In a surprise move given its relatively strong holiday shopping sales, Macy’s Inc. announced it will implement a series of focused cost reductions, including organizational changes, layoffs and store closures. The announcement came simultaneously with its announced sales results for the 2013 holiday season, which were better than expected.
The cost-trimming moves are estimated to generate savings of $100 million per year, beginning this year. The company said the planned changes are intended to support continued profitable sales growth based on insights the retailer has learned from implementing new business strategies and technology in recent years focusing on localized shopping, omnichannel integration and customer engagement. The planned changes include:
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1. Combining its Midwest and North Regions and reducing its ongoing number of districts to 60 from the current 69;
2. Realigning, combining and reducing some positions in Macy’s stores;
3. Trimming certain central office, administrative and back-of-the-house expenses across the company.
Macy's said it expects to lay off approximately 2,500 employees as a part of the changes it is implementing. Other associates are being reassigned new duties or transferred to other locations.
Meanwhile, the company said it continues to add positions in other parts of the company, including online operations, direct-to-consumer fulfillment and in the new stores it plans to open. In total, Macy’s said it expects the planned reductions and new hires to offset each other, with its workforce expected to remain at approximately 175,000 associates.
As part of its cost-reduction plan, Macy's is closing five stores in early spring 2014:
· Fiesta Mall, Mesa, AZ (159,000 square feet; opened in 1979; 98 associates);
· Metcalf South Shopping Center, Overland Park, KS (216,000 square feet; opened in 1967; 88 associates);
· Jamestown Mall, Florissant, MO (200,000 square feet; opened in 1994; 88 associates);
· Medley Centre, Irondequoit, NY (129,000 square feet; opened in 1990; 96 associates); and
· Fashion Place Mall, Murray, UT (26,000 square feet; opened in 1988; 42 associates).
While the store closures were included in the same announcement as the cost reduction program, Macy’s noted that the store activity was part of “normal course adjustments” to its portfolio, and the closures were accompanied by a list of eight previously announced store openings. New Macy’s stores will be opening in:
University Town Center, Sarasota, FL (160,000 square feet; to open in fall 2014; approximately 175 associates);
Shops at Summerlin, Las Vegas, NV (180,000 square feet; to open in fall 2014; approximately 160 associates);
Mall at Bay Plaza, The Bronx, NY (160,000 square feet; to open in fall 2014; approximately 225 associates);
Plaza Del Caribe, Ponce, PR (150,000 square feet; to open in fall 2015; approximately 275 associates);
Mall at Miami Worldcenter, Miami, FL (195,000 square feet; to open in fall 2016; approximately 150 associates).
The retailer will also be opening several new Bloomingdale’s stores:
Stanford Shopping Center in Palo Alto, CA (120,000 square feet; to open in fall 2014 to replace an older store in the same shopping center);
Ala Moana, Honolulu, HI (167,000 square feet; to open in fall 2015; approximately 250 associates);
Mall at Miami Worldcenter, Miami, FL (120,000 square feet; to open in fall 2016; approximately 225 associates).
Once all of these changes have been implemented, Macy’s will operate 844 stores.
Impact on Pair of CMBS Loans
According to Nomura Global Research, given the mall quality, current occupancy, and the size of the stores, the closures will have varying impacts on the two malls secured with CMBS.
With a footprint of just under 26,000 square feet, the closure of the Macy’s at GGP’s Fashion Place is likely to have a muted impact on loan performance for several reasons. One being that the store accounts for just a little more than 6% of collateral square footage (2.5% total square footage) and at $569,400 it contributes less than 3% to annual rental revenue. Assuming no backfill, the loss of Macy’s would reduce the mall’s NOI debt service coverage to 3.13x, down from its current level of 3.22x. In addition, the mall generates sales of more than $550/square foot and is indicative of the collateral’s high quality.
Nomura added though that it is worth noting that although the direct impact from the Macy’s vacancy is minimal, the loss of the tenant likely reflects increased market competition.
In 2012, Taubman Centers opened an upscale open-air shopping center 11 miles from Fashion Place that appears to serve the same demographic.
The loss of the Macy’s at The Macerich Co.’s Fiesta Mall has the potential to intensify an already troubled situation. As of June 2013 the collateral was 85% occupied, and the appraisal given at that time values the property at $39.5 million, a 72% decline from the $140.6 million value given at securitization, Nomura noted.
While the current appraisal implies a loss severity of 53%, as with all distressed retail recently, risks are geared significantly to the downside. Since the appraisal, the borrower has requested a deed in lieu of foreclosure, and the upcoming vacancy of Macy’s has the potential to accelerate the decline in value.
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