Tuesday, February 24, 2015

Merge Ahead? Staples, Office Depot, and the FTC

If it’s not a bankruptcy, it’s a merger or an acquisition. At least, that’s the way it seems in the retail world these days. Last month we addressed recent bankruptcies and faltering retailers in the Juniors apparel category that have been largely impacted by the new fast-fashion retailers such as Forever 21 and H&M. Other retailers are coping with operating inefficiencies by looking for a friendly suitor or white knight to take over and avoid the inevitable. We just witnessed the epic battle between Dollar Tree and Dollar General for Family Dollar (see Family Dollar: Holiday Woes or Something Deeper? in our April 2014 edition). Other retailers are coping with the gradual but continual loss of market share to Amazon and other online retailers. Some are engaging in mergers and acquisitions to stem the tide: earlier this month came the announcement that Staples and Office Depot had entered into a $6.3 billion merger agreement. And that’s our story this month.

The heyday of the office supply superstore was in the mid-to-late 90’s. In 1996, Staples made its first attempt at a merger with Office Depot, but was denied by the Federal Trade Commission on the basis that a potential monopoly would develop that would dictate office supply pricing, particularly in markets where Office Max had no presence. While Staples and Office Depot made the case that other category competition existed in the form of Wal-Mart, Target, Circuit City and Best Buy, among others, the FTC was not swayed. So why will the FTC view the merger any differently this time around? More competition, that’s why. A great deal has happened in this category in the last 18 years. This time it’s not about monopolizing market share; it’s a question of remaining viable.

For one thing, the traditional workplace isn’t the same anymore. The need for paper, pens, fax machines, copiers and printers has waned dramatically. The home office, the virtual office, and cloud storage are becoming more popular every day. Also, on the brick-an-mortar side, stores such as Costco have expanded rapidly since the mid-1990s, adding more competition. But what’s really driving the proposed merger is e-commerce.

18 years ago there was no Amazon to worry about. Although the internet retail giant launched in 1995 as an online bookstore, it didn’t sell office products until as recently as 2007. Walmart.com wasn’t established until 2000. The same goes for Target, and its online presence, among other supercenters, wholesale clubs, and online office products retailers. Now Amazon and other online retailers have been driving down pricing and impacting gross margin.

Currently Staples is ranked #3 behind only Amazon and Apple in online sales. Office Depot is ranked #9. While brick-and-mortar sales of these two office products retailers has been trending down in recently years, partly a result of store closings, partly a result of negative comp store sales, it could have been worse without the sales growth both companies generated from their online segments.

Commercial sales are also a big part of each companies business: reports indicate that Staples generates 80% of sales from this component online. By merging, the two companies can leverage that part of the business to compete effectively against Amazon and the other online retailers.

The recent merger between Office Depot and Office Max made it through the FTC approval process without a hitch, and the FTC specifically cited increased competition as a basis for its decision. Not a single store was required to close – although in this case store closings may be a necessity, if not by FTC direction, then by choice: analysts predict that the geographic overlap between Staples and Office Depot will probably require the closing of 500 to 1,000 stores and the downsizing of others, something landlords won’t like, but should be accustomed to by now.

In any case, it’s clear that the proposed merger between Staples and Office Depot spells survival in today’s office supply category. That’s why it has to happen. The FTC’s recognition of new competitive restraints bodes well for a successful attempt this time around.

Bob Sheehan, Vice President of Research

Company News

New Business: Leasing assignment: Granite Town Plaza, 185 Elm Street, Milford, New Hampshire. Michael Branton is the broker. The Investment Sales Team completed the sale of Rockland Plaza, a 50,000 s/f retail center in Rockland, MA. Co-broker Paul Durgin of Conway Commercial represented the Buyer. Employee News: Kiersten DeWynGaert joined the Burlington office as Administrative Assistant for the Leasing Team. Ed Shea joined the Burlington office as a Property Manager. Ed’s had previously been at Colliers International.

National News

Consumers appear to have been feeling a seasonal hangover after what some analysts have called a relatively strong 2014 holiday season. According to the monthly Retail Performance Pulse for January 2015 from RetailNext, store sales and traffic both declined 7.7%. The last week of the month saw relatively stronger performance with upticks in average transaction value and sales per shopper. Among retailers reporting monthly comp-store sales, L Brands was up 7.0%, Gap was down 3.0%, Rite Aid was up 4.8%, and Costco gained 2.0%. See our sales report below.

Accelerating News

Staples is buying rival Office Depot for $6.3 billion. Staples CEO Ron Sargent will remain in his position and the combined company will retain the current Staples headquarters in Framingham, MA. Staples had been in talks to purchase its rival for about five months...In its first acquisition in 10 years, Macy’s will acquire luxury beauty products retailer Bluemercury for $210 million in cash. Bluemercury currently operates about 60 specialty stores in 18 states, primarily in prime street-level locations and urban lifestyle centers. Most locations include in-house spas. The company also operates an online business. Macy's plans to operate and significantly expand Bluemercury stores as a standalone business. The transaction is expected to be completed in Macy’s, Inc.’s fiscal first quarter, which ends in May of  2015)... Smokey Bones Bar & Fire Grill will open 3 new US restaurants in 2015 - in Peabody, MA, Chicago, and an undisclosed East Coast location - bringing the brand's portfolio to 68 across the US....Tractor Supply Company opens its 1,400th store, in Eunice, LA, this month. The location is one of 110 to 115 new stores the retailer plans to open this year....Target has confirmed that most of the stores it opens this year will be smaller-format outlets, not traditional sprawling suburban-type stores. 8 of the 15 stores it opens in 2015 will be TargetExpress stores, which run about 20,000 s/f, roughly one-tenth the size of a SuperTarget. Target said it also intends to open a CityTarget in Boston near Fenway Park, and another next year in Brooklyn. CityTarget stores are somewhat smaller than traditional suburban stores but still run between 80,000-160,000 s/f. Target also plans to open 6 standard general merchandise stores in 2015, including two in Hawaii, and one each in Illinois, Texas, California and Massachusetts...Forever 21 will open a five-level store this month on Fifth Avenue in Manhattan, taking over space that formerly housed an H&M. Forever 21 is planning to open 600 new stores in the next three years...Mattress startup Tuft & Needle plans to open its first retail store this summer in San Francisco’s SoMa neighborhood...Orchard Supply Hardware opened three new stores this month, one in Oregon and two in California...British women’s activewear brand Sweaty Betty plans to expand its presence in the US. Sweaty Betty operates more than 40 stores in the UK, and two in the US...British toy retailer Hamleys has begun a multiple store roll-out throughout the US. Hamleys currently has 49 stores across 17 countries in Europe, Asia and the Middle East, and is most famous for its seven-story location on Regent Street in London...Stew Leonard’s will open its fifth store and first grocery store location in Farmingdale, NY on Long Island. It now has four locations: Norwalk, Danbury and Newington in Connecticut, and Yonkers, N.Y...JC Penney plans to expand its in-store Disney shop concept, currently featured in 565 stores, to an additional 116 stores this year...GNC Holdings Inc. plans to open 125 total net new domestic locations, approximately 150 net new international locations, and approximately 30 net new GNC-Rite Aid store-within-a-store locations...Whole Foods Market plans 38 to 42 new store openings, including relocations, in 2015. The company currently has 408 stores, and plans on tripling its US store count to 1,200 locations over the long term.

Decelerating News

As has been expected for some time, RadioShack Inc. has filed for bankruptcy protection. The filing includes a plan to sell more than half of the 4,000 company-owned stores and to shutter the remaining 1,600 or so over time...Gap Inc plans to close its Piperlime business, including the online platform and single store in New York, by the end of the first quarter of fiscal year 2015. Piperlime launched in 2006 as an online footwear store. In 2012, the brand ventured into bricks-and-mortar, opening a store in Manhattan...Jones New York will close 127 Jones New York Outlet stores and discontinue its wholesale business over the course of 2015....Kate Spade & Company is closing all 19 of its lower-priced Kate Spade Saturday stores and all 12 of its Jack Spade menswear stores in a phased approach during the first half of 2015...Cache has filed for Chapter 11 bankruptcy protection. The women’s apparel retailer will continue to operate its business, but will reduce its store count and sell and renegotiate some of its leases. The retailer has secured up to $22 million in financing from Salus Capital Partners to keep operating during the Chapter 11 proceeding, with the financing subject to court approval. Cache also will seek a stalking horse buyer for its assets...Saladworks LLC filed for Chapter 11 bankruptcy protection. Saladworks has hired SSG Advisors to help market the company for a possible sale, according to the bankruptcy filing. Saladworks has more than 100 locations with another 80 units in development...Ascena Retail Group is eliminating its fledgling boys brand, Brothers, as part of a strategic review of its Justice business. Operations related to the brand are expected to be fully wound down by the end of the company’s fiscal year. Ascena operates 3,900 stores under the Lane Bryant, Cacique, Maurices, Dressbarn, Catherines, and Justice banners.

New England News

A contemporary 200-room AC Hotel by Marriott boutique hotel is planned for Boston’s Ink Block project, with a 2017 targeted opening. AC Hotels started in Europe in 1998 before affiliating with Marriott in 2011. The chain has one US hotel, in New Orleans, with others slated to open this year in Washington, D.C., Miami Beach and Kansas City...Kings Burlington (MA) opened this month, nine months after a fire destroyed the venue within days of its originally scheduled April, 2014 opening. At 30,000 s/f, this Kings location, in the new 3rd Ave. development, is the largest of the bowling & entertainment chain’s 3 in MA...An affiliate of Bierbrier Development Inc. has acquired the newly built 45,000 s/f South Shore Place retail center for $41.5 million. South Shore Place, whose tenants include Legal Sea Foods and Ben & Jerry's, was developed by Carpenter & Co. on the site of the Sheraton Braintree, and sold by a joint venture of Carpenter and BayNorth Capital LLC...Trendy clothing retailer Primark is coming to the Danbury (CT) Fair Mall, the first of 5 stores Primark will open in East Coast malls in space currently occupied by Sears. Primark will lease 70,000 s/f.  Sears and its Auto Center will continue to operate in 107,000 s/f on the lower level of the mall...Chico's and White House Black Market at the Burlington (VT) Town Center closed suddenly this month. Mall owner Don Sinex said the decision to close the stores was made by Chico's, with no previous conversation...SONIC announced two new agreements for its first franchise developments in Rhode Island. The first will open in Providence in mid-2015, with plans for more down the line. The second new franchisee is planning to bring two new drive-ins to the state in the next few years. SONIC has 3,500 locations...The owner of South Bay Center has plans for a large mixed-use project that includes a hotel, movie theater and up to 500 units of multi-family housing next to the Dorchester shopping center, as well as 115,000 s/f of commercial/retail space, two parking garages and new internal roadways, sidewalks and open space. Plans must go through the BRA’s review process.

January 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

Retail sales fell 0.8% in January, more than forecast, according to the US Commerce Dept.. It was the second straight month of decline. Sales excluding automobiles, gasoline, building materials and food services edged up 0.1%, also less than forecast, after being flat in December.  

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 in December, rose sharply in January. The Index now stands at 102.9 (1985=100), up from 93.1 in December. The Present Situation Index rose to 112.6 from 99.9, while the Expectations Index increased to 96.4 from 88.5 in December.

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

Purchasing Managers Index

Manufacturing expanded in January as the PMI® registered 53.5 percent, a decrease of 1.6 percentage points when compared to December’s reading of 55.1 percent, indicating growth in manufacturing for the 20th 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