Tuesday, April 21, 2020

Entering Uncharted Waters

Dear Subscribers: All of us at KeyPoint Partners wish you and your families continued health and safety during the pandemic. We thank you for your ongoing support.


It was just over a decade ago that the retail industry was facing its most difficult period since the Great Depression. Retail stores were closing by the hundreds and vacancy skyrocketed by more than 50%  - over a three-year period, although it felt like it overnight. 

At the same time, online shopping was gaining momentum, with Amazon leading the way. It was the perfect storm—“hit ‘em when they’re down” as they say. From that point on we have seen online sales growing rapidly at double-digit rates while brick-and-mortar sales struggle to stay above water.

Since that time, however, shopping center landlords have done a respectable job of filling vacancies left behind in the wake of the Great Recession. In large part they did it with Amazon-proof tenants, tapping categories such as restaurants, bars, movie theaters, trampoline parks, bowling venues, adventure parks, escape rooms, and fitness centers. These efforts were enough for many shopping centers to survive another day.  But now the industry has been plagued with COVID-19, maybe the most impactful watershed moment that retail veterans have experienced in their lifetimes.

Right now, everyone wants to know when stores will open, how will openings be rolled out, and what operational guidelines will be in place when states give the go-ahead. We were handed the map, Guidelines for Opening Up America Again, a few days before this writing. First, states need to get past a 14-day declining trend in new coronavirus cases, or percentage of positive tests, before they can begin a three-phase approach leading to a “new normal”. If all goes well and there are no setbacks, it’s possible for some states to reach the third phase by June or July. Nevertheless, social distancing and hygiene practices are probably here to stay for a while. 


But what will the retail world look like when the dust settles? Well, if the writing wasn’t already on the wall for regional enclosed malls, it sure is now. The best should survive, but the worst won’t. There’s just too much pressure on department stores and mall-based retailers for the weaker centers to continue operating. We’ll likely see a number of bankruptcies coming among the prime suspects such as JCPenney, Neiman Marcus, J Crew, Macy’s, GNC, Lands’ End, and the Signet jewelry stores, as well as the Tapestry group of fashion chains. Even L Brands and Gap were recently downgraded.

Beyond the malls, there should be concern for numerous retail and entertainment operators where face-to-face interaction is part of the business. It’s the restaurants, movie theaters, and other Amazon-proof concepts which played such an important role in filling space in many shopping centers during post-recession era. Will those business models work now if social distancing cuts seating capacities in half? Will consumers patronize these establishments with the same frequency as in the past, if at all? At least until a vaccine is approved, maybe not.

With respect to independent mom-and-pop operators, we can only imagine what the landscape will look like. Even with assistance from the federal government, there’s a strong chance that many will simply run out of cash. Given the fact that retail sales pre-virus had been just plodding along, the impact of the coronavirus may push a significant slice of this retail segment over the edge. 

It would be a godsend if strong pent-up demand leads to a sharp recovery and by fourth quarter we are out of the woods. But before we can expect clear sailing, we’ll first have to venture into uncharted waters.
Bob Sheehan
Vice President of Research
BSheehan@KeyPointPartners.com


KeyPoint Partners Company News


National Retail News: COVID-19 Updates

According to the Commerce Department, retail sales plunged a record 8.7% during March, the largest monthly fall since the Commerce Department began tracking retail sales three decades ago. The previous record was a 3.9% drop in November 2008, during the Great Recession. Core retail sales, excluding the volatile auto and gas components, fell 3.1%. Online spending rose 3.1% and grocery sales jumped 26.9%. Sales at department stores fell 19.7%, furniture stores saw a 26.8% drop, sporting goods sales fell 23.3%, and clothing sales fell by 50.5%. Auto and auto parts sales plunged 25.6% and gas sales fell 17.2%. However, even with the significant decline from February to Match, total retail sales from January through March of this year are up 1.1% compared to the same period a year ago.  See sales reports below.

Covid-19:
We can’t include every headline related to retail and the pandemic. However, here are some key ones:
 Tapestry, Parent of Coach and Kate Spade,will extend store closures in North America and Europe through April 24, and will continue to pay employees through that time…Michaels is expanding its product delivery options with a national rollout of a contactless, same-day delivery option at US stores…Starbucks plans to re-open as many stores as it can with modified operations and safety measures, and will gradually expand and shift in-store customer experiences. Some locations will continue as drive-thru only, while others may feature mobile ordering for contactless pickup and delivery. Others may reopen with to-go ordering only...Amazon will reportedly delay its annual Prime Day due to concerns over COVID-19 until August or even later. Since its launch in 2015, Prime Day has always occurred in mid-July. The delay could reportedly cost anywhere from $100 million to $300 million. Amazon has seen surging demand from the COVID-19 pandemic. A postponement would negatively impact Amazon third-party sellers, who participate in Prime Day sales...The number of retail employees who have been furloughed number will over 1 million as of this writing. Here’s a partial list of retailers who have furloughed all or most employees: Abercrombie & Fitch, Ascena, Best Buy, Burlington, Dick’s Sporting Goods, Gap, Kohl’s, L Brands, Macy’s, Ralph Lauren, Ross Stores, Reformation, REI

Accelerating News

Note: Accelerating/Decelerating announcements may be subject to change in light of current conditions.

Stop & Shop, Aldi US and Lidl US are expanding hiring as grocery retailers nationwide seek extra hands amid the pandemic. Stop & Shop plans to hire at least 5,000 new associates for regular part-time jobs in stores, distribution centers and delivery operations in New York, New Jersey, Connecticut, Massachusetts and Rhode Island. Aldi US has hired nearly 7,500 employees. Lidl US announced plans to hire up to 1,000 temporary employees across its store network and distribution centers... Rise Southern Biscuits & Righteous Chicken has signed a 5-unit deal to expand to Tulsa, OK. Rise currently operates 16 locations in 6 states, with over 160 units in development...Ulta Beauty still plans to open new stores this year, but not as many as the 75 it had previously announced. Its 1,254 stores remain temporarily closed...Lidl is building a network of large distribution centers along the Eastern seaboard that will be capable of serving 1,500 or more stores when fully operational. The grocer recently opened its third center, in MD. A fourth warehouse, the company’s largest to date, will be located in southeast of Atlanta.  Any one of these facilities would be able to handle between 300 and 400 stores depending on sales volumes and replenishment frequency, based on the experience of other food retailers. Lidl currently has 100 US locations...Sea Bags plans to open 8 new locations this year, once the crisis is over. Sea Bags  has 25 retail locations from Maine to Florida…Sherwin-Williams added 62 net new stores in 2019 in its Americas Group unit. It plans to add 80-100 new stores in 2020…Big Blue Swim School has signed 4 franchise deals for a total of 14 units in March. The company has signed 22 units so far this year. Big Blue Swim School has 5 locations, and plans to grow through franchising to 150 by 2021...Raley’s has opened a new flagship location in Sacramento, CA as the grocer continues to serve customers through the pandemic. The 55,000 s/f store can process up to 250 orders for pick-up or delivery per day via the chain’s online ordering platform. Raley’s owns and operates 129 grocery stores under the names Raley’s, Bel Air Markets, Nob Hill Foods, Murieta Market by Raley’s, Market 5-ONE-5, Food Source stores, and Sak N’ Save…AlphaGraphics will open a new store in Hamilton, NJ later this year. AlphaGraphics has over 285 locations across 6 countries, and plans to open 25 new stores every year for the next 3-5 years.

Decelerating News

Note: Accelerating/Decelerating announcements may be subject to change in light of current conditions.

The parent of the Logan’s Roadhouse and Old Chicago casual chains said it is “mothballing” all 261 of its restaurants after a lender withdrew financing to keep the bankrupt company in operation until it could emerge from Chapter 11 protection. All of the restaurants are currently closed… Duluth Trading plans to reduce new store openings and take other measures that will curtail expenses and capital spending in 2020. The company has 5 new stores planned in 2020, including 4 with signed leases, that will continue but the company is holding off additional locations. For the year, the company opened 15 retail stores to end with a total of 61... In a court-supervised asset auction, Fairway Market awarded bids for 2 store leases in NJ to Amazon and 6 locations in NYC to ShopRite operator Village Super Market Inc. and Key Food Cooperative member Seven Seas Georgetowne LLC…GameStop is set to permanently close 300 more stores in the coming year... The parent of the Brio Italian Mediterranean and Bravo Fresh Italian casual chains has filed for Chapter 11 bankruptcy protection after closing 71 of its 92 remaining restaurants.The chains had been struggling with sales and profit declines before the COVID-19 pandemic. In January, 10 stores were closed…Pier 1 Imports, which filed for bankruptcy protection in February, is expected to receive a revised purchase offer that would keep open less than 100 of the retailer’s 900-plus locations. The bid is from CSC Generation, whose DirectBuy subsidiary acquired the assets of Z Gallerie in a bankruptcy auction last summer. Pier 1’s bankruptcy court process has been put on hold while its stores are temporarily closed due to the pandemic... TGI Fridays will not be going public after Allegro Merger, a shell company that agreed to take the casual-dining chain public in a reverse merger late last year, opted to back out of a planned $380 million merger and return money to shareholders…A&G Real Estate Partners concluded the sale of 10 Earth Fare store leases to Winn-Dixie, Whole Foods Market, Aldi and an investor group including one of Earth Fare’s founders. A&G also negotiated lease termination agreements for 9 other locations of Earth Fare. In early February, Earth Fare filed for Chapter 11 bankruptcy protection and announced plans to close all of its stores and go out of business... Stein Mart and Kingswood Capital Management have mutually agreed to terminate their merger agreement, announced in January, which would have taken Stein Mart private…Gold’s Gym has closed 30 company-owned clubs, noting that the pandemic had caused the company to evaluate the viability of some of its locations. Gold’s Gym International had temporarily closed all of its corporate-owned locations on March 16.

New England News

Restaurant chain Wagamama laid off about 140 people across multiple MA locations in March. Primark laid off about 350 people from its MA locations. The TJX Cos. Inc. has closed its stores and will furlough store and distribution center employees in the US and Canada. Paper Source laid off 88 employees across its MA locations. Sephora, Destination XL, and DSW have also laid off a substantial number of employees in MA.

Mall News

True Religion is the first major retailer to file under Chapter 11 amid the spread of COVID-19. The company made the decision in March to close its 87 stores. The denim maker’s wholesale business has also been hurt by the closures of its retail partners Macy’s, Nordstrom, Saks Off 5th, Nordstrom Rack, TJ Maxx and Burlington.

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 reported that March retail sales were down 8.7% compared to February, the single largest annual monthly retail sales decline since this data was first tracked by Commerce in 1992.

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® declined sharply in March, following an increase in February. The Index now stands at 120.0 (1985=100), down from 132.6 in February.

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

PURCHASING MANAGERS INDEX

Manufacturing contracted in March, as the PMI® registered 49.1 percent, a 1-percentage point decrease from the February reading of 50.1 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 - www.ism.ws