now you see it. . .now you don’t › sites › default › files › 2015... · 2 fung business...

1

Fung Business Intelligence Centre (FBIC) publication: 2015 US store landscape Copyright © 2015 The Fung Group, All rights reserved.

March 6, 2015 March 6, 2015

D E B O R A H W E I N S W I G E x e c u t i v e D i r e c t o r – H e a d G l o b a l R e t a i l & T e c h n o l o g y F u n g B u s i n e s s I n t e l l i g e n c e C e n t r e d e b o r a h w e i n s w i g @ f u n g 1 9 3 7 . c o m N e w y o r k : 6 4 6 . 8 3 9 . 7 0 1 7

NOW YOU SEE It. . .NOW YOU DON’T A Deep Dive into the US Store Landscape • Alarming headlines about store closures are merely the status quo for the retail industry

• Overbuilding and technology advances support continued store closures in 2015

• Grocers, book stores and office-‐supply stores among the most vulnerable verticals

• Strong industry occupancy rates mask bifurcation in retail real estate

1


March 6, 2015

A Deep Dive into the US Store Landscape Recent retail headlines trumpeting store closures (Macy’s and Target), bankruptcies (Delia’s and Wet Seal) and potential bankruptcies (RadioShack) can be disquieting. But they are really nothing out of the ordinary. Retailers typically hold on through the holidays to capture seasonal demand before announcing inventory liquidation sales (including fixtures) and shuttering stores.

As we enter an increasingly omnichannel world, and with ecommerce still in early days, FBIC is taking a closer look at store closures: the rationale behind them, key trends, vulnerable retail categories and the outlook.

THE BIG PICTURE The US retail sector has long been derided for being overbuilt. With 23.7 square feet of (gross leasable area) GLA per capita, the US has nearly 40% more retail square footage (SF) than its Canadian neighbors to the north. Compared to Brazil, where GLA is less than a foot per capita, the overbuilding is absurd. Given the double-‐digit growth rate in ecommerce, it’s no surprise that total shopping center GLA barely increased (by 0.3%) in 2013 and likely declined in 2014.

A SEASONAL PATTERN TO STORE CLOSINGS Based on quarterly data available from 2010 through 2014, we see in the figure below that the majority of store closures are announced in 1Q, which typically represents 40%-‐45% of the total closures for the year, and the remainder is split fairly evenly between 2Q, 3Q, and 4Q. The figures in the graph are skewed due the high number of store closings in 2Q 2014, when the number of closings was three times the average for 2010–2013.

Figure I. Seasonality of Store Closings, 2010–2014

Source: ICSC

1Q 46%

2Q 25%

3Q 14%

4Q 15%

2


March 6, 2015

STORE CLOSURE RATIONALE Retailers shutter stores for a variety of reasons, ranging from a desire to move to a better location with improved amenities, or to pursuing more brand-‐appropriate adjacencies to forced liquidation.

• Pruning store fleet. Opening and closing stores, expanding locations and store remodels, are fundamental to retailing, and a portion (about 5%) of a retailer’s store fleet undergoes these adjustments continually. Like a garden, a retail store fleet can get overgrown over time. Neighborhoods change and new opportunities arise in other locations. Retailers that grow through acquisition frequently prune the acquired fleet to avoid duplication within a market trading area (it can also be an anti-‐trust requisite, as was the case with Dollar General’s bid for Family Dollar). When leases are up for renewal, retailers typically perform a thorough lease analysis to determine whether to renew.

• Executing an omnichannel strategy. An omnichannel strategy, or “Where he/she wants it, when he/she wants it, how he/she wants it,” means changing roles for the store and its staff and greater operational complexity. The good news is that a shopper who shops across stores, tablet, mobile and PC also tends to spend more than a single-‐channel shopper. The rapidly changing consumer purchasing patterns have forced retailers to relook at their business models, from store-‐fleet size to shopping apps. It is incumbent upon retailers to adjust their business models to reflect the way their customers shop. To that end, Macy’s recently announced a series of initiatives consistent with an omnichannel approach involving adjustments to the store portfolio. Specifically, 14 store closures will offset nine store openings in 2015 within an approximate 850-‐store base.

• Re-‐establish supply-‐demand equilibrium. Fashion brands go in and out of favor. During the 1990s, specialty retailers expanded at a rapid pace as they captured apparel market share from department stores. As the current century got underway, many retail banners had expanded beyond their optimal size, and store productivity suffered.

Gap brand is the poster child for overexpansion. The brand entered 2000 with 1,781 US stores and 400 international stores. It began net closings soon after, as consolidated sales growth slowed and same-‐store sales turned negative, a slump that would persist for the next three consecutive years. By 2004, the Gap brand US store count had declined by 392, to a total of 1,389. This trend continued through 4Q 2014, at which point Gap had 849 US stores—less than half the number it had 15 years earlier! Meanwhile, international expansion has continued with 550 Gap stores, including 151 in Japan, 140 in the UK, and 98 in China. Gap Online was launched in 1997 and accounted for $1.7 billion, 14.7% of revenues for the first nine months of 2014.

• Market and/or competitive forces. Similar to Gap, teen retail concepts enjoyed vibrant growth through the 1990s. This extended into the 2000s as American youth bought denim, Henleys, graphic T-‐shirts and hoodies for self-‐expression. This too came to an end with the confluence of the iPod (the must-‐have fashion accessory of 2007), fast-‐fashion retailers (Forever 21 and Zara), an unending supply of new brands via the Internet, and the Great Recession of 2008. Aeropostale, American Eagle, and Abercrombie & Fitch saw their target consumer move on to other brands and categories, and all three (along with other retailers targeting a youth demographic) are closing underperforming stores in tandem with natural lease expirations. In pursuit of growth, they are turning to factory (outlet) locations and international markets. According to comments on 3Q 2014 conference calls, Abercrombie & Fitch expected to close 60 of its 1000 stores in 2014 and plans a

3


March 6, 2015 like amount of closings for the next several years. Aeropostale will have closed about 120 stores in

2014 and another 50–75 in 2015, along with 126 P.S. from Aeropostale locations. American Eagle is slated to shed 150 stores over the next three years, including 70 in 2015.

Recent bankruptcy announcements at Delia’s (December 2014) and Wet Seal (January 2015) are further evidence of how competitive the teen apparel retail space has become. Both retail banners targeted teenage girls and have succumbed to fast-‐fashion competition that execute to a nimble business model with rapid merchandise flows derivative of designer fashions at bargain-‐basement price points. Delia’s operated approximately 99 stores and is in the process of liquidating merchandise and closing all stores. Wet Seal operates 173 stores (following the January 7, 2015 closing of 338 stores).

In the accessories arena, which a bevy of new designers and labels have entered, Coach is executing a multiyear repositioning strategy to become the “leading global modern luxury lifestyle brand.” This includes closing underperforming full-‐price stores while leveraging flagship locations and fleet renovations in the top 12 metropolitan statistical areas (MSAs). Coach will close about 70 stores in FY 2015 (ending June) as it resets for profitable growth.

Meanwhile, consumer electronics retailers, office suppliers and stores offering various forms of media, such as books, CDs and DVDs, have seen their customers flock to the best price/value and convenience providers—frequently Amazon and Walmart.com. Not surprisingly, the steady adoption of ecommerce by the US public, along with showrooming and webrooming, led to notable bankruptcies among booksellers and consumer electronics retailers. The saga continued with RadioShack’s attempt to close 1,100 stores in 2014 and subsequent bankruptcy filing February 5. Branded products that don’t need examination easily transferred to online sales once the consumer was comfortable transacting in that venue.

• Poor retail execution. Be it a lack of inventory discipline, not knowing the target customer (JC Penney under Ron Johnson), or an inefficient supply chain and the consequent high out-‐of-‐stock metric, strategic missteps have also led to store closures. Creative destruction and urban renewal will continue to change the retail landscape to reflect consumer desires.

OUTLOOK FOR 2015 Overbuilding during the last cycle and rapid technological advances will continue to impact retailers in 2015. CoStar has identified seven retailers that are at risk of substantial store closings this year, representing 442 million square feet of retail space across the US and, roughly 3% of the occupied stock. Figure II. Troubled Retailer Square Footage by Market Tier

SF By Market Tier

7

11

15

27

42

105

109

127

0 50 100 150

GameStop

RadioShack

Barnes & Noble

Office Depot

Staples

Kmart

JCPenney

Sears

SF (Millions)

10%

16%

21%

52%

Tier 1 Tier 2 Tier 3 Tier 4

Source: CoStar Portfolio Strategy

4


March 6, 2015

According to this data, 52% of the troubled retail locations are in Tier 4 markets (generally, smaller markets with less population and income density and/or economically distressed regions), and about 30% are in the weakest trading area in terms of buying power.

VULNERABLE RETAIL VERTICALS In addition to the specific retailers above, FBIC Global Retail & Technology sees a number of retail verticals vulnerable in 2015 and beyond. An estimated 1% of US grocery sales are online, which compares with ~5% in the UK. The US market is ripe for disruption. Amazon is investing heavily in “the last mile” for its AmazonFresh grocery platform, while the relatively new “buy online pick up in-‐store (BOPIS)” retail service is likely to accelerate a channel shift.

Online apparel sales continue to grow as retailers (must) offer free shipping and shoppers are able to access brands and merchandise that are not available in their local markets. The benefits of online apparel shopping are encapsulated in the omnichannel mantra, “Where he/she wants it, when he/she wants it, how he/she wants it,” and include a shopping experience you control and a store that’s always open. That said, fast-‐fashion chains are a fast-‐growing segment in physical retail, meeting the needs of the young fashionista dressing for date night.

Bookstores, office supply stores and toy stores are also shrinking their store footprint and closing underperforming stores, and independents are especially vulnerable, as time-‐starved consumers increasingly opt for the convenience and efficiency of online shopping.

ONLINE PURE PLAYS PLAN STORE OPENINGS IN 2015 On the positive side, according to a survey by Deloitte, 70% of retailers plan to open brick-‐and-‐mortar stores in 2015. The sector likely to see the biggest increase is men’s apparel, with nearly 400 stores in the pipeline, a 3% increase. Lingerie shops are planning a 3% increase as well. This year a growing number of online retailers plan to open their first physical stores, following firsts in 2014 for Birchbox and Nasty Gal, to name two. Online retailers from Amazon to Warby Parker to RentTheRunway realize multiple distribution channels support successful brand development. Additionally, the trend to shop and purchase online and pickup in-‐store is growing.

INTERNATIONAL INVADERS Spain’s Desigual and Zara, Japan’s Uniqlo, Sweden’s H &M and a handful of foreign luxury brands plan US expansion in 2015, perceiving the improving health of the US economy. Ireland-‐based Primark is scheduled to open its first US store in Boston this fall. At the same time, US retailers as varied as Aeropostale and J.Crew are looking at international growth opportunities and opening non-‐US stores to meet growing consumer demand for their brands.

5


March 6, 2015

AN UPDATE ON VACANCIES AND OCCUPANCIES Figure III. Vacancy Rate in 3Q 2014

Shopping Centers

3Q 2014 Vacancy Rate

National Summary

Community/ Neighborhood/ Strip 9.6%

Power Centers 5.7%

Malls 4.7%

Specialty Centers 6.9%

All Shopping Centers 8.3%

Regional Summary (All Shopping Centers)

Pacific 6.6%

Mountain 9.6%

Midwest (Great Plains) 9.2%

Midwest (Great Lakes) 11.0%

Texas (South Central) 8.2%

South US 10.4%

Southeast 8.9%

Northeast 6.0%

Source: Cassidy Turley Cassidy Turkey tracks US retail shopping centers and publishes quarterly vacancy rates by shopping center type and region. With national vacancies below 10% at the end of 3Q 2014, the environment is seemingly strong. A deeper dive into the metrics reveals a bifurcated market: for instance, Cassidy Turkey estimates a 2.5% vacancy rate at Class A malls (or trophy shopping centers); 6% for Class B and 11% for Class C. Older Class B properties are charged with either upgrading or falling into Class C. The national average vacancy for malls was 4.7% in 3Q 2014. For all shopping centers, an 8.3% vacancy rate was driven by a 9.6% vacancy rate in community/neighborhood/strip centers (67% of the national summary GLA).

6


March 6, 2015

Figure IV. US Occupancy Rates Through 3Q 2014

Source: ICSC

According to ICSC data occupancy rates improved in 3Q 2014 on a YoY and QoQ basis. Power centers enjoy the strongest occupancy, at 95.1%, closely followed by regional malls and super regional malls, at 93.4% and 93.8%, respectively. Fashion/Specialty trailed with 91.3% occupancy in 3Q 2014 (the latest available data).

2014 STORE CLOSURES Figure V. Announced Store Closings

2008 2009 2010 2011 2012 2013 2014

GAFO 6,913 4,810 5,170 3,648 3,863 2,104 5,019

Groceries — — 246 221 308 296 206

Restaurants — — 156 203 293 192 258

Total — — 5,572 4,072 4,464 2,592 5,483

Source: ICSC

During 2014 retailers and restaurateurs announced the closing of nearly 5,550 establishments, more than doubling the record low number of store closings in 2013. 80% of the closures were announced in the first half, before the economy began to accelerate (3Q GDP rose 5% and was up 2.2% in the final period). According to ICSC, the 69.6 million square feet represented by these announced store closures account for only 0.4% of the total inventory of US retail space in 2014.

In the final quarter of 2014 there were 98 fewer store closure announcements YoY. Apparel stores represented 38% of announced closures, and reflected announcements from Delia’s, Naartjie and Destination Maternity. Department store and discount department store operators, such as Sears, Kmart and Target combined to contribute 36 store closings, or 6.5% of the 4Q tally. In 2014, Sears and Kmart (both subsidiaries of Sears Holdings) reduced their retail area by more than 10 million square feet.

82

84

86

88

90

92

94

96

2009-‐03

2009-‐04

2010-‐01

2010-‐02

2010-‐03

2010-‐04

2011-‐01

2011-‐02

2011-‐03

2011-‐04

2012-‐01

2012-‐02

2012-‐03

2012-‐04

2013-‐01

2013-‐02

2013-‐03

2013-‐04

2014-‐01

2014-‐02

2014-‐03

Percen

t (%)

Quarter Power Center Fashion/Specialty Regional Mall Super-‐Regional Mall

7


March 6, 2015

STORE CLOSING ANNOUNCEMENTS IN 2014 The table below lists the largest store closings announced in 2014 (including Alco).

Figure VI. Top-‐10 Selected Store Closings-‐2014

Retailer Segment Announcement

Quarter Number of Announced

Store Closings Total Number of Stores

1 RadioShack Home Entertainment 1Q 1,100

4,297 (Dec 2013)

2 Office Depot (Merged with Office Max 2014) Office Supplies 2Q 400

1,912 in US (Dec 2013)

3 Family Dollar Dollar Store 2Q 370 8,055

(Oct 2014)

4 Dots Apparel 1Q 360 Not disclosed

5 Coldwater Creek Apparel 2Q 356 >350

6 Staples Office Supplies 1Q 225 >1,424

Worldwide

7 Alco General Merchandise 4Q 198

Bankruptcy (Oct 2014)

8 Sbarro Restaurants 1Q 183 799

(Mar 2014)

9 American Eagle Apparel 2Q 150 1,066

(Feb 2014)

10 Rent-‐A-‐Center Computer & Electronics 2Q 150

2,841 in US, Canada and Puerto Rico(Sept 2014)

Significant announcements in 2015 include:

• January 7: Wet Seal announced that it was closing 338 stores which represented approximately 48% of net sales for the nine months ended November 1, 2014

• January 8: Macy’s announced a broad restructuring alongside the opening of two new stores (in addition to seven previously announced planned openings) and the closure of 14 stores

• January 15: Target announced that it was exiting operations in Canada, involving the closure of 133 stores in the country

• January 27: JCPenney announced that it had closed all 10 of its Foundry Big & Tall Supply Co. stores. The brand will survive as an offering within JC Penney stores

• January 29: Kate Spade announced that it will close its 19 Kate Spade Saturday stores and the 12 Jack Spade men’s locations in the H1 2014 as the company positions Kate Spade New York as a full lifestyle brand

• February 19: Wall Street Journal reported Frederick’s of Hollywood hired liquidators to help close at least a third of its 93 stores as the lingerie retailer re-‐engineers its business.

• February 26: During its 4Q conference call, Chico’s FAS said it has identified opportunities to close approximately 120 store locations over the next three fiscal years. Most of these stores will be closed in conjunction with their lease term end or kick-‐out dates to minimize incremental charges from landlords

Sources: ICSC, corporate websites and filings

8


March 6, 2015

SIGNIFICANT RETAIL EXPANSION PLANS IN 2014 Lest the reader think 2014 was a year of merely shuttering retail stores and luring consumers to ecommerce platforms, we provide a list of notable retail expansion plans announced during 2014. According to the ICSC’s US Retail Real Estate Supply Conditions report, a total of 4,490 store openings were announced in 2014, for 1,084 fewer store openings than announced store closings. The following table lists the top ten store expansion plans announced in 2014: a total of 3,136 new stores, representing 70% of all announced store openings in 2014.

Figure VII. Top-‐10 Selected Retail Expansion-‐2014

Retailer Segment Announcement Quarter

Number of Announced Store

Openings

Total Number of Stores

Dollar General Dollar Store 1Q 700 11,132 (Jan 2014)

Forever 21 Apparel 2Q 470 480 (Dec 2013)

Dunkin Donuts Restaurants 4Q 410 18,862 (Dec 2014)

Dollar Tree Dollar Store 1Q 375 5,367 (Jan 2015)

Family Dollar Variety Stores 4Q 375 8,055 (Oct 2014)

Tim Horton’s Restaurants 1Q 300 4,485 (Dec 2013)

O’Reilly Auto Parts Auto Supplies 1Q 200 4,366 (Dec 2014)

Dick’s Sporting Goods Sporting Goods 1Q, 2Q,3Q 105 690 (Nov 2014)

Hobby Lobby Hobby Store 1Q,3Q 101 575 (Jul 2014)

The Men’s Wearhouse

Apparel 2Q 100 1,775 (Nov 2014)

Sources: ICSC, corporate websites and filings STORE OPENINGS AND CLOSINGS BY TENANT TYPE Family Dollar was the only retailer among the Top 10 Retailers in terms of both openings and closings, and announced a net five new stores for 2014.

Not surprisingly, the home entertainment category was the second largest category with announced store closures reflecting channel migration among consumers. Apparel retail announced store closures were largely offset by announced store expansion.

9


March 6, 2015

Figure VIII. Store Closings Announced in 2014 by Tenant Type

Source: ICSC Research and PNC Real Estate Research Retail NEC-‐ a category consisting of retailers such as Aaron’s, Dollar General, Dollar Tree, Fred’s PetSmart and others

Figure IX. Stores Openings Announced in 2014 by Tenant Type

Source: ICSC Research and PNC Real Estate Research Retail NEC-‐ a category consisting of retailers such as Aaron’s, Dollar General, Dollar Tree, Fred’s PetSmart and others

0

300

600

900

1200

1500

1800 Re

tail, NEC

Home En

tertainm

ent

Apparel

Varie

ty

Restaurants

Footwear

Grocery Stores

Departmen

t Stores

Discou

nt Dep

artm

ent

Stores

Drug Stores

Sporrn

g Go

ods

Home Furnish

ings

Who

lesale Club

Bookstores

0

400

800

1200

1600

Retail, NEC

Apparel

Restaurants

Varie

ty Stores

Sporrn

g Go

ods

Grocery

Home Furnish

ings

Drug Stores

Home En

tertainm

ent

Footwear

Departmen

t Stores

Home Im

provem

ent

Who

lesale Clubs

Electron

ics

Discou

nt Dep

artm

ent S

tores

10


March 6, 2015

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2008 2009 2010 2011 2012 2013 2014

Num

ber o

f Ann

ounced

Store Closings

GAFO-‐Type* Groceries Restaurants Total

HISTORICAL STORE CLOSING TRENDS During the 13-‐year period from 2001 through 2015, there have been on average nearly 5,000 general merchandise, apparel and accessories, furniture and other (GAFO) store closings per year. During 2011–2013, we see that the number of store closings was generally flat to down every year; however, the large number of closings in 1H 2014 pushed the total figure for 2015 to above 5,000. Figure X. Historical GAFO Store Closings, 2001–2014

Source: ICSC The graph below shows the breakdown of store closures by store type during 2008–2014.

Figure XI. Store Closings by Store Type, 2001–2014

Source: ICSC

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Store Closings by Year Average, 2001-‐2014

11


March 6, 2015

Deborah Weinswig, CPA Executive Director – Head Global Retail and Technology Fung Business Intelligence Centre New York: 917.655.6790 Hong Kong: +852 6119 1779 [email protected] Marie Driscoll, CFA [email protected] Christine Haggerty [email protected] John Harmon, CFA [email protected] Amy Hedrick [email protected] Aragorn Ho [email protected] John Mercer [email protected] Lan Rosengard [email protected] Jing Wang [email protected]

now you see it. . .now you don’t › sites › default › files › 2015... · 2 fung business...

Documents