Friday, May 30, 2008

Pizza Hut turns 50 in tough time for the industry

LOUISVILLE, Ky.—Dan and Frank Carney borrowed $600 from their mother 50 years ago and opened a small pizzeria in Kansas using second-hand equipment in what was once a bar. The dream was to make enough pizzas to pay for college and earn a little money on the side for the family. That humble enterprise with a humble name -- Pizza Hut -- is now the world's largest pizza chain with $10 billion in annual sales and more than 11,000 stores worldwide.

"We were able to build something from nothing," Dan Carney said, recalling the hardscrabble early days and that first pizzeria in Wichita, Kan., which opened 50 years ago Saturday. The chain known for its red-roofed restaurants is now updating its look, with plasma TVs, sports bars and local sports memorabilia. It's also rolling out tubs of baked pasta and piles of fried chicken wings to go with its famous pizzas.

It is a tough time for pizza makers, who are strapped by rising cheese and flour costs and consumers who have been pinched by a sluggish economy. Last year, Pizza Hut Inc. closed more U.S. restaurants than it opened, which it attributes to such factors as leases ending and restaurants being sold. Analysts say Pizza Hut was due for an overhaul the new menu may help it through a rough time for the industry. Restaurant analyst Larry Miller with RBC Capital Markets said "the iconic red roof store is dated."

"From a bigger picture, longer-term view, this is a brand that's starting to differentiate itself from the competition in some really unique ways," he said. Pizza Hut went public in 1970 and was then acquired by PepsiCo Inc. in 1977. Frank Carney left the company three years later in a clash with the new owners. Pizza Hut's corporate parent changed again in 1997 when PepsiCo spun off what is now Yum Brands Inc., a Louisville-based company that also owns Taco Bell, KFC, Long John Silver's and A&W All-American Food Restaurants.

"I'm proud every time I see Pizza Hut doing well because that's part of me," said Frank Carney.
Now 70, he is a competitor with a stake in 73 Papa John's pizza stores in Wichita, Houston and Hawaii. "Good competition keeps everybody on their toes, them and us," Carney said.

Pizza Hut began an aggressive advertising campaign this spring to publicize the new menu. It says the effort paid off in the first month, when it sold 2 million pans of pasta, doubling its expectation, said Pizza Hut President Scott Bergren. The company sells chicken wings in an agreement with WingStreet. "We have changed our sales mix substantially," Bergren said.

Bergren declined to say what kind of profit margins the company was seeing for pasta and chicken wings compared with pizza, saying, "these are all profitable products." Ingredient costs like wheat, cheese and chicken have soared in the past year. Bill Walsh, a Pizza Hut franchisee with a stake in 93 stores in a dozen states, said the menu has bolstered sales at his restaurants. While restaurants have incurred higher costs and extra equipment expenses, "by the time you get those additional sales, we're happy to accept that higher food cost."

Pizza Hut is quick to emphasize that it will stay true to its name. "Our core, and Lord knows we sell more of it than anybody in the United States, it's always going to be pizza," Bergren said.
While the chain's most heated growth is now overseas, Bergen said there is room to expand at home. "We think there are another 1,000 towns in the United States where we can actually build a Pizza Hut," he said. "So we're not done growing in the United States at all."
Dan Carney, 76, has left the pizza business but still keeps an eye on the company he founded 50 years ago in a rented bar with his brother. "I'd love to see it go another 50 years," Carney said. "As long as they stay dynamic with new ideas flowing in and out, they have a great chance to do that."


Costco 3rd-period net up 32%, sales up 13%, same-store up 8%

Costco Wholesale Corp., (COST) Issaquah, Wash., the largest U.S. warehouse retailer, reported fiscal third-quarter net income rose a stronger-than-expected 32% on 13% higher total sales and 8% higher same-store sales. For the quarter ended May 11, earnings reached $295.1 million, or 67 cents a share, from $224 million, or 49 cents, in the year-earlier period. Sales increased to $16.26 billion from from $14.34 billion. A survey of analysts by FactSet Research produced consensus estimates of 65 cents of profit on $16.32 billion of sales. Same-store sales, those from outlets open at least a year to eliminate the effects of new and divested stores, rose 6% in the U.S. and 16% internationally, Costco reported on Thursday. Revenue, which includes membership fees, rose 13% to $16.61 billion. Costco had said that a higher reserve for returns would hurt sales; excluding that higher reserve, total sales rose 12%. Excluding gasoline-price inflation, U.S. same-store sales rose 4%. Neutralizing the effects of stronger currencies, especially the Canadian dollar, international same-store sales rose 6%. Costco operates 538 warehouses, including 394 in the U.S. and Puerto Rico, 75 in Canada, 19 in the U.K., six in Korea, five in Taiwan, eight in Japan and 31 in Mexico.

Source: MarketWatch

Crate & Barrel, new chief exec navigate retail dive

CHICAGO - Fresh out of college, Barbara Turf walked into a home furnishing store in Chicago in 1968, seeking a part-time summer job at an upstart boutique called Crate & Barrel.

Four decades later, she's ascended as well as the store morphed to a national chain whose products are contemporary home staples.

The 64-year-old president of the privately held retailer became chief executive this month, replacing founder Gordon Segal, who had held the post since he and his wife opened their first store in Chicago's Old Town neighborhood in 1962.

Turf's new role comes as the Northbrook-based company, now owned by Germany's Otto GmbH, tries to weather an economic and housing downturn that's sending the housewares sector into a tailspin while causing some other retailers to file for bankruptcy protection, close stores or scale back operations.

Howard Davidowitz, chairman of the retail consulting firm Davidowitz & Associates, said Crate & Barrel's product development, attractive merchandise and affordable prices mean it's among the best-positioned chains to ride out the turmoil.

"This company's in the worst segment of retailing, where almost no one is doing well," he said. "(But) I think they are positioned to succeed. I think they're among the best out there, but it's just very hard right now."

The company, which operates 170 Crate & Barrel, CB2 and Land of Nod stores, had sales climb more than 10 percent to $1.31 billion last year and expects those figures to hold steady while it opens eight new locations this year.

In an interview with The Associated Press, Turf acknowledged the effects of the worsening economy on the closely held company's financial results, but said she's confident Crate & Barrel's conservative strategy will help it thrive while rivals stumble.

Q: Can you walk me through what some of your goals are for the company under your leadership?
A: Well, I think there are certain areas of the company that are non-profitable that we need to focus on and pay attention to - whether it's repositioning a store or repositioning operational issues that can make it more profitable. (We're looking at) growing the business beyond the traditional ways. That means you don't have to put a store in every mall as much as you have to look at how the Internet has changed retail bricks and mortar. ... I think the catalog has to be addressed with the green environment. ... Beyond North America's borders, we're trying Canada right now for September.

Q: With the catalog, do you think you'd ever phase that out?
A: First of all, our direct marketing business is critical. We're not going to ever phase out of the catalog. That's too important. And it means too much the customer. But does it have to be so big? That's what I'm talking about.

Q: What's the status of a possible store in Dubai?
A: We're still exploring it under due diligence, like lots of other retailers are, to see if it makes sense.

Q: Are there other markets that you're examining?
A: We're going to put an international committee together with our partners in Germany to start to look at globalization. Does it make sense to go into China? Does it make sense to go into India someday? What about Europe? We just have to do a whole lot more homework, but I think it's an opportunity for Crate & Barrel along with other retailers to look at borders beyond the United States.

Q: How is the company weathering the economic downturn?
A: Certain pockets are definitely suffering. I'm actually pleased that we're holding as strong as we are. I think the economy is such a challenge right now. Maybe there's just too many stores or too many weak sisters in the playing field and that's what happened to them. Maybe there was too much growth too quickly. We've always been such a conservative growth company in the sense of being able to capitalize and not just do growth for the sake of growth, but to grow more methodically.

Q: Do you expect sales this year to increase?
A: We expect it to be very tough. And I think that's why we need to focus on profitability as well. You're not going to see increased sales jumps like we've been used to for the last 10 years with home furnishing.

Q: Do you believe your company's history of conservative growth insulates you?
A: I don't think anybody's insulated. I think we have a solid financial sheet and I think we're going ahead with plans as usual and hoping for the best. But I think you can't retract yet until you see what's really going to happen.

Q: Do you think that there's going to be more bankruptcies within the home furnishings market?
A: Yes, I do. I do think there was too much growth in the last 10 years with some weak competition. And I think a lot grew too fast.

Q: You don't anticipate Crate & Barrel being among them?
A: No! I really don't.

Q: How do you keep shoppers coming into stores?
A: It's a challenge. I've had so many people describe the joy of being in the store. And I think sometimes, even when you're a little bit depressed about your economic status, if you go in and buy four yellow placemats at $3.95, that's going make you feel better. So I guess I feel we're still a fun place to be.

Q: Do you think that you're going to slow down your (expansion) pace to deal with the economy?
A: I think that will be under discussion depending upon how things go. I just think we have to be very careful about where we put our bricks and mortar in the next couple of years. Because of the Internet, we really have to think about making that more synergistic with the store and making it easier and more seamless for the customer to shop both channels.

Q: How do you think Crate & Barrel will be different in the future?
A: We have always been a company that has evolved and we will continue to evolve, reflecting the American lifestyle - whether it's healthy eating, or it's storage, or being more environmental. Whatever is addressing America, we will try to reflect that.

Q: The green living and green products seem to be in right now. Is that just a fad?
A: No, that's not a trend. It's here to stay. I think everyone with education really realizes that the planet is definitely in trouble and we need to worry about it more. And I think it's coming down the mainstream.

Q: Are customers willing to pay more for a product that's green?
A: I would absolutely say yes. I think people will be committed to it.

Q: How long do you think you're going to stay on as CEO?
A) My legacy will be to the put the next generation in place. Because both Gordon and I are committed to keeping this company going for the next 20 years. And I certainly won't be around when I'm 80. I definitely feel my commitment is to put the next leadership generation in place.


Investment firms win Sharper Image in bankruptcy

NEW YORK, May 29 (Reuters) - A joint venture led by units of private investment firms Hilco Consumer Capital Corp and Gordon Brothers Group have won a bankruptcy auction to acquire the assets of gadget retailer Sharper Image Corp SHRPQ.PK, a lawyer for Sharper Image said on Thursday.

The firms will pay $49 million plus some contingent recovery for assets of the gadget retailer, according to Harvey Miller, an attorney with Weil, Gotshal & Manges, LLP, who is representing the company.

Source: Reuters

Property Pain Past, Present And Future For U.S. Banks

When the chairman of the Federal Deposit Insurance Company says, "Its the kind of thing that gives regulators heartburn", it is time for investors, too, to reach for the antacids.

The "kind of thing" that the FDIC's Sheila C. Bair was referring to was the continuing erosion of commercial banks and savings institutions' coverage ratio -- their loss reserves as a percentage of non-performing loans, and an important benchmark within the industry of a bank's health.

According to the FDIC latest Quarterly Banking Report, released Thursday, loan loss reserves increased by $18.5 billion or 18.1% in the first quarter of this year, their largest quarterly increase in more than two decades. But non-current (i.e. 90 days or more past due) loans increased by an even larger percentage -- 24% or $26 billion to $136 billion. The coverage ratio fell from 93 cents of reserves for every $1 of non-current loans to 89 cents per $1.

That is its lowest level since the property slump-induced downturn in the early 1990s. "This is a worrisome trend." says Bair, whose agency oversees the insured deposits, now totaling $150.4 billion, at banks and savings institutions.

No surprises about the financial institutions that most concern her: "The banks and thrifts we're keeping an eye on most are those with high levels of exposure to sub-prime and nontraditional mortgages, with concentrations of construction loans in overbuilt markets, and institutions that get a large share of their revenues from market-related activities, such as from securities trading."

The number of institutions on the FDIC’s Problem List -- banks facing potential failure -- increased from 76 to 90 in the first quarter, or 1.1% of the total (see: "Bad News Banks"). Total assets of those on the list rose from $22.2 billion to $26.3 billion, or 0.2% of industry assets.

This is the sixth consecutive quarter that the number of Problem Listers has increased, from a low of 47 institutions at the end of third quarter 2006. It is, however, a far cry from the days of the savings and loans crisis a decade and a half ago when institutions on the Problem List accounted for, at their peak in 1993, 9.9% of banks and thrifts and 18.4% of industry assets.

That year, 181 banks failed, following 271 and 382 failures in the previous two years. Since then, bank failures have been relatively rare -- none in 2005 and 2006, three in 2007 and two so far this year.

The FDIC doesn't name publicly its Problem Listers and they are likely to be scattered across the U.S. though concentrated in areas hardest hit by the housing slump. Forthcoming data on banks with high concentrations of commercial real estate and construction and development loans may provide more clues.

As well as leading to higher provisions, today's troubled real estate loans have also hit the financial institutions' profits. Commercial banks and savings institutions insured by the FDIC reported net income of $19.3 billion in the first quarter of 2008, a decline of $16.3 billion, or 45.7% from the $35.6 billion that the industry earned in the corresponding quarter a year earlier.

Half of all insured institutions reported lower net income in the first quarter. In addition to the sharp increase in loan-loss provisions, non-interest revenues fell on a year-over-year basis for a second consecutive quarter, declining by $1.7 billion (2.8%). Income from trading was $4.8 billion (67.8%) lower than in first quarter 2007, while sales of loans yielded $1.7 billion in losses, compared to $2.0 billion in gains a year earlier.

Sales of real estate acquired through foreclosure, which produced $3 million in gains a year ago, resulted in losses of $310 million in the first quarter. Other market-related sources of non-interest income, such as investment banking fees and venture capital revenue, were also lower than a year ago.

"While we may be past the worst of the turmoil in financial markets, we're still in the early stages of the traditional credit stress you typically see during an economic downturn," said Bair, somewhat ambiguously. She urged banks to beef up their capital cushions beyond regulatory minimums given the uncertainties about the housing markets and the economy.

Almost 90% of the increase in non-current loans in the first quarter consisted of real estate loans, but non-current levels increased across board, including credit card loans and home equity lines of credit. At the end of the first quarter, 1.7% of the industry's loans and leases were non-current.

Loss provisions totaled $37.1 billion, more than four times the $9.2 billion the industry set aside in the first quarter of 2007. Almost a quarter of the industry's net operating revenue (net interest income plus total non-interest income) went to building up loan-loss reserves. Bair expects banks' loan loss provisions to keep going up for the next few quarters.

Investors also took a $12.2 billion hit from a reduction in dividend payments. Of the 3,776 insured institutions that paid common stock dividends in the first quarter of 2007, 48% paid lower dividends in the first quarter of 2008, with 666 institutions paying no dividend at all. That translated into a aggregate pay-out of $14.0 billion in total dividends in the first quarter, down 46.5% from $26.2 billion a year earlier.

Pain shared is still pain.

Source: Forbes

Newbury Street icon Louis seeks someplace trendier

Louis Boston, a fixture on Newbury Street that helped usher luxury retail into the city, will move out of its historic building when its lease expires in 2010, opening up the marquee 40,000 square foot space for the first time in 20 years.

Owner Debi Greenberg, who took over the business in 2003 from her father, Murray Pearlstein, said the trendsetting boutique will leave Newbury Street, Boston's best-known shopping address, for the waterfront or another neighborhood. Greenberg, who wants to add a spa and bakery to the designer emporium, said she is looking for a new site with the kind of edge Newbury Street used to have.

"I want a home that is my own identity. Here on Newbury Street, the stores are all similar. There isn't anything new anymore," Greenberg said. "The building next door houses H&M and Victoria's Secret. It makes this area feel less special and less unique."

Louis' move will mark the departure of one of the signature retailers from a street that has migrated away from its eclectic, locally-owned boutique roots to a mall-like scene dominated by chain stores.

Louis' current three-story space at Newbury and Berkeley streets features a restaurant, salon, music bar, optical shop, and men's and women's collections with top designers from across the world. (The restaurant, Boston Public, abruptly closed this week because of financial problems, according to chef Pino Maffeo.) Louis has served as one of the city's top fashion forces, producing designers such as Boston native Joseph Abboud and helping make Newbury a shopping destination.

The Back Bay boutique pushed the boundaries of the city's conservative tastes, offering luxury goods such as $2,500 Balenciaga women's leather bomber jackets and a $25,000 one-of-a-kind Tuleh black, beaded coat. The high-fashion, high-priced Louis Boston, known as the place for custom-made suits, earned a reputation over the years as bringing in the hot brands before other retailers and staying ahead of the trends.

The store's stately 1863 building, home to the New England Museum of Natural History until the late 1940s, is prime real estate, located on manicured grounds at the corner of Berkeley Street. With its own parking in the middle of the bustling retail district, the freestanding Louis Boston space could fetch some of the city's highest rents at $200 per square foot on the floor level, according to real estate brokers.

Andy LaGrega, of the Wilder Cos., a Boston development firm, described the Louis Boston building, designed by noted architect and Bostonian William G. Preston, as, "The most iconic individual retail location in the Back Bay."

One high-end designer negotiated for the building about six months ago, but the deal ultimately fell through, brokers said. Retail analysts expect an upscale brand, such as Ralph Lauren or Gucci, to replace Louis Boston in the space, but they also pointed out that the Natick Collection's recent expansion of a luxury wing in the suburban mall could lessen demand for more designer stores in the region.

"It's an awesome piece of real estate that could command the attention of any world-class retailer," said Geoff Millerd, a senior director at real estate company Cushman & Wakefield of Massachusetts Inc.

Over the last two years, national merchants with deeper pockets such as Guess, Filene's Basement, Victoria's Secret, and H&M moved into a building near Louis Boston, pushing up rents all along Newbury Street, and squeezing out smaller independent stores. Greenberg said high rents weren't a factor in her decision to leave the neighborhood, but rather the quality of tenants.

"There is a changing character from the funky shops to something more generic. And we regret that," said Susan Ashbrook, vice president of the Neighborhood Association of the Back Bay. "The Louis Boston is an incredibly historic building and the neighborhood association is very keen to see that it will be preserved properly by whoever comes into the space."


Thursday, May 29, 2008

Coach Targets China -- and Queens

By convincing American women they need to buy several $300 handbags a year, Coach Inc. has helped shape the "accessible luxury" retail category, producing $2.6 billion in fiscal 2007 sales.
Bill Nelson

Now, after increasing its profit in each of the 31 quarters since it went public in 2000, the company is at a turning point. U.S. consumers are trimming spending, and some analysts predict that the company's net income growth will slow to 11% in the fiscal year that begins in July, down from an average of 51% in the five years ended June 30, 2007.

But rather than hunker down, Chief Executive Lew Frankfort is going on the offensive, overhauling the look of Coach products for fall and adding a new "C" logo pattern that is more subtle than the signature logo that shouts Coach. He also plans to add 200 stores in the U.S. over the next several years, bringing the total to 500.

In addition, Mr. Frankfort is pushing aggressively into China. Coach just announced that it is buying out Imaginex Group, its third-party distributor there, and taking control of the business. It also just opened a new flagship store in Hong Kong, its biggest outside the U.S., and it could add 50 stores in the next five years to the nearly 30 it already has in China.

At the same time, Coach plans to introduce more higher-priced styles -- a limited-edition Peyton bag, for instance, will soon sell for as much as $900 -- and on average bag prices will rise slightly. To balance its assortment, Coach is also expanding its selection of lower-end purses priced at $200 to $250.

Mr. Frankfort discussed his strategy in an interview. Excerpts:

WSJ: How are you dealing with the economic slowdown?

Mr. Frankfort: A year ago, we decided to accelerate the level of innovation, compressing several years of innovation into one year.

Our new product for the fall is drapier, more feminine. We have a broader range of new material, and the product is much more sophisticated.

We want to be transformative in the way we look. You can't be iterative when the economy is tough.

WSJ: At some point, doesn't the U.S. become oversaturated with Coach stores?

Mr. Frankfort: Our surveys tell us that 80% of visits of mall shoppers are in one mall, and 90% of spending is in one mall. We have identified 200-plus additional locations, primarily in malls. We are pacing ourselves. We are opening about 40 a year.

About four years ago, I convinced my team that we should open a store in Queens and Staten Island. A lot of my team said, "Queens? How can you do that?" But our target consumer shops in those stores. We aren't going to advertise it on our marquee: Staten Island, Queens, Tokyo and Hong Kong. But for those consumers -- and I go to many of these openings -- they are thankful. And what do we find? In the first six months, 30% to 50% of our consumers are first-time users. So we are able to attract, in those instances, candidly, a more aspirational consumer.

WSJ: How do you retain the very elite, New York, Madison Avenue customer?

Mr. Frankfort: She doesn't go to Queens Center. She doesn't know about it.

Even though it may appear high and low, most of the consumers in Queens and Staten Island are college graduates. Many of them are teachers and social workers. The demographics aren't very different than the demographics in New Jersey, for example.

Manhattan, Los Angeles and San Francisco are countries unto themselves, so to speak.

Americans are very egalitarian. We don't really have a history of luxury brands in America. There's Tiffany and Polo. But we all shop high-low. We shop at Target, Costco, as well as at Tiffany, Coach and Saks.

WSJ: So after opening another 200 U.S. stores, where does your growth come from?

Mr. Frankfort: We have a growing business in Japan and emerging businesses in China, where we are beginning to invest very significantly.

One day, China will be a bigger market than Japan for Coach. We are doing extremely well in Hong Kong. We want to catapult brand awareness through a series of actions -- the new flagship store, taking over the business so we can directly manage [it], and building infrastructure. As brand owners, we are confident we can run the business more effectively than a third party.

WSJ: How is the Chinese consumer different from the U.S. consumer?

Mr. Frankfort: In China, there's a luxury consumer that represents perhaps 0.05% of the population -- very small but with enormous purchasing power. That's not our primary target. Our target is the emerging middle class who have gone to university and are now getting 30% to 40% [pay] increases a year as engineers, doctors, bankers and lawyers. These women are trading up and investing in plasma TVs and travel and laptop computers and Coach bags. They are looking for ways to broaden their life, and Coach is one way.

Several years ago, an inflection point was reached for cosmetics and spirits. Coach products, which are more expensive, are reaching that inflection point now. Millions and millions of consumers for the first time will be able to enjoy a Coach experience. There are some consumers who are extremely wealthy, and hopefully our limited-edition product will attract some of them, but they are not our primary thrust.

WSJ: How do you compete with your European rivals, who have been in China for some time?

Mr. Frankfort: We will provide an alternative to the European luxury brands, as we did in Japan. In 2000, we had 2% market share, Louis Vuitton had 33% and Gucci and Prada had more than 10% each. Today we have 12% market share. Louis Vuitton has 27%. Gucci and Prada have less than 10% [each].

Many Japanese women told us they would rather spend 60,000 yen ($578) for a Coach bag and spend the other 60,000 yen that they would save from [not buying a] European luxury brand and use it to go to Thailand.

In Japan, we are particularly appealing to women under 35, even though their moms are carrying the European luxury brands as a status symbol.

We don't know what China will be, but we can tell you we only have 3% market share and 4% brand awareness. Louis Vuitton has over 30% market share. The [handbag and women's accessories] market in China, Hong Kong and Macau is about $1.2 billion today, excluding Taiwan.

If we are able to replicate what we did in Japan, the business will double in the next four or five years.

WSJ: How do you keep the Coach brand more accessible than other luxury handbags?

Mr. Frankfort: We make our product in lower-cost countries. Even though the raw materials come from the finest mills and tanneries in the world, we save incredible amounts of money on labor. The average cost in France and Italy is $50 an hour, and a bag could take five hours to make. Our labor costs are 10% of that.

WSJ: Why are you pulling back from your signature "C" logo pattern?

Mr. Frankfort: We aren't pulling back. We are reducing our dependence on it by producing another logo that is more sophisticated. What consumers are telling us is that our new fabric is much more abstract than our traditional logo -- and more appealing.

Stores in Staten Island and Queens, for instance, will have a greater proportion of bags with the old logo, and the stores in Manhattan will have a greater proportion with the new pattern.

Source: Wall Street Journal

Sears Swings to a Loss As Weak Sales Hit Results

Sears Holdings Corp. swung to a surprise loss in its most recent quarter, as sales continue to weaken and margins shrank.

The retailer blamed a tough economy, weak housing market, pressure on consumers from fuel and food costs, and intense competition. Margins were hurt by discounting needed to clear inventory that piled up late last year.

The results show that the deterioration of the storied retailer under the control of hedge fund manager Edward S. Lampert, who took over the company in 2005, is continuing if not accelerating. Sears's earnings announcement offered no hope for a change in direction soon.

"Given that we do not expect any significant near-term improvement in the overall retail environment, we believe that our sales and gross margin for the balance of fiscal 2008 will continue to be pressured," the company said in a statement.

Sears shares were down 4.2% at $85.60 in late morning trading on the Nasdaq Stock Market.

For the quarter ended May 3, the department- and discount-store retailer posted a net loss of $56 million, or 43 cents a share, compared with prior-year net income of $223 million, or $1.45 a share. The quarter included items that added 10 cents a share to earnings.

Sears, which gets about one-third of its sales from home goods and appliances, said revenue fell 5.8% to $11.07 billion. Analysts polled by Thomson Reuters were expecting earnings of 15 cents a share on $11.41 billion in revenue.

The company did say sales declines "have moderated somewhat" in the current quarter. It also said it would buy back an additional $500 million in stock and said it expects higher cash flow in 2008 than it posted a year ago. Sears has $143 million left under its previous buyback plans.

The company's underlying business continues to weaken sharply. U.S. sales at stores open at least a year fell 9.8% at namesake Sears stores and 7.1% at the Kmart discount chain. Sears said same-store sales fell across "most major categories ... most notably within the home appliance, lawn and garden, and apparel categories."

Gross margin slid to 27.3% from 28.2% on increased markdowns. Inventories, at $10.3 billion, are little changed if not up slightly from levels at the end of the company's fiscal fourth quarter Feb. 2.

Sears has been suffering amid a misplaced bet that the U.S. economy would improve. Despite the fact that sales of its home-related goods slowed early last year, the company had added to inventories in anticipation of better year-end sales. Instead, consumer spending weakened further, leaving the company with racks of unsold clothing, stacks of linens and rows of lawn mowers.

Those issues further stressed a retailer already struggling already with waning business and rising complaints about stores and service that made it hard to stop customer losses to more focused rivals. Sears' once-dominant place supplying refrigerators and washing machines to American homes has been chipped away by Lowe's Cos. and Best Buy Co., while its clothing business has suffered at the hands of department-store retailers Kohl's Corp. and J.C. Penney Co.

The company still is searching for a new chief executive to replace Aylwin B. Lewis, who was ousted in January.

In an effort to bring shoppers back to its stores, Sears recently went on a markdown spree at both namesake and Kmart stores, offering Midnight Madness discounts on Web purchases and "Friends and Family" store discounts, among other profit-sapping price cuts. The company also is hoping to snap up customers' economic stimulus payments, with an offer for a bonus gift card with 10% of the value of any gift card purchased with a customer's entire check.

The company reported cash and cash equivalents of $1.4 billion at the end of the quarter, down from $3.5 billion a year earlier and $1.6 billion at the end of its fourth quarter. Analysts have been watching the company's cash position, as less cash could limit management's ability to spend big to revitalize sales and stores.

Source: Wall Street Journal

Wal-Mart puts the squeeze on food costs

The retailer is using its clout with vendors to hold onto its everyday low prices.

(Fortune Magazine) -- With gas, grain, and dairy prices exploding, you'd think the biggest seller of corn flakes and Cocoa Puffs would be getting hit by rising food costs. But Wal-Mart has temporarily rolled back prices on hundreds of food items by as much as 30% this year. How? By pressuring vendors to take costs out of the supply chain.

"When our grocery suppliers bring price increases, we don't just accept them," says Pamela Kohn, Wal-Mart's general merchandise manager for perishables. To be sure, Wal-Mart (WMT, Fortune 500) isn't the only retailer working to cut fat from the food chain, but as the largest grocer - Wal-Mart's food and consumables revenue is nearly $100 billion - it has a disproportionate amount of leverage. Here's how the retailer is throwing its weight around.

Shrink the goods. Ever wonder why that cereal box is only two-thirds full? Foodmakers love big boxes because they serve as billboards on store shelves. Wal-Mart has been working to change that by promising suppliers that their shelf space won't shrink even if their boxes do. As a result, some of its vendors have reengineered their packaging. General Mills' (GIS, Fortune 500) Hamburger Helper is now made with denser pasta shapes, allowing the same amount of food to fit into a 20% smaller box at the same price. The change has saved 890,000 pounds of paper fiber and eliminated 500 trucks from the road, giving General Mills a cushion to absorb some of the rising costs.

Cut out the middleman. Wal-Mart typically buys its brand-name coffee from a supplier, which buys from a cooperative of growers, which works with a roaster - which means "there are a whole bunch of people muddled in the middle," says Wal-Mart spokeswoman Tara Raddohl. In April the chain began buying directly from a cooperative of Brazilian coffee farmers for its Sam's Choice brand, cutting three or four steps out of the supply chain.

Go locovore. Wal-Mart has been going green, but not entirely for the reasons you might think. By sourcing more produce locally - it now sells Wisconsin-grown yellow corn in 56 stores in or near Wisconsin - it is able to cut shipping costs. "We are looking at how to reduce the number of miles our suppliers' trucks travel," says Kohn. Marc Turner, whose Bushwick Potato Co. supplies Wal-Mart stores in the Northeast, says the cost of shipping one truck of spuds from his farm in Maine to local Wal-Mart stores costs less than $1,000, compared with several thousand dollars for a big rig from Idaho. Last year his shipments to Wal-Mart grew 13%.

In fact, it's the small suppliers that are feeling the pain from Wal-Mart's pushback the most. Bushwick has seen its costs rise 10% over the past year, but has passed only half that amount on to Wal-Mart and its other retailers. For consumers who are having a hard time paying $3.80 for a gallon of milk, however, without those measures that sticker shock would be a lot worse.


Dress for Less and Less

SINCE 1998, the price of a “Speedy” handbag — the entry-level style at Louis Vuitton — has more than doubled, to $685, indicative of a precipitous price increase throughout the luxury goods market. The price of Joe Boxer’s “licky face” underwear, meanwhile, has dropped by nearly half, to $8.99, representing just as seismic a shift at the other end of the fashion continuum, where the majority of American consumers do their shopping.

As luxury fashion has become more expensive, mainstream apparel has become markedly less so. Today, shoppers pay the same price for a basic Brooks Brothers men’s suit, $598, as they did in 1998. The suggested retail price of a pair of Levi’s 501 jeans, $46, is about $4 less than it was a decade ago. A three-pack of Calvin Klein men’s briefs costs $21.50, only $3.50 more than in 1998. Which is the better buy?

Factoring for inflation, each of these examples is actually less expensive today. In current dollars, the 1998 suit would cost $788, the jeans would be $66 and the underwear would be nearly $24. As consumers adjust to soaring prices for gasoline, food, education and medical care, just about the only thing that seems a bargain today is clothes — mainstream clothes, anyway.

Clothing is one of the few categories in the federal Consumer Price Index in which overall prices have declined — about 10 percent — since 1998 (the cost of communication is another). That news may be of solace to anyone whose budget has been stretched just to drive to work or to stop at the supermarket; in fashion, at least, there are still deals to be had.

An anecdotal price comparison by Thursday Styles for 31 name-brand clothing items — such as Calvin Klein underwear, a Chanel tweed cardigan, a pair of L’eggs pantyhose, Ray-Ban Wayfarer sunglasses and a wool crepe jacket from Anne Klein — would seem to demonstrate that while luxury prices have outpaced inflation, lower-priced clothes have generally experienced deflation. Even some items that may seem more expensive today, like a $75 Ralph Lauren polo shirt (which cost $62.50 in 1998), are really not, because their prices have risen more slowly than inflation.

Anyone who has spent time walking along 34th Street in Manhattan recently, from Kmart to Macy’s to Forever 21 and H&M, would think that the economic outlook is rosy. Shoppers there are still laden with bags from Payless and Victoria’s Secret, and several said they perceived fashion to be a better buy, with more variety and style at lower prices, than a decade ago.

“You can buy a lot more with your money today than before,” said Joanna Eliza, a recent graduate from the Fashion Institute of Technology, shopping on 34th Street on Tuesday. “Stores like H&M and Forever 21 make it more affordable for people who want to be fashionable, and that makes me feel really good.” Over all, apparel prices have gone down primarily because of two factors: the overwhelming movement of manufacturing to countries with cheaper labor, where the clothes are made, and increased competition between traditional retailers and discounters, where the clothes are sold.

In some cases, the low prices today seem almost ridiculous. Steve & Barry’s sells celebrity-branded shoes and dresses for $8.98 or less. Target offers a silk faille ball gown from Isaac Mizrahi on sale for $129.99. Wal-Mart, the nation’s largest retailer, promotes an Op T-shirt for 97 cents.

But how low can prices go? While fashion deflation may be good news for consumers, it is not necessarily so for stores. Such prices at the low end and, conversely, such high prices at the luxury end, where $1,300 handbags are piled up like tomatoes at Saks Fifth Avenue, are beginning to cause concern among retailers and analysts, because they are having a profound impact on the way people shop.

“Everything we pick up today has to pass a test,” said Candace Corlett, the president of WSL Strategic Retail, a consulting group. During a survey of shoppers in November, 60 percent of the respondents said they had recently begun to stop and reconsider clothing purchases before buying. “To me, that is the scariest thing for retail going forward, because that is a new habit,” Ms. Corlett said. “It’s not like in 2000, when we were just buying so much stuff. We are learning now what we call the cautious pause.”

The fashion and retail industry fear that the appeal of price, for consumers of both mass and luxury goods, is becoming a more important factor in decisions about what to buy than desire, which has been the driving mechanism behind the growth of fashion and luxury for decades.

“We as a business cannot afford to have a customer take a second look and ask, ‘Do I need this?’ ” said Bud Konheim, the chief executive of Nicole Miller. “That is the kiss of death. We’re finished, because nobody really needs anything we make as a total industry.”

The divergence of price extremes has become so striking that some fashion executives, including Mr. Konheim, are openly asking whether prices have reached both their nadir and apex at the same moment. “As far as bottom costs go, we’re there,” Mr. Konheim said. “I think we’ve exploited all the countries on earth for people who really want to work for nothing.”

But at fashion’s high end, it may be consumers who think they are being exploited. Of the name-brand items that Thursday Styles ran a 10-year comparative price check for, the highest gain, 104 percent, was for the Speedy bag, followed by a $1,900 Lady Dior bag (73 percent higher) and a $325 Diane Von Furstenberg wrap dress (71 percent higher). These prices were not adjusted for inflation, which has run 32 percent cumulatively since 1998.

Of nine items that declined in price, those that dropped the most were basics like underwear and T-shirts, by as much as 60 percent for Joe Boxer’s three-pack of basic briefs, 32 percent for capri pants from Liz & Company, and 21 percent for a Lacoste polo shirt. Prices for the remaining five items stayed the same or changed within 1 percent of their 1998 prices, including styles sold by L.L. Bean and Lands’ End, which are frequently touted in catalogs for maintaining their original prices.

Price differences for products that have remained consistent in image and design can also be affected by sales and competition among stores. The suggested retail price of a pair of Levi’s 501 jeans, for example, has declined $4 since 1998, to $46, but stores like J. C. Penney and Kmart have often sold them for much less.

The cost of materials — all the denim is produced in the United States — has remained constant. But the cost of production has fluctuated as production has moved overseas, a factor that could now lead to price increases.

“As we see gas prices going up, and the shipping going up with that, that will certainly affect what the end price will be,” said Erica Archambault, a Levi’s spokeswoman.

It is becoming harder to compete with price alone, said Stephen Donnelly, the general merchandise manager for women’s apparel at Kmart, where shoppers, he said, are increasingly value minded. They are often more informed and more interested in fashion that is affordable, rather than basics that are cheap, and increasingly, less profitable.

“Just like everyone else,” Mr. Donnelly said, “we’ve definitely had some cost increases and a lot of that has to do with transportation, for getting the goods from the manufacturers to our warehouses and off to the stores, as well as increases in the price of raw materials. But we are trying to minimize increasing the costs to our customers.”

HOW the potential for higher prices will sit with consumers may depend on the how many companies find themselves in the same boat, unable to withstand further cuts without sinking.

“Clothing has been incredibly cheap,” said Sarah Maxwell, a professor of marketing at Fordham University and the author of “The Price is Wrong” (Wiley, 2008), which looks at how price affects consumer behavior. In the book, she describes buying the same pair of sneakers for 15 years, during which time the price ranged from $19.95 to $29.95. When she recently went to buy a new pair, they cost $34.95, so she rejected them.

“There is room to move up,” she said. “If the entire market moves up at the same time, there isn’t any problem. It’s when one person moves up that the market notices.”

Source: New York Times

Phillips-Van Heusen to close Geoffrey Beene retail division

BOSTON (Thomson Financial) - Shares of Phillips-Van Heusen Corp. rose Wednesday after the New York-based apparel maker said it has decided not to renew its license agreements to operate Geoffrey Beene outlet retail stores and will close its Geoffrey Beene outlet retail division by the end of fiscal 2008.

The stock was up 1.6% at $45.29 on volume of 190,154 shares.

Phillips-Van Heusen said it expects to record after-tax charges of about $15 million, or 29 cents per share, which will be recognized over the balance of 2008.

The company continues to project 2008 earnings of $3.32 to $3.41 a share, excluding the exit costs. Analysts polled by Thomson Reuters, on average, estimate 2008 earnings of $4.17 a share.

The Geoffrey Beene outlet retail division, which currently operates about 100 stores, is expected to complete its liquidation by the end of fiscal 2008.

About 25 stores will be converted to Calvin Klein outlet retail stores, with the remaining stores being exited, Phillips-Van Heusen said.

Source: CNBC

Commercial Property Markets Remain in a Lull

As the industry makes its way through the second quarter of 2008, the outlook for the U.S. retail property market remains muddled, according to the first quarter report from Reis, Inc., a New York City-based provider of commercial real estate information. Transaction volume during the first quarter continued its downward slide, but pricing for the assets that did trade hands remained relatively stable. Where the market will go from here will depend largely on the performance of the credit markets in the next few quarters, said Sam Chandan, chief economist of Reis, during the company’s first quarter presentation on May 28.

After months of little activity in the investment sales sector, the volume of retail transactions in the first quarter amounted to only $7 billion, an 81 percent decline from $37 billion during the same period in 2007. Portfolio sales, which made up the bulk of activity in 2006 and 2007, have been virtually non-existent this year, coming off a high of $208 billion for the entire commercial sector in 2007. The change has been due to the decreased appeal of properties in secondary markets, which makes it harder to get rid of sub-par portfolio assets, and the difficulty of getting enough credit to finance such transactions, according to Chandan.

With credit markets still in a funk, the easiest loans to obtain are those under $25 million, since they can be financed by regional banks, instead of Wall Street players, according to Gary E. Mozer, managing director and principal with George Smith Partners, a Los Angeles-based real estate investment banking firm.

At the same time, the price depreciation in the retail sector for the properties trading hands has been relatively modest. The price per square foot during the first quarter was down just 2.8 percent from the high of more than $180 in the second quarter of 2007. In contrast, apartment prices were down more than 13 percent. However, part of the reason that prices have remained stable is because only the best assets in large markets are trading hands. Had lower quality properties been trading, it's likely the price drop would have been more severe, according to Chandan.

Currently, cap rates for retail properties range from just under 6.4 percent to approximately 9.5 percent on lesser quality centers, with Las Vegas, San Diego, Orange County, Los Angeles and Chicago registering the lowest cap rates in the country. In the past 12 months, cap rates for retail properties averaged about 7.2 percent.

However, Chandan cautioned the industry against taking the current transaction statistics out of context. While transaction volume may be down and cap rates up compared to the fever pitch of the past three years, they are roughly in line with the levels experienced in 2004. “Last year’s transaction levels are far above the normal rate for the market,” he noted.

At the same time, Chandan remains worried about the availability of debt for commercial properties in the coming months. In recent weeks, the freeze in the credit markets has eased—LIBOR spreads over Treasury have narrowed to 75 basis points from 198 basis points on March 20 and spreads over swaps on AAA-rated notes have come down as well, to 142 basis points from 325 basis points. But similar drops have occurred twice already since the onset of the credit crunch last summer, in November 2007 and in February 2008, only to blow back open again after further credit problems arose.

If the spreads widen once again, the difficulty of re-financing existing properties will likely lead to distressed property sales in the commercial sector, Chandan notes. Reis estimates that CMBS issuance will range from $32 billion to $35 billion this year, compared to $230 billion in 2007, taking away a significant source of financing for real estate owners. Traditional lenders have not been able to pick up the slack. Currently, many of the country’s leading financial institutions are over-leveraged and don’t have the capacity to extend credit to commercial owners, Chandan says.

In the first quarter of 2008, the delinquency rate on loans in the commercial property sector stood at 3.7 percent, according to Reis, the highest level since 1994. But if the owners who bought their properties in 2005, 2006 and early 2007 counting on easy availability of credit and rapidly rising cash flows won’t be able to refinance, that number will rise, leading to a negative price bubble, Chandan cautions.

“There is material downward risk for the market later this year,” he says, predicting further cap rate increases in the weaker markets.

Source: Retail Traffic

Strong Grocery, Drugstore Sales Buoy Shopping Center REITs

Consumers spending on staples and necessities buoyed shopping center REITs during the first quarter.

Nine of the 13 shopping center REITs reporting results to date either beat or met consensus estimates. Acadia Realty Trust, Cedar Shopping Centers, Inc., Equity One, Inc., Kimco Realty Corp., and Regency Centers Corp. bested their consensus estimates. Weingarten Realty Investors, Inland Real Estate Corp., Kite Realty Group and Urstadt Biddle were in-line with expectations. Only four companies, including Federal Realty Investment Trust, Developer's Diversified Realty Corp., Ramco-Gershenson Properties Trust and Saul Centers, came in below estimates, by $0.01 to $0.03.

The sector’s strength comes from its reliance on supermarkets and drugstores as anchors, says Rich Moore, an analyst with RBC Capital Markets. “In hard times, that’s when people quit eating out and return to the grocery store,” says Moore. “The grocers are going to continue to do fine and grocery-anchored centers will continue to do fine.”

In addition, drugstores saw same-store sales growth of 2.9 percent in the first four months of this year, according to ICSC, higher than the 1.7 percent same-store sales growth figure for all U.S. chain stores.

However, Moore expressed concern about REITs that focus heavily on ground-up development because those firms could find it challenging to secure tenants in this economic climate. Shopping center REITs that currently have large development pipelines include Developers Diversified Realty, Weingarten Realty Investors and Regency Centers. Now, Moore noted, the best strategy is redevelopment, which offers yields ranging from 10 percent to 14 percent, compared to yields of 8 percent to 9 percent on new projects.

Kimco Realty Corp., which told analysts it plans to concentrate on redevelopment going forward, reported FFO of $0.64 per share, $0.01 above consensus estimates. The figure represents a 17.9 percent decline from the first quarter of 2007, due to a disproportionate gain from the company’s investment in the supermarket chain Albertson’s, LLC last year. Occupancy amid its portfolio slid 10 basis points, to 96 percent; and its same-store NOI growth of 3.3 percent was below its eight-quarter average of 4.7 percent. However, it still represents a “reasonably healthy long-term pace,” wrote Jeffrey J. Donnelly, an analyst with Wachovia Securities. The New Hyde Park, N.Y.-based REIT has about 20 projects in the works, totaling approximately $325 million.

Acadia Realty Trust beat consensus estimates by $0.06, reporting FFO of $0.38 per share; a 5.5 percent increase over the first quarter 2007. The White Plains, N.Y.-based firm, with 8 million square feet, posted NOI growth of 7.5 percent, and occupancy remained flat at 94.1 percent.

Equity One Inc.'s FFO of $0.44 per share beat consensus estimates by $0.03, representing a 10 percent increase from the same period a year ago. However, analysts remain concerned about the company’s modest NOI growth of 1.3 percent, and the 140 basis point drop in its occupancy level to 92.7 percent. Bear Stearns analyst Ross Smotrich notes Equity’s major problem is its exposure in Florida, which is one of the weakest markets in the U.S. because of the severity of the housing downturn in the state.

Cedar Shopping Centers, Inc. reported FFO of $0.30 per share in the quarter, beating estimates by $0.01. The Port Washington, N.Y.-based REIT also reported its occupancy of 92 percent was flat and a 2.7 percent fall in same-store NOI. Cedar owns 12 million square feet of shopping center space. “Operationally, we find the portfolio is performing okay, but a bit below our expectations,” wrote Philip Martin, an analyst with Cantor Fitzgerald.

Regency Centers Corp., a Jacksonville, Fla.-based REIT with a 51-million-square-foot portfolio, beat consensus estimates by $0.02, with FFO of $0.87 per share. The figure represents a 23 percent decline from the first quarter 2007. Its NOI rose 3.1 percent.

Missing analysts' consensus estimates, Developers Diversified Realty Corp. reported FFO of $0.91 per share, $0.02 below forecasts. That was an 8.8 percent decrease from the same quarter last year. The Beachwood, Ohio-based REIT reported same-store NOI grew 2 percent, which was below the sector average of 2.5 percent. Its occupancy dropped 20 basis points to 95.8 percent. Developers Diversified owns 163 million square feet of shopping center space in the United States. With Developers Diversified's penchant for development, Donnelly wrote, it might suffer disproportionately from low real estate capital market flows.

Saul Centers Inc. missed consensus estimates by $0.03 for the quarter. The Bethesda, Md.-based owner of 6.2 million square feet of retail space, reported FFO growth of 1.5 percent, to $0.68 per share. Saul’s occupancy level fell 50 basis points, to 95.4 percent, compared to the same period a year ago. However, its same-store NOI growth of 3.2 percent was above average.

“There was a pretty fair amount of hits, so overall they have performed well considering the broader market conditions," says Jason Lail, senior research analyst with Charlottesville, Va.-based research firm SNL Financial. "And it’s the same caveat as for the regional mall REITs will apply here—the quality of your assets will affect how well you do. Tenant diversification is certainly a good safety net. I think it’s a lot of the same influences you would expect for regional malls. I think it’s on an individual company basis, I don’t think it’s a broader sentiment.”

Source: Retail Traffic

Wednesday, May 28, 2008

Sharper Image, Linens 'n Things face auctions

NEW YORK, May 27 (Reuters) - Facing the tightest credit markets in years, bankrupt companies are finding it easier to sell off assets to the highest bidder or liquidate, rather than spend years crafting a restructuring plan.

The incentives to liquidate or sell assets have grown in the last few years due to tougher bankruptcy laws and tight credit markets, restructuring experts say. It will be highlighted this week as two bankrupt retailers, Sharper Image Corp SHRPQ.PK and Linens 'n Things, face auctions for all or parts of their assets.

"Sales in Chapter 11 have become more commonplace than they were certainly 20 years ago," said Mark Shapiro, managing director and head of Lehman Brothers Holding Inc's (LEH.N: Quote, Profile, Research) restructuring finance group. "To do a reorganization you need enough capital to survive for a long time."

Sharper Image, which filed for bankruptcy protection in February, will hold an auction on Wednesday for its assets, including its trade name and intellectual property.

The gadget retailer concluded last month that the best route to exit bankruptcy would be to sell itself, despite already closing 96 of its 187 stores in the hope a leaner version of the retailer could have stayed afloat.

The company had hoped a new catalog would boost sales enough to propel it through reorganization, but when that failed to materialize and credit markets did not improve, it began looking for buyers, its attorney, Harvey Miller, told a Delaware bankruptcy judge earlier this month.

A joint venture between private investment firms Hilco and Gordon Brothers, which had already partnered to liquidate the 96 Sharper Image stores, offered a bid for the company of $51.25 million, plus other considerations. That bid was approved as the "stalking horse," meaning the joint venture will make the first bid for the company on Wednesday.

But the auction could be competitive as Sharper Image has also received a bid from a group called JWLSP Acquisition, which includes the retailer's former chairman Jerry Levin.

The retailer joins a slew of other companies that have ended up selling assets or announced plans to sell assets over the last few months, including online gift catalog site RedEnvelope Inc REDEQ.PK, Hawaiian air carrier Aloha Airlines and all-business class airline Eos Airlines.

"The idea is if you sell the businesses quickly, then you can do a liquidating plan and that doesn't take very long to do," said Barbra Parlin, a bankruptcy attorney at Holland & Knight in New York. "But if you try to operate the business and pare it down and reorganize it in the true sense, it might take longer."

A buyer has the opportunity to reorganize a business, but it gains the ability to reorganize outside of court where its actions are not under a microscope.

Other companies have tried to liquidate weaker portions of their businesses in an effort to raise cash.

Linens 'n Things is heading down a similar path as Sharper Image, by auctioning off liquidating rights to 120 of its "underperforming" stores on Thursday, but for now, the retailer still plans to emerge from bankruptcy protection as a going concern with its remaining 589 stores.

Companies such as retailers and airlines face particular challenges, bankruptcy experts say, because it is hard to forecast when consumers will begin shopping again, or whether oil prices will ever return to more airline-friendly levels.

"There's a lot more pressure today," said David Heiman, a bankruptcy lawyer at Jones Day in Cleveland.

"You may have creditors who don't want to wait forever and say you better try and sell this company, rather than wait three to four years for it to reorganize."

Due to changes in the bankruptcy law, companies also find they are now running against a clock when they file for bankruptcy protection, Parlin said. The 2005 reforms to the bankruptcy code gave companies new time limits, including essentially an 18 month window to come up with their reorganization plan, Parlin said.

"As a result of the way the law changed, people who go into bankruptcy are concerned they're not going to have enough time to really reorganize," Parlin added. "People are almost feeling like they have to sell."
Source: Reuters

Borders Opens Concept Store in Southbury, Conn.

Ann Arbor, Mich.-based Borders Inc. unveiled a new concept store in Southbury, Conn., as part of its plan to open 14 new concept stores in 2008. The company debuted its first-ever concept store in Ann Arbor in February. The store blends digital and Internet options with a fresh, new look and enriching in-store services. Borders officially opened the 21,915-sq.-ft. store located at Southbury Plaza on May 23. HIghlights of the store include a new Digital Center housing multiple computer kiosks and stations dedicated to new services, allowing customers to mix and make their own custom CDs, download books and music, publish their own books, explore their family history and create photo books. The store also has put a strong focus on popular categories, including Travel, Cooking, Wellness, Graphic Novels and Children's, by incorporating digital options and the online world, making these sections of the store interactive destinations where customers can not only shop for books, but also take advantage of computer kiosks featuring recommendations from expert buyers, related video content including interviews with experts and authors, and more.

Source: Display & Design Ideas

Dollar stores a cheap haven for gourmands

A penny can buy a thought, but a dollar can buy a can of smoked herring fillets from Germany and a jar of garlic cloves marinating in chili pepper-infused sunflower oil.

Dollar stores have long been the Dean & Deluca of adventurous Epicureans, offering the same random spontaneity as that of thrift shops. Like chefs who work with seasonal ingredients, dollar store gourmands work with whatever curiosities bloom from the shelves (save for any edibles coming from China). However, with the recent loss of local dollar stores like $1 Supermarket in North Miami Beach -- it used to sell Cabernet Sauvignon-scented candles -- dollar store gourmands may feel like they are losing their mojo.

Never fear, The Palate offers a summer entertaining experience to keep you frugally inspired. And while we are doing things on the cheap, if you pick up an item that looks suspect, put it right back or tell the store clerk.

First, the main dish: Pasta Pobrecita (Poor Girl's Pasta). You'll need two garlic cloves, extra virgin olive oil, a can of Polar smoked herring, a can of Iberia Sardinas Picantes, a pack of Maruchan Ramen Noodles, a jar of Spanish olives and paprika. Everything's a dollar except for the noodles -- you get six packs for $1 and the olive oil is $1.69.

Maruchan Ramen Noodles are my favorite dried pasta to work with as it holds flavor very well. Chop up two garlic cloves and the herring fillet and keep separate. Put 1 tablespoon of olive oil and the oil from the Sardinas into a pot and turn to medium high heat. Once it gets super hot, add garlic and reduce to low heat. Wait two minutes, then add chopped herring (you can also use anchovy fillets for a saltier bite). Keep on a low heat for about five minutes or until the garlic sweetens, the anchovy dissolves into the oil or the fillets create a chunky sauce. Your kitchen will smell like Greece.

Boil noodles for about a minute, no more than two, or until al dente. Throw away that sodium-suicide seasoning packet. Drain the noodles. Run a little cold water over them, and when completely drained, add to your smoked herring sauce and toss until noodles are coated. Garnish with a sprinkle of paprika, a couple olives and one sardine fillet.

Serve in a crystal ice-cream bowl on top of a gorgeous Bollywood-style green and gold doily. This delicious, light, smoky pasta dish conjures up images of dining at a tavernas in Greece. You can get all these ingredients at the 81st Street Family Dollar, but the accessories you will find at TNG Dollar Plus Store.

TNG is a tiny mom-and-pop dollar-plus store squished inside the Publix and Kmart plaza in North Miami Beach. Because of the economy, many dollar stores are renaming themselves ''dollar plus'' stores. At first glance it just looks like the typical dollar store -- huge, floral-print gift bags, plantain chips, hair accessories, the usual. But the home aisles have amazing household accessories: hand-painted, Chinese-inscribed ceramic candle holders; pyramid-shaped candles in lavender, cherry red and royal blue. There's even a rainbow-colored candle (they all range from 89 cents to $1.49).

Here's where you'll find the crystal ice cream bowls ($1.59) and assortment of drinking glasses in different shapes and colors. In the back you will find an assortment of doilies -- green and gold, black and gold and white ($2 each). In the evening you can sit on your patio, light up all these candles and brag about what's next: dessert.

The Family Dollar in North Miami has diverse dessert items to create everything from nostalgic treats to Art Smith-styled creations. First is the small museum of Little Debbie relics that takes front stage at most Family Dollars, only this location has a wide selection: star crunch, nutty bars, zebra cakes, Swiss rolls, honey buns and fudge brownies, all around $1.05 per box.

In the freezer, you will find Breyer's vanilla and chocolate ice-creams ($2.25 per pint). Top off a couple scoops of ice-cream with chunky bits of star crunch or nutty bar then exchange childhood lunch box stories for the rest of the night. You can also stick the honey bun in the microwave for 30 seconds and serve it up with a scoop of vanilla ice cream and top it off with a handful of Golden Orchards pistachios ($2 per bag).

There is a whole aisle of cookie options for $1. A better choice is the bags of Twix and Snickers minis for the same price.

When you hear Duran Duran trumpeting from the parking lot next to Laurenzo's Italian Supermarket, it means the Dollar & More store is open. This plaza nook has everything from beautiful sunflower tray tables and shot glasses for $3 to jarred asparagus ($1.49), capers ($1.29), huge jalapeƱo peppers ($1.29) and apricot preserves.

And to keep things gourmet, treat your friends to a cool bottle of Perrier sparkling water (4 bottles for $3.49).

''It's hard to live life on a dollar because rent is killing dollar stores,'' said owner Patty Amaya. "But we try our best. At least the music is free.''

Source: Miami Herald

Upbeat Burberry shrugs off credit squeeze

Burberry on Wednesday shrugged off fears that the financial crisis was affecting luxury goods as it reported a 25 per cent rise in annual pre-tax profits and said it expected strong growth in the US market.

But towards the end of the second half, Burberry said sales were more volatile in stores.

Stacey Cartwright, finance director, said: “It has become difficult to extract trends. We are seeing volatility not so much in specific regions but within stores, some days sales are significantly up, and others significantly down.”

The company, which last year outlined plans for a rapid US expansion, said it expected a strong performance in this market in the six months to September, as it capitalises on a fondness for the British brand. It anticipates growth of more than 20 per cent during this period.

Ms Cartwright said: “We continue to see double-digit sales growth in the US. We are very under-penetrated in this market. There is lots more to go for there.”

Burberry’s upbeat statement follows weaker-than-expected sales from Gucci last month, which prompted several analysts to predict a possible shake-out at the lower end of the luxury goods market, with more aspirational brands suffering more than traditional, exclusive names.

Ms Cartwright brushed off suggestions that Burberry might be more vulnerable to a downturn, pointing to underlying growth across the business of 18 per cent during the year.

Burberry forecast good growth in the first half in all of its regions except Spain and 20 per cent growth in emerging markets for the wholesale division for the six months to September.

It expects average selling space to increase 12-13 per cent year on year and wholesale revenues in the six months to September 2008 to grow about 10 per cent on an underlying basis.

It anticipates broadly flat underlying licensing revenues in the year to March 2009, and a £2m boost to revenues and profits as a result of the yen exchange rate.

Revenues rose by 17 per cent to £995.4m while pre-tax profits rose to £195.7m. Earnings per share were 32.4p compared with 29.7p last time.

Angela Ahrendts, chief executive said: “Burberry’s revenue growth and profit increase demonstrate the robustness of our global luxury business in these challenging times, with consistent performance across our regions, channels and products.”

Source: Financial Times

When courting retailers, smaller may indeed be better these days

An economic downturn led some retail developers and brokers to shift their strategy at the nation's biggest retail convention, courting restaurants and smaller retailers rather than big chains.

The shift comes as national retailers such as Ann Taylor and Linen 'n Things shutter more than 100 stores. The move is one example of how the economic downturn impacted the annual International Council of Shopping Centers RECon meeting, held in Las Vegas May 18-21.

Developers are getting hit with the credit crunch while retailers hold the upper hand in negotiations, Baltimore-area show attendees said.

Top city and state officials rely on the convention to sell the region to prospective retailers while brokers and developers strike deals. Baltimore retail executives credit the show for opening up doors to new retailers in the market such as Target Corp.

Without any major store expansions among national chains, Greenberg Gibbons Commercial Corp. is eyeing specialty women's clothing outlets, CEO Brian Gibbons said. These include Lucy's, a New York women's athletic wear chain, and Canadian chain Lululemon.

Lucy's has two Maryland stores in Rockville and Bethesda while Lululemon has two, in Bethesda and Annapolis.

The Owings Mills-based Greenberg Gibbons' projects include Hunt Valley Towne Centre, Annapolis Towne Centre at Parole and Canton Crossing. The developer's strategy highlights how new retail names are filling spots. Westfield Annapolis' $100 million expansion, for instance, included the addition of Zumiez, a Washington state skateboarding store.

Emerging casual eateries had a strong presence at the retail show, said Mark Millman, a retail consultant and president of Millman Search Group Inc. in Owings Mills. These include Pinkberry, a Los Angeles frozen yogurt chain, and Chicken Kitchen, which has stores in Colorado, Florida and Texas.

"Restaurants are still aggressive in their plans," Gibbons said.

Source: Baltimore Business Journal

Vacancies Rise in Smaller Spaces

Retail vacancy rates are rising -- and smaller retail operators have been especially hard hit.

Those are among the findings of a recently released report by KeyPoint Partners LLC, a Burlington-based commercial real estate firm that tracks retail space supply. The retail vacancy rate in eastern Massachusetts rose to 6.9 percent during the 17-month period ending March 1. The last time KeyPoint released a survey was for 2006, when the vacancy rate was 6.1 percent.

Smaller space users -- retailers taking up 2,500 square feet or less, which make up a big part of the market share at 21.4 percent -- have been disproportionately affected. The vacancy rate for small space users is 9.9 percent in 2007/2008, up from 8.4 percent in 2006.

Big-box retailers and department stores taking up 200,000 square feet or more, improved occupancy rates as less than 1 percent of the large retail formats were vacant.

The disappearance of Filene's department stores, a New England institution, had little impact on that vacancy rate, as Macy's and other department stores have stepped in to fill most of the approximate 1.6 million square feet left vacant. Filene's closed six stores in eastern Massachusetts after a merger with Macy's, leaving temporary vacancies that have been mostly filled by Macy's operating divisions, including Macy's and Bloomingdale's, or demolished to make room for Nordstrom department stores. About 73,400 square feet remains vacant from the Macy's takeover.

Other nameplates that disappeared include Comp USA, Decathlon USA, Jasmine Sola, Strawberries Records & Tapes, and Alpha Omega.

Brooks Pharmacy lost the most number of stores -- 117 -- to Rite Aid Pharmacy (NYSE: RAD), which acquired Brooks in 2007. Other retailers that cut back store numbers include Curves for Women, Baskin Robbins, Work'n Gear, Movie Gallery and Applebee's.

"I think the vacancy rate is on par with the economy," said Bob Sheehan, vice president of research for KeyPoint Partners.

"I don't think we're through the fallout," he added.

Sheehan said the vacancy rates in this downturn are not as steep as the last downturn in 2001/2002, when the eastern Massachusetts vacancy rate hovered around 8.5 percent.

Just as some nameplates disappeared from the area, others grew aggressively. Rite Aid expanded into the 117 stores left by Brooks. Fitness Together grew the most by opening 30 locations; Citibank followed with 18 openings. Sleepy's Mattresses opened 16 locations for a total of 33 locations in eastern Massachusetts.

Many of the retailers new to the area were introduced through new construction and development, such as Ikea. Newly constructed retail space grew 4.5 million square feet during the 17-month report period, a large jump from the 1.9 million square feet in the 2006 report. Bass Pro Shops and L.L. Bean were among the concepts that opened in lifestyle developments, often upscale outdoor malls.

"What we're seeing is the kind of retail being developed is the kind of retail that consumers are demanding at this point and time," said Sheehan. The net absorption of the newly built 4.5 million square feet was 4.2 million square feet, an improvement from the 2006 report that shows net absorption of 1.2 million square feet on 1.9 million square feet. Patriot Place in Foxborough, Mansfield Crossing, Westwood Station, Legacy Place in Dedham, Wareham Crossing and the Natick Collection are just several lifestyle centers that have been built or are under construction.

Among regions, the highest vacancy rate belongs to Buzzard's Bay, which includes Fall River and New Bedford, showing a rate of 8.2 percent, up from 5.9 percent in 2006. Boston's vacancy rate is the second highest, yet has remained relatively flat at 8.1 percent for 2007/2008, compared to the 8 percent vacancy rate reported in 2006. The Southwest, which includes Bellingham and Wrentham, has the lowest vacancy rate at 6 percent, up from 5.8 percent rate in 2006.

Source: Boston Business Journal

Lululemon's Incoming CEO Advocates Measured Mantra

Lululemon Athletica Inc. chief executive officer-to-be Christine Day's model is one of patience.

Considering that in its first year as a public company the Canadian yoga brand's earnings more than tripled to $31 million on sales that nearly doubled to $275 million, one might suspect the plan would be to explode the 86-unit chain to the 300-store goal as quickly as possible.

But Day, who will replace Robert Meers as president, ceo and chief operating officer when he retires on June 30, is committed to sticking with the company's slow-but-steady approach to growth. Perhaps taking heed from the recent pains at Starbucks, where she worked for two decades, Day plans to keep store growth to about 35 units a year through 2012, limit wholesale to fitness studios (no big-box retailers in sight) and steer clear of paid advertising and athlete endorsements.

That is not to say the 46-year-old executive doesn't have a lot on her plate. She was brought into the company in January as executive vice president of retail operations with intentions to utilize her skill set growing doors for a public company (her most recent position at Starbucks was president of the Asia Pacific Group). Lululemon went public in July in a $327.6 million initial public offering.

Last year the company focused on entering new markets with its stores, and this year the focus shifted more to filling out existing markets, like New York and Washington. For example, New York currently has one store in Lincoln Center, but Lululemon stores are slated to open in Garden City, N.Y., next month; at Manhattan's 66th Street and Third Avenue in early August; its Union Square in mid-to-late August; Manhasset, N.Y., in September, and New York's SoHo in October — plus a showroom in the Hamptons is in the works. The firm's stores average 2,700 square feet.

"The biggest challenge is building the infrastructure to grow while protecting the branding," Day told WWD during a recent New York visit. "So many right decisions have been made. Any changes to be made are just natural consequences of being run like a family business and then a small business, like the lease terms of the early stores."

Chairman Chip Wilson founded Lululemon in Vancouver in 1998 and opened the firm's first retail door in 2000.

One of the biggest changes Day has made so far is convincing Wilson — who is still hands-on in running the company and has long been against e-commerce — to launch online direct sales in mid-2009. The Web site has added experiences such as an interactive "goal tending" section ( that make the Web site more similar to the retail experience.

"[Meers] was moving toward e-commerce, but I was able to frame it so Chip gets it," Day said. "He has this all-consuming fear that the stores won't be busy if customers can buy online, but we've grown the business enough that the two can exist together and supplement each other. E-commerce can also serve as a bellwether for what markets we should expand into by showing us where there is pent-up demand."

Day declined to project how big e-commerce could be for Lululemon, instead pointing to typical business figures in which e-commerce represents 10 percent of sales — though she added: "We have a lot of pent-up demand."

Such a differential between supply and demand typically is followed by a rush of store openings. But Day is committed to staying in the bounds of approximately 35 a year through 2012, and sticking with the yearlong community building formula the company has developed.

"Our biggest constraint is people, and I won't open a store badly," Day said. "We won't be in such a hurry that we break a great model."

The Lululemon store-opening formula works as follows: A year before the company plans to enter a new community, it opens a small showroom — typically a 1,000-square-foot space with limited retail that hosts community events. Lululemon recruits educators and a store manager to work in the showroom. From the showroom, the company reaches out to top local yoga and Pilates instructors and recruits about 10 as brand "ambassadors," whom it pays in apparel credits to wear and test the merchandise, plus hundreds more to give product feedback. In that first year, Lululemon also funds unlimited yoga classes for its educators, who can fill new classes, encouraging growth in communities. "We call it 'a thousand entrepreneurs, a million touches,'" Day said.

As a result, by the time Lululemon's store arrives in a city, most of the yoga and fitness instructors in town are loyally wearing its products, and the students in the classes have a growing interest in the brand.

Wholesale is used as a pre-branding tool that typically goes into new cities along with the showroom. There are about 1,000 of these accounts and the company adds about 150 doors a year as Lululemon enters new cities. Day plans to keep wholesale limited to yoga, Pilates and fitness studios, like Equinox in New York, avoiding mass distribution.

"We do not view big-box retail as a healthy market," Day said. "You don't have control overpricing, because if their store is doing badly, they can put your product on sale, which can train the customer to wait for a lower price point. You let your brand be defined by someone else."

That's part of the reason Day is rejecting traditional retail outlets for wholesaling. She said Lululemon will do "something else instead," but declined to specify plans.

Day is taking eight months to hammer out the rest of her corporate strategy. This week begins market analysis, looking at alternative channels of distribution, after the first month or so was dedicated to "reconfirming our core."

"It's all about understanding what drives your business," Day explained. "There are certain labor inefficiencies we don't cut out, like tagging the product in the morning, because it's key to socialization and education [of the store staffs]."

Day sees Lululemon's points of differentiation as functional yet stylish design, the fabrics, the products' quality and longevity (designed to last five years) and the retail environment, "which is a social experience first." She pointed to the big tables in the middle of the stores, which she called "a perfect mess — they make the stores' environment less intimidating and more like your best friend's kitchen."

With less than five months at Lululemon under her belt, Day already has adopted the company philosophy. For one, she wears the company dress code (all Lululemon activewear) even to her biggest meetings (the pinstripe capri yoga pants step up the business attire).

Day went through the six-week corporate training just like all the employees who have joined the company since it went public last summer. During the training, Day said she noticed "a lot of things we don't put people through, like design, that everyone needs to see to understand how we differentiate ourselves."

She also works in the stores, like all Lululemon employees are required to do. While she was working in the dressing rooms one day, a customer commented that he'd heard Lululemon had a new CEO, Day recalled, to which she replied: "Yes, I hear she's terrific."

Source: Women's Wear Daily

Pension Fund Cuts New Real Estate Money by 73%

SAN FRANCISCO-The City and County of San Francisco Employees’ Retirement System has signed off on an expected 73% reduction in its new capital investment in real estate for the next fiscal year. SFER’s real estate consultant, the Townsend Group, recommended the pension fund allocate no more than $200 million toward real estate, down from $750 million in the previous fiscal year, and invest all of it in Non-Core assets as opposed to Core assets.

“The broad real estate markets are in transition,” says Townsend Group principal Micolyn Yalonis in an executive summary of the revised investment strategy, a five-year planning document that is reviewed annually. “Re-pricing is expected but has not begun to clear within market transactions or asset valuations.”

Given that the Core portfolio is projected to be 49% at the end of 2010 and the longer-term goal is 30%, “Townsend does not recommend new Core allocations and will instead continue to focus new allocations in the non-core strategies,” states an executive summary of its real estate investment recently approved by the SFERS’ Board of Retirement. Specific strategies will be reviewed by the Board later this year.

In the Non-Core sector, Townsend says it will focus its due diligence efforts and resulting recommendations on niche strategies (e.g. non-traditional property types, unique market opportunities) and international opportunities for excess returns. More specifically, Townsend says it will look for “Value and High Return pooled funds capable of providing unique access to opportunities (property type, platform, property life cycle) and advantageous funding capabilities (pre-specified pools and/or short investment windows) to facilitate maintaining the funded status of the program.”

As part of that effort, Townsend is recommending two new commitments to Capmark Investments—a $25-million allocation to Capmark Apartment Income and Growth Fund and a $37.5-million investment in Capmark High Return Fund. In late 2006, SFERS committed $25 million and $75 million to the two funds, respectively.

Capmark and SFERS are 50-50 owners of the Apartment Income and Growth Fund, which focuses on value-add and higher-return strategies in the US apartment market, including niche products like student housing. The High Return Fund will invest in all property types and credit enhancement opportunities with a return goal of net 15% IRR to the investor.

As for the rest of this fiscal year, SFERS likely will invest $100 million less than projected ($1.27 billion) in Core investments and approximately $100 million more than projected ($486 million) in Non-Core investments, according to Townsend.

The Board also made moves earlier this year to balance its portfolio, which became overweight in Core last year after its 80% interest in AMB Partners II was transferred from the Value sector to the Core sector after that fund’s development piece had matured and the other fund assets had stabilized to the point where their returns would be lower.

To shift some of the funds back to the Value sector, SFERS decided in March to transfer its interest in AMB Partners II to AMB Institutional Alliance Fund III. The move also will give it more flexibility to liquidate its interest and shift some of its interest away from Industrial, giving the portfolio more balance in that respect as well.

Also that month the Board committed $25 million to the Fidelity Real Estate Opportunistic Income Fund LP, a new funds that will invest primarily in high yield real estate debt securities and instruments backed (directly and indirectly) by commercial property. Some of the capital will be invested in residential mortgage-backed securities and subordinated securities of real estate CDOs, according to staff and advisor memos.

Source: GlobeSt.