield Corp. has signed leases with 14 gourmet food stores and grab-and-go spots at the new World Trade Center in NYC. Westfield has a total 350,000 s/f for retail and food uses at various locations in the Oculus, the base levels of 3 and 4 WTC, and in the underground concourses that connect them. Vendors include Eataly, a spinoff of gourmet market Epicerie Boulud, Lore Wine & Spirits, Japanese confectionary K Minamoto, brew specialist Beer Table, coffee concept Nobletree, Nunu Chocolates, Swedish cafe Fika, Philadelphia coffee seller La Colombe, Devon & Blakely, Pret a Manger, Wasabi Sushi and Bento, Joe Coffee, and Treat House...Bob’s Discount Furniture will open its first 2 stores in the Baltimore market next year, expanding from a base of stores in the greater Washington, DC area

Decelerating News

Target will close 11 stores as of February, 2015, citing performance issues. The stores include 3 locations in Michigan, 2 in Illinois, and single stores in Georgia, Iowa, Indiana, Kansas, Minnesota, and Texas...Staples plans to shut an additional 30 stores this year, accelerating its ongoing efforts to slash costs. These store closures are in addition to the 140 already announced.

New England News

Market Basket has opened its Revere store, which had long been finished but sat dormant during the battle for control of the company among the Demoulas family. The next scheduled opening is a small supermarket in Littleton, MA in early November, followed by a 90,000 s/f Market Basket in Waltham, MA in December. Market Basket’s Attleboro store is opening the first week of January.  The supermarket off Route 1A has remained finished but vacant since last spring due to the corporate standoff....RadioShack's Fix It Here same-day mobile repair service is now available in 31 Boston stores. Fix It Here is available in more than 550 RadioShack stores across the nation, and RadioShack plans a rollout to 750 locations by the end of the year.  Fix It Here offers same-day repairs for the most popular smartphones and tablets...Crumbs is back in Boston's Financial District. The one-time purveyor of cupcakes that closed abruptly in July  reopened with a substantially expanded menu under new ownership that includes CNBC star Marcus Lemonis and Fischer Enterprises...Price Chopper will change its name to Market 32 and modernize its stores beginning this month and continuing over the next five years. The supermarket chain has 135 stores in New York, Massachusetts, Vermont, Connecticut, Pennsylvania, and New Hampshire...Bangor, Maine’s Big Lots store will close its doors in January. The retailer opened its Bangor location in 2009, making it the 7th in the state at the time. The retailer operates more than 1,400 stores nationwide...A brand-new Goodwill store has opened in Somersworth, NH, moved from its original Dover location. Goodwill has more than 2,900 stores worldwide...Berkshire Group, WS Development and Boston Global Investors (BGI) have begun construction on One Seaport Square, a three-acre mixed-use development located within the 23-acre Seaport Square, the largest master-planned project in the city of Boston. Plans for One Seaport Square include two towers, the Benjamin and the VIA. WS Development will develop, own and manage 250,000 s/f of retail space throughout the first three floors of The Benjamin and VIA. Confirmed retailers include Equinox fitness facility, ShowPlace ICON Theatre, and Kings Bowl. The project includes Courthouse Square, a 17,000 s/f, retail-lined open space between the two towers that will serve as a pedestrian link between the buildings, the MBTA Courthouse Station and the Moakley Federal Courthouse...Kings is gearing up to reopen early next year at 3rd Ave Burlington, MA. A fire engulfed Kings Burlington on April 13, just weeks before its scheduled opening, heavily damaging the structure...There are new plans for development in Quincy Center, after a $1.6 billion, 55-acre downtown redevelopment proposal fell apart earlier this year. A new $100 million plan was unveiled by project investor and insurance company Quincy Mutual, Quincy Mayor Thomas Koch, and other officials. The first phase of the plan includes a six-story building with 169 housing units called West of Chestnut, and 12,000 s/f of retail space. A second phase for the project, a building called East of Chestnut, will have 220 additional housing units. The project represents just a small portion, both in terms of size and money, of the once-ambitious, now-failed Street-Works plan.

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

The Commerce Department said Friday that retail sales rose 0.3 percent last month after falling by the same amount in September. Excluding gas stations, where falling prices lowered spending, sales rose a solid 0.5 percent.

Source: U.S. Department of Commerce -

Treasury Yields

Treasury Yield Sources:;

Consumer Confidence Index

The Conference Board Consumer Confidence Index®, which had decreased in September, rebounded in October. The Index now stands at 94.5 (1985=100), up from 89.0 in September. The Present Situation Index edged up from 93.0 to 93.7, while the Expectations Index increased sharply to 95.0 from 86.4 in September.

Source: The Conference Board -

Purchasing Managers Index

Manufacturing expanded in October as the PMI® registered 59%, an increase of 2.4 percentage points when compared to September’s reading of 56.6%. This is the same reading as reported in August 2014, which is the highest reading for the index since March of 2011 when it registered 59.1 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 -