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Retailers Taking Their Medicine and Turning Cautious Over Growth

Retail Industry Experts Say Closing Stores and Pulling Back is the Right Move in this Market
February 6, 2008
The past couple months in retail real estate have been laden with more store closing announcements and news of retailers slowing expansion plans than we've seen in a long time. However, two retail real estate strategy executives, a Wall Street retail analyst and a leading Texas retail real estate broker, confide that closing stores and turning cautious over expansion plans may be the best thing for retailers to be doing right now.

Announcements over the last couple months include Movie Gallery closing another 400 stores; Charming Shoppes closing 150 stores and cutting expansion plans by 50%; Starbucks closing 100 stores and slowing expansion plans by 34%; Ann Taylor shuttering 117 stores and slowing store growth; Boston Market evaluating its real estate opportunities; Buffet Holdings sorting out its underperformers; Sprint Nextel closing 125 stores and 4,000 distribution points; Cost Plus World Market closing 18 stores; Liz Claiborne closing 54 Sigrid Olsen stores; New York & Company axing the Jasmine Sola brand and its 32 stores; Ethan Allen closing 12 stores; PacSun closing all of its 173 demo stores; and Talbots exiting its kids and men's lines through closure of 78 stores.

Others include Rite Aid exiting Nevada by closing 28 stores; Macy's closing nine stores; Krispy Kreme expecting many franchisees to close stores; Kirkland's Home likely closing 130 stores; CompUSA's remaining 103 stores being disposed of; Rent-A-Center closing 280 stores; Sofa Express closing 44 stores in bankruptcy; 84 Lumber closing 12 stores; Home Depot closings some call centers; Levitz Furniture disposing of 76 stores in bankruptcy; Pep Boys closing 31 stores; Lifetime Brands closing 30 stores; Big A Drugs liquidating its 21 stores; and more.

CoStar Advisor: Is 2008 an opportune time for retailers to close stores and pull back on expansion plans?

Nina Kampler, Executive VP of Strategic Retail and Corporate Solutions for Hilco Real Estate, said, "Absolutely. This is the largest number of retailers who have announced store closings in my professional experience. I think we're at the beginning of the downtrend in the retail economy. There's a wave of conservatism that's hitting the consumer: there are very few people who 'need' another t-shirt or pair of jeans right now. So even if a retailer's core stores still perform okay, their stores are nonetheless likely comping down against last year's sales. So, they respond by examining the bottom 10% or 15% of stores, the underperformers that are not adding to the bottom line, and they're going to get rid of those -- in some cases that means getting rid of an entire concept."

Kampler says large, publicly traded retailers that are Wall Street driven are making decisions to close stores. "There are a significant number of these retailers who will continue to stay healthy through this business cycle. These companies will be here tomorrow, they've been through variations of this before, and are not afraid to analyze and cut." Kampler went on to explain that for all the closing and cutback announcements of the publicly traded retailers, there are a host of privately held small companies that are quietly closing stores under the radar.

Andy Graiser, Co-President of retail real estate advisory and disposition firm, DJM Realty, said, "Yes. It’s a good time for retailers to re-tool and clean out the problems they have now. If cash permits its time to cleanse a portfolio that's just not performing as it should. The guys coming out now to address store-closing issues are smart about it; they know what's going on in the marketplace and are looking at the trends and where these stores are going. Instead of waiting for the situation to get worse, they're addressing the situation today -- that is a sign of good management team."

Vaughn Miller, President of the retail division for Henry S. Miller Commercial said retailers closing stores has nothing to do with Wall Street, but their losses. "Retailers are hemorrhaging and are trying to stop the bleeding. The bleeding is the operational cost or the occupancy cost of the stores. They have to get rid of them immediately and it doesn't profit them to continue operating them if they're losing money. The real estate market has nothing to do with whether a retailer will close a store or not. It’s purely a bottom line decision. If they're fortunate enough to do it when the market is strong enough to reabsorb the space - that's all the better; but usually that's not the case - and usually its an indication that our economy is soft."

Rob Plaza, Senior Equity Analyst for retail stocks at Zacks Investment Research told CoStar, "It's going to be a requirement for retailers this year. We're just at the beginning of this now. These stores you've listed, they're actually being proactive and are ahead of the curve. I think we're going to see store closing announcements, like we have over the last two months, keep coming for the rest of the year. Some companies are doing it to increase profitability, some are doing it just to stay alive. I started to talk about this slowdown in the third quarter of last year; but at that point, a lot of retailers already had their plans for 2008 laid out, had already invested in signed leases, ground-breakings, pre-opening, etc, so they couldn't just stop those new stores on a dime. Looking back on that, they're going to wish they had just walked away and paid whatever it would have cost them to stop the process."

Do you have an opinion to share on retailers closing stores or the CoStar Advisor newsletter? Relevant comments emailed to Senior Editor Sasha Pardy at will be added as updates to this story.

CoStar Advisor: With so many store closing and cutback announcements over the last few months, do retailers now have less concern with investors and customers' perceiving such announcements as a sign of weakness?

"At the end of the day, Wall Street and economics will reward the companies that are being this forward thinking, because if they don't get rid of the things that aren't working, it will be a far worse situation." Kampler explained Hilco is working with some retailers on this because, "If they can't be successful in real estate and inventory liquidation, they will have no choice but to file bankruptcy because they cannot otherwise remain viable." She added, "from my perspective as a retail lawyer and real estate restructure specialist and strategist, we are in a cycle where the retailers are consistently thinking long and hard before expanding their store numbers and are in fact tightening their belts and taking off balance sheet things that aren't working and they're trying to be leaner and meaner, because otherwise their own numbers won't work."

Graiser says customers aren't paying attention to store closings because they have their own issues to focus on. But from a Wall Street perspective, he says, "There's a lot of retail stocks that are still very, very good companies, so there are a lot of good buy opportunities in the marketplace."

Plaza commented. "Absolutely. Now, retailers have got to throw away perception and just focus on their operation. There are retail stocks that are down 70%-80% over the last 12 months. They have to quit caring about perception and instead worry about survival and positioning themselves for better times ahead. If they do this, the stock price will eventually take care of itself."

And Plaza says the cutback moves are being viewed as a positive to Wall Street in some degree. "It will eventually be a positive, yes. I was recently asked when it will be a good time to buy stock of retailers as a group again -- it's basically when every retailer is retrenching; no longer opening new stores and instead closing underperforming stores, clearing out inventories, etc. When that happens, it will at least be a clear time to enter the stocks, but it will be a time lag of 6-12 months before you start to see material improvements from an earnings perspective."

CoStar Advisor: Has retailers' aggressive expansion over the last few years set them up for cannibalization in 2008?

Kampler commented, "A lot of times these companies have grown their retail with such a velocity that the stores are cannibalizing one another. When you have x number of people shopping in a market, that market can support two stores, but when you have y% fewer shoppers in that market, the sales could be perhaps supported by one store and by closing one, you've cut off half your overhead.

Kampler spoke of upscale coffee shops as an example of a retail category facing some cannibalization issues, "Putting aside whatever operational issues they may be addressing -- We're in an economy where people might begin to think twice about spending $5 on a cup of coffee; so suddenly you don't need two coffee shops on a single city block."

Miller used movie rental and fitness retailers as an example, "Every major fitness chain has come into the Dallas market and they're located every two miles. That strategy reminds me of the rapid video store expansion of the '90s, when their real estate mantra was 'he who got the best locations first won' -- let's just hope it turns out to be a more healthy result." He added the example of Starbucks, "Starbucks was really expanding way too fast and too close together nationally, but they wanted to get the best locations so their competition didn't have an opportunity to come in and compete. For the most part, their stores have been profitable and now they're starting to see that fall. The slowdown in expansion for them is the big deal as opposed to closing the 100 stores."

Graiser says, "There certainly is cannibalization with some retailers. I look at what's happened with bank branches and non-traditional retailers, like Sprint, that have opened up on every corner. Wall Street has put so much pressure to grow, grow, grow."

"We've already seen cannibalization from stores that have been expanding for a while. One that comes to mind is Home Depot - in their quarterly reports they list their cannibalization rate. When housing kept expanding into suburban sprawl and retailers kept opening new stores, it hid some of the weakness that retailers might have had in older stores," says Plaza.

Plaza says we can't know if the country is "over-retailed" yet. "Retailers were just meeting the demand of the consumer, who was really addicted to credit, which really helped boost retail sales over the last several years. But now that's been cut off and consumers are spending less. The real question is whether people are still going to live on less and spend less once the economy starts to turn around. If that's the case, that's when we'll be able to determine if we are in fact over-retailed. If there is an attitude shift that way, we've got retailers that just aren't going to be around anymore."

Plaza says the cannibalization effect will ease up, "The whole reason for opening up the new stores was to meet the additional population, so if they stop opening up new stores in addition to closing stores, the cannibalization effect is going to start to diminish."

Do you have an opinion to share on retailers closing stores or the CoStar Advisor newsletter? Relevant comments emailed to Senior Editor Sasha Pardy at will be added as updates to this story.

CoStar Advisor: Is now the time when retailers should focus on honing site selection criteria and strategies for future store expansion or new concept launches?

Miller says, "Yes it is. The successful retailers are pulling back, not expanding unnecessarily and focusing on existing unit profitability and that's exactly the right thing to do."

Commenting on retailers launching new concepts, Kampler said, "Retailers are always exploring new ideas. But I am guessing that now, a smart retailer, instead of launching a new concept with the opening of 25 stores, maybe they'll open only two or three stores instead. They're going to proceed more gingerly because they won't want to bear the burden and cost, and perhaps the embarrassment of another set of mistakes."

"That's part of any long term plan," says Plaza. "But probably for the next decade, retailers are not going to have to open a brand new store because there's going to be so many empty ones that need to be filled. It's not going to be like before where retailers were fighting to get the best location in the new strip mall that opened up. The smart retailers are just going to stay back, be a little bit more patient, identify where they want to go and when it gets to the right price, they'll make that strategic investment and that store will succeed over the long term."

CoStar Advisor: Where does retailers closing stores en mass leave landlords and developers? Can landlords expect retailers not closing stores to attempt to renegotiate lease rates? What should a landlord be doing in response?

One of the specialties of Kampler's firm, Hilco Real Estate, is renegotiating leases and restructuring real estate portfolios for retailers. She says landlords can expect to see more retailers attempting to renegotiate leases. "First, you have retailers who don't need or want to close stores but still have to tighten their belts; if they can keep their costs down, they will succeed and stay healthy. So they want to try that approach. Second, you have retailers seeing vacancies on either side of them and they'll see sales being impacted, maybe not enough to cause them to leave, but its enough for them to need to rewrite their economic portrait so that they can stay open and actually make some money instead of just paying rent," said Kampler.

"When you have a situation of mass closings in the way that the beginning of 2008 seems to be indicating, its not something the landlords can easily adapt to, its not merely a matter of finding a replacement tenant in one spot in a mall. Perhaps stores need to be shuffled around so that more tenants don't fall in a domino effect. If closings are happening in significant numbers, landlords may question whether the existing shopping center economic model works," said Kampler. She suggested that some landlords and developers should be questioning if there are more profitable uses for their real estate. "Some centers in some locations may have outlived their useful life. I think it’s going to trigger some deeper analysis. If this goes away in the next quarter, no, but if this is a reflection of America being over-retailed, then I think it will precipitate some serious re-thinking by shopping center landlords and developers to restore and rebalance the interplay of the landlords and retail tenants."

Graiser says, "Landlords are certainly getting inundated with a lot of calls right now and aren't surprised because they see the store sales and track these companies. But how flexible the landlord will be in terminating leases or giving rent concessions depends on the type of center. In addition, if a retailer is showing that it really is in trouble, the landlord will typically adjust to those problems; especially if they believe the retailer is one that can survive. Landlords have historically worked with those situations pretty well. Now what they're being faced with is a lot of healthy retailers that are retrenching and closing stores - and there's certainly less flexibility than they normally have. The landlords certainly are feeling the pressure from some of their tenants that have been with them for a long time."

"While there can be an adversarial relationship in some cases with the landlord suing the tenant in a store closing situation, that landlord is still going to be working very hard for to get that space released. In general, the owner is not going to help the retailer while its still operating, but as soon as the doors are closed, that hurts his property and he's going to work really hard to get that space released by marketing it, re-tenanting it, reconfiguring it, etc. The landlord or developer is going to be much more capable and have more resources at his disposal to get that space back into production," said Miller.

On whether or not landlords can expect retailers to try and renegotiate lease rents, Miller said, "They always do. The smarter retailers do try to renegotiate, but they also realize that if it’s a good location, they don't want to run the risk of losing a good unit by negotiating the renewal rates too hard."

Do you have an opinion to share on retailers closing stores or the CoStar Advisor newsletter? Relevant comments emailed to Senior Editor Sasha Pardy at will be added as updates to this story.

CoStar Advisor: In light of retail chains closing stores and pulling back, what opportunities are created for other retailers, as well as landlords and developers?

"Foreign retailers can't wait to get here. So I say for new and growing non-US retailers, this is an opportunity for them to perhaps get real estate locations at 50 yard lines in malls that they might not have received in the past," commented Kampler.

And opportunities are there for landlords too, says Kampler, "For a landlord that has a marginally functioning shopping center that has become significantly vacant, this might be his opportunity to contemplate that his shopping center was really not meant to be a shopping center in 2008 and maybe its time to put the property through redevelopment. We can mope about it or move onto the new economy and reinvent."

In response to whether big box vacancies are harder to deal with than small shop, Kampler said, "I think most people would absolutely think that - but I disagree. The specialty retailers of the world are pretty much in enclosed malls or lifestyle centers - when they close - what else will go there? Only another retailer that will go in a 3,000 to 6,000-square-foot footprint. Whereas if a large supermarket or department store or home improvement center is closing, that whole space could be redeveloped, maybe even into something completely different. Many times, I think it's easier to have the owner and lender work together in a major redevelopment program than it is to re-tenant vacant in-line mall space."

When asked if this phase possibly creates an opportunity for those smaller local or regional retailers who had a tougher time getting great real estate when the big chains were expanding, Kampler said, "I think this is an opportunity for the ones that would typically have had trouble getting a landlord's attention. The consumer is bored and does not want to see the same collection of stores in every shopping center from coast to coast. Malls should have more flavor, and stores should reflect the specifics of the geography and natural setting. There's a small handful of malls around the country that have gone out of their way to have interesting tenant mixes and maybe we're going to get back to some of that."

Graiser says this market "creates opportunities for good growth for a company that has the capital expenditure budget to do so, and creates good opportunities for retailers to take over space that they might not normally be able to get. Now there are spaces coming available in good locations in some A malls, so that retailer has the opportunity to grow into those stores." Graiser gave discount operators that normally go into B and C strip malls as an example, "Where before the landlord wouldn't really talk to them, all of sudden now these landlords are knocking on their door to take over space, so its kind of an indication of where the market has gone."

Miller says retailers closing stores and leaving markets where they're not profitable "creates opportunities for other retailers that have learned how to be successful in their niche to expand into a market that perhaps before they were unable to. You want to buy when the market's low - so there are some very smart aggressive retailers that are expanding that are taking advantage of this drop in real estate prices," added Miller.

Further, Miller thinks some discount chains that do well in a down market can seize the opportunity, "The landlord or developer now has an opportunity to re-tenant with a fitness user or other success stories in the industry that are making it in these tough times. The lower end price point, very value-oriented retailer is definitely succeeding right now. They are the ones that know how to keep occupancy costs low and how to run a tight ship and don't overpay for their real estate; which can be hard for a landlord or developer - but they're a good retailer and a good merchant to have when you need them." Miller added that the quick service restaurant industry will continue to expand and do well in a depressed economy.

Miller says, however, that retailers won't necessarily take advantage of a down real estate market to expand, "It is so interesting. When the economy is good, retailers all want to expand and will pay more for their real estate. When the economy's bad they don't want to expand and don't care how much the real estate costs. What I've noticed, in my 25 years of doing this, is that retailers do not necessarily care about real estate pricing. They are more interested in the profitability and sales of their stores and the state of the real estate market is not a big determining factor for a retailer's decision to put up a store."

Plaza doesn't think any retailers should be taking this downtime as an opportunity to expand. "There's still retailers out there opening stores and those are the ones I'm questioning. Retailers really need to be retrenching here; shoring up their balance sheet, saving their cash flows. When prices come down and really start to bottom out, then you start snapping up a couple stores. Any quick buying a retailer does to snap up property right now, thinking that it's cheaper than it was two years ago, that's not the best strategy. The real estate market will likely keep going down for another three to four years. The long upside was great, but the downside is vicious and it’s going to happen at a much faster rate," he says.

Do you have an opinion to share on retailers closing stores or the CoStar Advisor newsletter? Relevant comments emailed to Senior Editor Sasha Pardy at will be added as updates to this story.

CoStar Advisor: Will retailers reorganizing, sorting out underperformers, closing stores, and pulling back be in a better position once the economy starts to recover?

A recent Retail Wire poll asked respondents if retailers cutting back now are going to be in a better or worse competitive position when the economy picks up again. 56% of respondents said retailers will be in a somewhat stronger or much stronger position; while only 22% said a somewhat weaker or much weaker position.

When asked if the loss of sales and lease termination expenses incurred from closing stores could really leave a retailer in a better position, Kampler said, "In terms of store closing expenses, if managed properly with the lease termination fees, the company can take their lease liability and monetize it; because for somebody else, this might be good real estate."

Miller says, "Yes most definitely. The sooner the better. The quicker they shed underperforming stores and assets, the better off everybody is. Everybody - the Landlord, the developer, the tenant. If that store's not making money, they need to get out and close it and cut their losses as quickly as possible."

Plaza says, "They'll definitely be in a better position. It will be painful in the near term, but a smart retailer takes the medicine now and clears the deck so that when things are better, they are positioned to make sizeable profits."

"I think the smart retailers who get rid of their surplus, their excess, their duplicative, their un-needed and unwanted locations will be repositioning themselves so that when things settle down again, they'll be able to pick up and re-launch growth plans," said Kampler.

(Editor's Note: To keep up on happenings and trends in retail real estate, subscribe to CoStar's Retail News Roundup, a weekly column covering retailer expansions and new concepts, store closings, bankruptcies, cutbacks, acquisition, mergers, sales. new shopping centers, personnel changes, and sustainability. Follow this link for access to back issues of the roundup. In addition to appearing every week in the national news and retail news sections of our web site, you may also receive the Retail News Roundup for free via email by requesting to be added to the distribution list by contacting senior editor, Sasha Pardy at Also, click here to subscribe to CoStar's dedicated Retail RSS Feed.

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