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Store Closure Strategies Still Overshadowing Expansion Campaigns

With Sales Still Soft, Some Retailers Find Bigger Pay-Offs By Closing Poorly Performing Stores
March 6, 2013
Announcements of store closures continue to outnumber planned store openings, according to the latest year-end results being reported by the nation’s largest publicly held retailers.

Major retailers such as Barnes & Noble, Best Buy and Sears, all announced store closures as part of plans to "rationalize" or "right-size" the number of stores.

Sears Holdings even went so far as to tell its shareholders that disposing of assets was proving beneficial to the retailer and said last week it planned to continue shuttering locations that fail to produce acceptable financial results.


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“As we have said before, almost all of our store closings are cash flow positive as we convert net inventory (gross inventory less payables) into cash, receive proceeds from select real estate transactions and relieve ourselves of lease obligations,” Edward S. Lampert, chairman of Sears wrote to shareholders last week.

"As anybody can now see from the events surrounding JCPenney, Best Buy, Toys R Us, Staples, Barnes & Noble and others, the retail landscape is fundamentally shifting. In our case, observers have mistakenly concluded that our issues were primarily related to underinvesting in our stores... (But) If it were just about store investment, then Best Buy would be thriving after the demise of Circuit City, Barnes & Noble would be thriving after the demise of Borders and other retailers who made significant store investments would be thriving instead of struggling to chart a new course,” Lampert said.

“In reality, the progression of the Internet and mobile technology is fundamentally reshaping many industries, with retail being one of the largest. Increased price transparency, better customer-level information and analytics, faster supply chains and the advent of social networking and social media are all contributing to making running a large retail organization more complex,” he said.

Since 2006, Sears has closed more than 300 of its Sears and Kmart stores, or 13% of the stores it operated at that time, with about half of these store closings occurring in the last fiscal year.

While saying he was disappointed in not being able to turnaround the low performing stores, Lambert pointed out several benefits ton the retailer from closing poorly performing stores, including getting out from under money-losing stores and improving its standing with rating agencies.

In addiiton, Lambert said, "We are usually able to generate significant cash from the net inventory invested in the stores, as the net inventory proceeds typically exceed the severance and closing costs... We (also) are able to realize the value of the real estate in situations where we own the stores or where the lease terms are attractive to third parties.”

Cutting Their Losses: Barnes & Noble, Best Buy, Radio Shack


Barnes & Noble reported revenues of $1.5 billion for its most recent quarter, a 10.3% decrease from the same quarter a year ago, attributable to a 7.3% decline in comparable store sales and store closures.

“We have historically closed 12 to 20 stores each year over the last 10 years, averaging 15 stores a year,” said Mitchell S. Klipper, CEO of-Barnes & Noble Retail. “That will not change. Today, we have 677 Barnes & Nobles nationwide. When we close 15 to 20 over next year, that represents fewer than 3% of our total stores.”

Simultaneous with the earnings announcement, Barnes & Noble said that Leonard Riggio, the company’s founder, largest stockholder and chairman of the Board, has offered to purchase all of the assets of the retail business. The bookseller said it was taking the offer under consideration.

Best Buy Co. Inc. in its year-end results announced last week laid out six priorities for the coming year and in one way or another, they all point to continued downsizing on the real estate front.

Hubert Joly, Best Buy president and CEO said the priorities are:
Accelerating online growth;
Escalating the multi-channel customer experience;
Increasing revenue and gross profit per square foot through enhanced store space optimization and merchandising;
Driving down cost of goods sold through supply chain efficiencies;
Continuing to gradually optimize the U.S. real estate portfolio; and
Further reducing selling, general and administrative costs.

Over the last several weeks, the Minneapolis-based electronics retailer has enacted Phase One of what it is calling its “Renew Blue” cost reductions, which totaled $150 million in annualized savings and included an initial headcount reduction of approximately 400 people. These savings are being driven by the discontinuation of non-core activities and the take-out of management layers.

“Occupancy cost reductions continue to be a key focus, and we make significant progress in fiscal 2013 in both the area of store closings and re-negotiated leases,” Joly said. “In fiscal ‘13, we permanently closed 49 large-format stores and expected to close an additional five to 10 large-format stores in fiscal 2014.”

RadioShack Corp. reported a net loss of $63 million last year compared to net income of $12 million for the previous year. Despite that, Joseph C. Magnacca, CEO of RadioShack, said the company wasn’t looking at additional closures.

“It doesn’t make a lot of sense to look at store closures, unless there’s a lease end in play,” Magnacca said. “We’ll continue to go through that review. But where our opportunity and our focus really has been trying to find stores that are borderline profitable and turning them into higher producing stores. That’s really where our focus is right now.”

That isn't to say that all retailers are in the same boat. In fact, several major retailers such as Kohl’s, Limited and Wal-Mart are actively expanding their store base.

SuperSizing


Wal-Mart said it expects to add between 36 million and 40 million square feet of store space internationally compared to the 34.6 million square feet that it added last year - which the discount retailer said a big chunk of the added store base will be in the U.S.

“Our real estate strategy continues to be a catalyst for growth. I’m pleased to report that our store fleet is now 4,000 strong,” said William S. Simon, CEO and president of Wal-Mart U.S. “Over the course of the year, we grew our retail space by 14 million square feet. In fiscal year 2014, we plan to add between 15 million to 17 million square feet of retail space, representing between 220 and 240 total units, comprised of new stores, expansions, relocations and conversions.”

“Supercenters remain our primary growth vehicle, and we will continue to expand this format to drive share,” Simon said. “During the year, we opened 129 Supercenters, including new stores, expansions, relocations, and conversions. We plan to expand our Supercenter fleet next year by adding approximately the same number of units.”

“We also accelerated the small format rollout,” he added. “In fiscal 2013, we opened 76 small formats. In fiscal 2014, we plan to add approximately 100 small stores.”

Kohl’s ended 2012 with 1,146 stores with gross square footage of 99.57 million square feet, 19 more than the year-end 2011.

“During 2012, we opened stores in 20 new locations. We relocated one store in Michigan and closed one store in Ohio,” said Kevin Mansell, chairman, CEO and president of Kohl’s. “Our current plans are to open 12 stores in 2013, nine in the spring and three in the fall. Consistent with 2012 new stores, we expect all but one of the 2013 stores to be small stores, with less than 64,000 square feet.

“We remodeled 50 stores in 2012, and we expect to remodel 30 stores in 2013. Most of these remodels are expected to occur in the fall season,” Mansell added.

Pink Stores Will Be Busting Out All Over This Year



Limited Brands is looking to increase its real estate capital expenditures this year primarily to increase square footage for Pink, its new Victoria’s Secret spin-off.

Only about 20% of Limited’s Victoria Secrets current stores carry the full Pink assortment. As such, the Columbus, OH-based company expects to grow Victoria’s Secret’s square footage by about 3.5% this year, driven by expansions of existing Victoria Secrets’ stores and the opening of about 50 new Pink stores.

“With respect to Victoria’s Secret stores that have the full Pink assortment versus balance of the fleet and so on, it tends to be the case that the stores that have the full assortment are in the higher-volume malls and venues,” said Stuart B. Burgdoerfer, CFO and executive vice president of Limited Brands. “And as a result, the productivity in those stores is very good and would be, as a general matter, above the company average.”

“The Pink free-standing [stores] are a little less productive than the Victoria’s business overall, but generate good return,” Burgdoerfer said. “We don’t have what I would describe as a big ramp-up period. There is timing of store openings to consider, but apart from -- once the store opens, and then they tend to do very well, frankly, from the first week. So there’s not a ramp-up per se.”


Keep up weekly on national news, trends and property leads with the Watch List Newsletter, a weekly pdf that includes other news and leads not found on the CoStar Group web news pages. Sign up for the Watch List E-Mail Alert. A new issue is published late each Wednesday.


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