From WWD Issue 05/16/2011
Retail’s cash spigot has opened up again.
Fashion chains are boosting capital expenditures by tens and even hundreds of millions of dollars this year, looking beyond the questionable consumer spending outlook as they vie for market share by bolstering both online operations and old-line stores.
A WWD analysis of spending plans at 10 major retailers — from Macy’s Inc. to Limited Brands Inc. to Tiffany & Co. — shows their capital expenditures are slated to increase by about a third this year, growing by up to a total of $1.52 billion. The dollars will be used to develop e-commerce capacity with new distribution centers, spruce up stores, add outlets and, in some instances, open new full-price doors.
After two years of downturn, when chains dramatically cut spending and loaded cash onto their balance sheets, retailers and other types of companies have plenty of money to spend and lots of catching up to do. But the massive infusion of cash might say more about retailers’ confidence in themselves than their outlook on the consumer. Many companies also are spending their cash hoards on massive share-buyback plans that goose earnings per share and can benefit investors, but do nothing to grow operations.
“The forward-looking retailers are fortifying their positions for the future,” said Arnold Aronson, managing director of retail strategies at Kurt Salmon. “There’s really no room for delay when you’re competing for market share in a low-growth marketplace. You have to be fast and nimble and take advantage of every opportunity.”
Much of the spending is going toward online operations, which are the fastest growing part of the business.
Macy’s Inc.’s capital expenditures are set to increase by 58.4 percent to $800 million without a single new full-price store planned. Instead the company is gearing up to support online sales, which shot up 38.3 percent in the first quarter.
Macy’s is building a Martinsburg, W. Va., online fulfillment center that will encompass 1.3 million square feet and employ 1,200 people year-round and an additional 700 around the holidays. The company broke ground at the 92-acre site last month and plans to have it ready to ship goods to online customers in June 2012.
Terry Lundgren, chairman, president and chief executive officer, sees investment in Macy’s online business as vital.
“This is a business that thrives on unrelenting creativity and innovation,” Lundgren said in January, when the company laid out plans to hire more merchandising and marketing specialists for its online business. “Having the right talent in the right place is vital as we seek to sustain and accelerate our sales growth online, as well as in the stores.”
And retailers are also investing in their physical stores — the bread and butter of their income statements.
Kohl’s Corp., which is boosting spending by 31.4 percent to $1 billion this year, has earmarked $250 million to remodel and relocate stores and another $120 million on fixtures and store improvements. The firm is expanding its use of electronic signage, making it easier and cheaper to adjust prices.
Kohl’s is just a part of it. Gap Inc. is continuing to refurbish its Old Navy stores, and The TJX Cos. Inc. is laying out $317 million on store renovations.
“A lot of the stores that were built 10 years ago, eight years ago, need to be improved,” said Antony Karabus, retail adviser with PwC, formerly referred to as PricewaterhouseCoopers, in Toronto.
Fixing up aging stores and updating supply chains will help retailers get more out of their existing businesses.
“Most apparel retailers do not have the capabilities in-house that they need in…merchandising, product development, global sourcing, design,” Karabus said. “There’s a lot of hurry-up-and-get-the-capability.”
All of this spending, though, is coming under scrutiny of more watchful chief financial officers.
“The cfo’s are putting their personal hand on it, making sure there’s a clear accountability and [return on investment],” Karabus said.
And some still see traction in new stores, even as others, such as Charming Shoppes Inc. and The Talbots Inc., continue to trim their portfolios.
In the specialty sector, Chico’s FAS Inc. plans to add 100 to 110 stores, while Ann Inc., which operates the Ann Taylor and Loft chains, will grow its door count by 48 and Limited Brands Inc. will cut the ribbon on another 35 doors in North America. Macy’s is opening three new Bloomingdale’s outlets for fall.
When chains do expand, they’re being careful to better understand the demographics of the markets they enter.
“Retailers are asking for more information,” said Alan Shor, president and co-founder of real estate firm The Retail Connection. “They’re trying to be much more precise in their site selection.”
Companies continue to look closely at demographic information such as income, education and gender, but they are also digging deeper.
“They’re doing a better job of understanding who their customer is,” Shor said. “What is the customer buying? When is the customer buying it? Social media has [also] become much more of a factor in data mining.”
Marie Driscoll, an equity analyst at Standard & Poor’s, said retailers are “confident in themselves and their growth strategies,” not the U.S. market.
“The bulk of [spending] is either going to be international, e-commerce fulfillment and [distribution centers] and all that and then the outlet channel,” Driscoll said. “Capex includes IT expenditures, which includes maintaining your Internet presence, which is the biggest store.”
