Tuesday, March 27, 2018

Another Category Killer Gets Killed

You know who’s on the list: Circuit City, Borders, Linens N’ Things, Sports Authority, Comp USA, Child World, and on and on. This time the “category killer” getting killed is Toys R Us.

Toys R Us has been around since 1948, when Charles Lazarus opened a baby furniture store, originally known as Children’s Bargain Town. The Toys R Us banner made its debut in 1957 and became a public company in 1978. In 1983, offspring Kids R Us opened its first stores, penetrating the childrens apparel market. By the time Mr. Lazarus retired as CEO in 1994, the company had grown to over 1,000 stores in 17 countries.

In 1996 the Babies R Us brand evolved, adding another growth concept to its repertoire. However, following several years of strong expansion, the company started feeling the competitive effects of a growing list of mass merchant retailers, and more recently online retailers, which resulted in a never-ending erosion of market share.

To illustrate the stagnation in Toys R Us sales performance during the past decade: Domestic sales at Toys R Us were down 6.8% through Q3 in 2017 and if sales remained on the same trend through year end, the company will end the year with US sales of roughly $6.6 billion, which, besides toys, also includes apparel, furniture, and other baby-related categories. The company’s Fiscal 2007 sales were $6.0 billion, reflecting an estimated compound annual growth rate over the past decade of a mere 0.96%. Same store sales are expected to be down 4.4% for this year.

The Toy Association, the toy industry’s trade association, indicates that toys sales in the US approximated $27 billion in 2017. Walmart took the lead in toy sales in the US as far back as 1999 and has never looked back. Currently the formidable discounter captures about 30 percent of the US market, according to IBISWorld. Toys R Us holds an 18% share and the slimmest of margins over Target, which has an 17 percent cut of the toy business.  Kmart sales represent a small but not insignificant share estimated at about 3.4 percent. Small specialty shops and online catalogs claim the remaining business with Amazon the most notable, generating approximately 5 percent of total sales.

At the end of Q3 2017, Toys R Us operated just shy of 800 stores domestically (discounted for outlets stores and both permanent and temporary express stores, which range from only 3,000 to 7,000 square feet). Currently, 735 stores remain. These units include traditional toy stores, generally sized between 20,000 and 50,000 square feet; Babies R Us stores, ranging from 30,000 to 55,000 square feet; and side-by-side combo stores that can be 30,000 to 70,000 square feet. Barring a partial sale of the company - which reportedly remains an option that could potentially preserve 200 US stores - a complete liquidation would incrementally add approximately 30 million square feet of retail vacancy within the US.

The two questions that always come up when bankruptcies are announced are, “Who will absorb the sales?”  and “Who will fill the vacancies?” Often there are direct competitors who pick up a chunk of the business - in fact, Toys R Us itself was able to take advantage of the Child World closing years ago. Best Buy immediately came to the fore when Circuit City filed, Bed Bath & Beyond benefitted from Linens N’ Things demise, Barnes & Noble absorbed a considerable share of Borders business, and when Sports Authority closed, Dick’s was there to benefit. But this time it’s not so clear cut. Walmart is probably the frontrunner to pick up a share of the business and Target will likely gain significant sales as well. Amazon is obviously in a strong position to grab a lion’s share of the freed-up online business. But beyond these retailers, it may be the independent toy operators that stand to collectively benefit the most.

Regarding replacement tenants, we can point to Sports Authority to get an idea of how successful landlords might be. Approximately the same prototypical size as Toys R Us, only five of the 15 Sports Authority stores that operated in Eastern Massachusetts, Southern New Hampshire, and Greater Hartford have found replacements. Burlington, HomeGoods, Sierra Trading Post, Party City, and The Guitar Center have either committed to, or currently occupy, these units. Comparatively, there are 19 Toys R Us stores occupying approximately 764,000 square feet. Fortunately, 12 of these stores are isolated from vacant Sports Authority units and should not have to compete for the same prospects.

At the same time, candidates to fill these stores will be limited. Consequently, we can expect to see a significant impact on vacancy rates in all regions which may take some time to fully mitigate - and that’s only until the next category killer bites the dust.

Bob Sheehan, VP of Research
BSheehan@KeyPoint Partners.com

The KeyPoint Reports for 2018: coming soon!

KeyPoint Partners Company News

We’re pleased to announce two new leases at University Mall, South Burlington, VT: fashion retailer H&M (its first Vermont store) and Shoe Dept. Encore will open at the Mall in 2018. VP of Leasing Don Mace handled the deals. New Business: Merrimack Park Place, Merrimack, NH, a new 372,000 mixed-use development to be built adjacent to the Merrimack Outlets. VP of Leasing Michael Branton will handle leasing for 48,000 s/f of retail and restaurant. The project is fully approved.

National Retail News

The Commerce Department said that retail sales slipped 0.1% last month. January data was revised to show sales dipping 0.1% instead of falling 0.3% as previously reported. Retail sales in February increased 4.0% year-over-year. Sales at department stores declined, but spending at online and catalog retailers, building materials stores, restaurants and clothiers rose to offset much of the decline. Among retailers reporting monthly sales, L Brands was up 3.0% and Costco was up 9.0%. See sales reports below.

Accelerating Retail News

Batteries Plus Bulbs opened 26 stores in 2017, 3 corporate locations and 23 franchise-owned. It plans to open 47 stores in 2018, including 14 corporate locations and 33 franchise locations…Tom Trkla, chief executive of a MA-based private equity firm, has created a convenience store company called Yesway that he expects to grow from about 80 stores to 650 in 5 years mainly in the central US...Starbucks opened its first Reserve store, a new upscale format that combines higher-end coffees, freshly-made Italian goods, and cocktails, on the main floor of its Seattle headquarters. It is the first of 1,000 Reserve stores Starbucks plans to open…Jersey Mike’s Subs plans to open 200 new locations, including franchise and corporate, in 2018. The company aims to have more than 2,000 stores open nationwide by 2020…Online mattress start-up Casper is opening its first store, a 3,000 s/f location in New York…Dry Goods announced today the opening of 12 additional US locations in 2018. The company currently operates 27 stores in 8 states...Kohl’s will bring discount grocer Aldi into as many as 10 stores later this year in a pilot test, as the retailer aims to scale down its real estate footprint and bring retail partners into excess spaces. By the start of this year, the company had readjusted the square footage of roughly 300 stores. Right-sizing efforts are expected to impact an additional 200 stores...Soft Surroundings will open 16 new locations this year, including its first in CA. 2018 is the company’s fourth consecutive year of double-digit store openings, and will bring the total store count to 75...Gap Inc. says it plans to double the number of Gap store openings for 2018 relative to 2017. Gap opened 30 Old Navy stores in 2017. The company will also invest in remodeling and adding new tech features to its existing Gap, Banana Republic and Old Navy stores, and work toward its goal of closing 200 older, underperforming Banana Republic and Gap stores by year-end…Roy Rogers plans to open 4  to 6 new restaurants per year. The chain now has 55 restaurants...Darden Restaurants is trying a burger-focused chain, The Capital Grille: The Capital Burger will open in Washington, DC this month...Domino’s Pizza opened its 15,000th store this month in Lewisville, Texas... Ross Stores will open about 100 new stores this year: 75 Ross Dress for Less and 25 dd’s Discounts locations...Washington Prime Group Inc. has signed an agreement to acquire four Sears stores in Texas, Ohio, Iowa, and Colorado in a sale-leaseback transaction for a reported $28.5 million. Sears will continue to operate the properties under new leases with Washington Prime, which will have control of the sites for future redevelopment…Big Blue Swim School, which operates four Illinois locations in former in-line retail spaces, plans to expand to Atlanta, Chicago, Washington, D.C., and Denver with 17 new locations by 2021. Their ultimate goal is 300 to 500 Big Blue Swim Schools nationwide. Big Blue schools feature water that’s always 91-degrees, comfortable parent viewing areas with WiFi, and toys and activities for waiting siblings. Forty swim instructors and three managers conduct 2,000 lessons a week at each location... Burlington expects to open 35 to 40 net new stores in 2018, along with 20 to 25 relocations and closings. The company remodeled 34 stores and opened 37 new ones, and intends to remodel an additional 34 stores this year. Burlington operated 629 stores at year-end.

Decelerating Retail News

Foot Locker plans to close approximately 110 stores this year, mostly under-performing locations. These closures augment the 147 stores the retailer closed in 2017; however, the retailer opened 94 new locations, bringing their global store count to 3,310...Toys R Us is planning to sell or close all 735 US stores. The news comes six months after the retailer filed for bankruptcy. The company is also closing all 100 UK stores... Supervalu has entered into three separate agreements to sell 21 of its 38 Farm Fresh Food & Pharmacy stores for about $43 million in cash to three retailers: Harris Teeter, Kroger and Food Lion. Supervalu is also involved in ongoing discussions to sell the remaining Farm Fresh locations... Southeastern Grocers, parent company of Winn-Dixie and Bi-Lo, will file for bankruptcy protection by the end of March and close 94 stores. The company will continue to operate 582 stores throughout its territory.

New England Retail News

The Dana-Farber Cancer Institute will open a satellite facility at Patriot Place’s North Marketplace in the spring of 2020. The center will lease 34,000 s/f in a new 150,000 s/f  building that’s being developed by owner the Kraft Group…Legal Sea Foods plans to open Legal Fish Bowl, a new fast-casual concept, in an 850 s/f space at Faneuil Hall’s Quincy Market this spring...Stewart’s Shops Corp. plans to spend up to $50 million in 2018 to rebuild or renovate 15 convenience stores in New York and Vermont, and build 2 new stores in NY. Stewart’s operates more than 335 convenience stores in 31 counties across upstate NY and southern VT…Chick-fil-A got approval to construct a new 5,000 s/f restaurant on Westgate Drive, Brockton, MA. There are 10 Chick-fil-A restaurants in MA; the chain has more than 2,285 Chick-fil-A locations across the country... Macy’s Inc. will open the first MA location of its off-price retail concept Backstage at the Solomon Pond Mall in Marlboro this month, and a second at the Emerald Square Mall in North Attleboro in June. Both will be store-within-a-store models located within existing Macy’s stores. Backstage sells clothing, housewares, home furnishings, and accessories at 20 to 80% off. Macy’s introduced 7 freestanding Backstage stores in New Jersey, New York and Texas in 2015 and 2016, before switching to the store-within-a-store concept. It has 44 store-within-a-store locations in 17 states.

Mall News

Best Buy will close all of its approximately 250 freestanding Best Buy Mobile stores by the end of May. The smaller-format stores, typically located in malls, average about 1,400 s/f. The retailer will continue to sell mobile phones through its 1,000 US Best Buy stores and online…Bachrach men’s stores, which had emerged from bankruptcy protection last August, filed Chapter 11 protection last month and will close all 14 of its stores, which are located mostly at malls...Abercrombie & Fitch  will close 60 stores later this year. The retailer, which also owns Hollister, has been reconfiguring its store fleet in malls. Last year, it closed nearly 40 stores, having previously planned to shutter 60 locations. In 2016, it closed about 50 shops…The Walking Company has filed for Chapter 11 protection, for the second time in 10 years. The retailer operates 208 stores in the US, including the FootSmart and Big Dogs Sportswear names...Signet Jewelers Ltd., parent of Zales, Kay Jewelers, Jared and other jewelry banners, anticipates closing more than 200 stores by the end of fiscal 2019. With three-quarters of the stores expected to close located in the same mall as another Signet banner, the company said it expects approximately 30% of revenue from closed stores to transfer to remaining Signet stores....Claire’s Stores Inc. filed for bankruptcy and reached an agreement with creditors to restructure around $1.9 billion in debt. Claire’s operates over 2,500 corporate stores across 47 countires, many in malls.


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. 


February retail sales fell 0.1%, despite signs of a robust economy and new tax laws starting to take effect, the Commerce Department said. Auto sales fell 0.9%, while purchases at gas stations tumbled 1.2%. Sales at department stores declined 0.9%.

Source: U.S. Department of Commerce - commerce.gov


Treasury Yield Sources:  federalreserve.gov; ustreas.gov


The Conference Board Consumer Confidence Index® increased in February, following a modest increase in January. The Index now stands at 130.8 (1985=100), up from 124.3 in January. The Present Situation Index increased from 154.7 to 162.4, while the Expectations Index improved from 104.0 last month to 109.7 this month.

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


Manufacturing expanded in February as the PMI® registered 60.8%, an increase of 1.7 percentage points from January reading of 59.1%, the highest level of expansion seen since May 2004. 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