Big Lots Decides Not to Go Through With IPO

Wall Street Journal
By Gina Chon and Anupreeta Das

Discount retail chain Big Lots Inc. has decided not to sell itself after bids from private equity firms came in below the company's expectations, people familiar with the matter said.

Big Lots had received interest from several buyout firms earlier this year, following which it decided to explore a sale, the people said. Two groups of private-equity firms—Bain Capital and TPG Capital, and Thomas H. Lee Partners and Advent International—had put in final bids for the discount retailer, they added.

But neither group was able to offer a price that met the expectations of Big Lots executives, people familiar with the matter said. The buyers weren't willing to increase their offers, partly out of concern over Big Lots' growth prospects because it hasn't performed as well as dollar stores as the economy stabilized, the people said.

Big Lots representatives couldn't immediately be reached for comment.

While financing terms are still attractive for buyout firms and they need to put their cash to work, private equity executives have said sale prices for many companies have become too expensive and they don't want to overpay for an asset.

Big Lots shares closed at $37.74 Wednesday, giving it a market capitalization of $2.8 billion. Some Big Lots investors hoped the company could sell for a price in the mid $40s a share, and some analysts expected an even higher sale price.

The company's shares have risen roughly 35% since news emerged of a potential sale in February. But in recent days, the stock had given up some of those gains as investors grew discouraged that a deal might be reached.

Big Lots first quarter sales for 2011 totaled $1.2 billion, a drop of 0.5% from the first quarter of 2010. Big Lots Chief Executive Steve Fishman attributed the decrease in sales to the bad winter weather and noted that stores in the southern region performed well.

Founded in 1967, Columbus, Ohio-based Big Lots sells a variety of products —from cans of tuna to furniture to Christmas décor—through more than 1,400 stores around the country. The closeout retailer competes with discounters such as Wal-Mart Stores Inc. and Family Dollar Stores Inc. for bargain-hunting customers.

Other discount stores, such as 99 Cents Only Stores Inc. and Family Dollar, have also attracted the attention of potential suitors. Leonard Green Partners made a $1.3 billion bid for 99 Cents while activist investor Nelson Peltz's Trian fund Management LP put in a more than $7 billion bid for Family Dollar, which was rejected.

Syms, Filene's Basement Post 4th Quarter and 2010 Losses

Off-price retailer Syms Corp, operator of the Syms and Filene’s Basement stores, has posted fourth quarter and full-year losses which it blames on restructuring-related costs and lack of growth in same-store sales.

For the quarter to February 26, losses widened to $17.8 million from $7.4 million, as sales fell 13% to $100.9 million. Same-store sales decreased 7%.

For the fiscal year the company swung to a net loss of $32.9 million from a profit of $8.3 million a year earlier. Net sales rose 18% to $445.1 million while comparable store sales were flat for the year.

Off-Price Booms as Overstock Supply Shrinks

The off-price market has been booming throughout the recession and recovery. But just as demand for off-price merchandise is skyrocketing, the supply of it is becoming scarce in America.

“It’s rarely been like this, where merchandise is so tough to get,” said David Lapidos, a career off-pricer and executive vice president of the OffPrice Show, the leading American trade event producer for the off-price market. Off-price fashions are typically produced by manufacturers and retailers seeking to liquidate extra inventory, and they have been typically sold at a discount of 20 percent to 70 percent off of full-price retail.

The off-price market has increased because consumers are looking for the lowest prices in every category in a still-sluggish economy, and many retailers are vying to give the public the lowest prices.

Americans spent $18 billion on off-price clothes in the 12 months ending in February 2011; it is a 1.5 percent increase from the previous 12 months, according to The NPDGroup Inc. /Consumer Tracking Service. Off-price retail accounts for more than 9 percent of the American apparel market.

The disparity between supply and demand in the off-price market has forced off-pricers to scramble to look for new sources—even venturing offshore. And many are prospecting for new businesses to make up for the shrinking supply of close-out goods.

The present market followed a feast for off-price, said Jacques Stambouli, chief executive of Via Trading, a liquidator based in Lynwood, Calif.

“There was a ton of inventory on the market,” Stambouli said of the years immediately preceding and following the Great Recession of 2008. “But they got flushed out of the system in the past few months. There were not many close-outs.” Via Trading’s sales were $25 million in 2010, and Stambouli forecast 20 percent growth in 2011. The company not only deals in offprice with clothes but also in tools, furniture and electronics.

Via Trading’s forecast reflects increased sales in its all of its categories, not just apparel.

Tony Peters also witnessed a big drop in available merchandise at his job as vice president of sales of Bermo Enterprises, a retailer based in Schoolcraft, Mich., that runs 40 stores in the Midwest.

In 2007, his team of buyers typically wrote more than 60 orders on their buying trips to New York. Now the buyers place 25 orders and less, he said. “It means that you have to find stuff by non-traditional methods,” he said.

Trouble started in the off-price market as a result of the rest of the apparel industry trying to stop a hemorrhage of red ink during the recession. Manufacturers and retailers slashed their inventory during the recession as a means to cut costs. These businesses have continued to control costs by keeping their inventories lean, which means less possibilities of overstock and close-outs.

Off-price wholesale also has been affected by rising prices for cotton and fuel, said Doron Kadosh, president of American Fusion, a Los Angeles company that has been supplying off-price apparel to retailers since 1993. If manufacturing costs are going up, prices for close-outs will increase.

“Off-price is a reactionary market,” he said.

However, it is hard to gauge how much prices are increasing, Lapidos said. Offprice wholesalers have struggled to keep prices down to remain attractive to retailers looking for a rock-bottom price. The clash between increasing prices in many categories and safeguarding a reputation for low prices is squeezing many in the off-price market. “If they let costs run rampant, they will not have a business,” Lapidos said.

New business, new models

For off-pricers seeking to satisfy growing demand, their search for merchandise increasingly takes them overseas, Lapidos said. Off-pricers typically visited Asia once or twice annually to buy close-out goods. Recently, they have been scheduling more than four trips each year to Asia to go where the goods are.

“Most are going to China,” Lapidos said. “There’s a colossal amount of merchandise there.” But there are costs to finding the cheaper stuff. The increased travel has driven up the cost of doing business.

Many off-pricers sought to protect themselves by diversifying their business.

Since 2010, the OffPrice Show has been building up its footwear, lingerie and accessories vendors. For the August 2011 show, scheduled to run in Las Vegas, footwear booths are forecast to double, to more than 80, compared with the February 2010 OffPrice show.

American Fusion created a new fashion market for its off-price clothes. For years, the company has purchased overstock and close-out blank T-shirts. In recent years, the company has been embellishing overstock and close-out blanks with sequins or new graphics for an additional $0.50 to $1.75 per piece. “It turns a basic item into a fashion item, and retailers are still able to sell them at a discount price,” Kadosh said.

Bermo Enterprises got into the licensing business to make up for the tougher market for off-price. Last year, Bermo debuted a clothing label for Farmall, a tractor line with considerable brand equity in the Midwest. Sales are good, Peters said. He forecast licensed apparel will be 25 percent of Bermo’s business by the end of 2013.

Peters forecast the off-price business will get tougher. “The amount of desirable available product will continue to decrease, meaning that not everyone will find enough to satisfy their needs,” he said.

Lapidos agreed the off-price market is experiencing tough times. But it is not unprecedented. He remembered a similar time, in the early 1980s, when merchandise seemed scarce. “Maybe it is going through a 20-to- 25-year cycle,” he said.

A strengthening economy means more manufacturing production, said Marshal Cohen, chief industry analyst for The NPD Group. “There will be no shortage of product,”said. “The bigger issue is more and more brands are opening their own outlet stores, and [those stores] will compete with off pricers and deplete some inventory opportunities.”

Meanwhile, the biggest off-price retailers— Ross Stores Inc. and TJX Companies Inc., operator of TJ Maxx and Marshalls stores—forecast they will have no trouble in finding overstock and close-out merchandise for their fleet of stores located across America.

In the latest Securities and Exchange Commission document reported by Pleasanton, Calif.–based Ross, the retailer noted it maintains a network of 7,800 merchandise vendors who work with their Ross Dress for Less and dd’s Discounts divisions. “We have not experienced any difficulty in obtaining sufficient merchandise inventory,” Ross reported in its 10K published March 11.

In a March 17 statement, Michael Balmuth, Ross’ chief executive, credited his company’s success to a “favorable position as a value retailer as well as the efficient execution of our off-price strategies.”

The company runs a fleet of 968 Ross Dress for Less and 67 dd’s Discounts, which will offer lower prices than Ross Dress for Less. 67 dd’s Discounts is the division for families with incomes more modest than the middle-class customers who shop for offprice deals at Ross Dress for Less. The recent report did not quantify how many new stores it will open this year. However, the report said opportunities were best with dd’s Discounts, which offers lower prices than Ross Dress for Less.

Even in Recovery, Discount Retailers Can Shine

Barron's
By Teresa Rivas

Michael Niemira, a veteran retail-industry observer, thinks that lower-end chains can benefit from "lingering weakness in pockets of the economy."

In the past year, stocks in the U.S. have risen along with a slowly expanding economy.

But with rising energy prices and slow job growth, some may worry that consumers are still feeling as strapped as ever.

Michael Niemira, chief economist and director of research for the International Council of Shopping Centers, sees consumers as quite resilient despite rising gasoline prices and other recent headwinds. However, he notes that there are still some dark clouds on the horizon.

Below are excerpts from his Barrons.com interview.

Barrons.com: The year 2011 began strong, but consumer sentiment tumbled last month. Where do you see the consumer today?

Niemira: The U.S. economy has been in recovery for what is coming on two years. Hence as this year rolled in, some of the economic momentum from the recovery in business equipment spending and even inventory rebuilding was cascading through the economy and igniting the job recovery slightly. Consumer spending, too, was improving and the economy had moved—with no fanfare—from "recovery" to "expansion." By the fourth quarter of 2010, real GDP had surpassed its previous high at the start of the recession.

At the same time, the housing markets—new and existing sales—remained depressed and state and local governments were and continue to slash spending and/or increase taxes to balance budgets.

On the policy side, interest rates remained exceedingly low—helping the stock market's recovery—and workers got a 2011 bonus with the payroll tax reduction that is worth a little over $100 billion this year.

So, both consumer optimism and business optimism were returning slowly as the economy was mending. But economic cross winds have been intensifying recently with new worries and drags developing on the consumers' discretionary spending power with rapidly rising energy and food prices and other costs. Indeed, the March dip in consumer confidence was largely because consumers were spooked by the potential of higher inflation. Although consumers were modestly more upbeat on current conditions, their expectation for the next six months were considerably less optimistic in March. A key reason for this increased worry is inflation. Consumers—who are not necessarily good forecasters—expect that the average inflation rate will rise dramatically over the next year.

All things considered, however, the consumer is still doing well, even as some dark clouds are forming.

Q: How have higher energy prices affected the consumer?

A: Energy prices—and food too—are rising. However, at the moment, those commodity price pressures are more of a worry for the economy than anything else. The payroll tax reduction this year and the pickup in hiring are much more important and significant than the higher-price impacts that consumers are facing. Consumer spending—theory suggests and empirical evidence shows—is primarily driven by income. Moreover, looking at the year-over-year gap between earnings and gasoline expenditures provides that perspective. Average weekly earnings have risen by $19 over the last year through February, while gasoline expenditures have risen by about $9 per week over the same month of last year. Although that is not a great situation, income is still winning out. If you were to go back to July 2008, income was up $18 (on a year-over-year basis) while gasoline expenditures were up slightly more than that! At that point in time, rising gasoline prices were far more problematic for the consumer, because of the rate of change relative to income. That income-gasoline expenditure gap also was very problematic for the consumer even at the turn of 2010, when gasoline expenditures were eating up all of the gain that workers were seeing in their weekly earnings, but that negative gap was soon reversed as income started to accelerate, even as gasoline prices glided gently higher through 2010.

Thus, negative drag from higher energy prices cannot be assessed without understanding the context, and in that regard the current situation does not look as dire as the headlines on rising gasoline prices would seem. Nonetheless, there are plenty of reasons to worry beyond today, if income and job growth do not march upward faster than the drag from energy prices and other consumer costs.

Q: How do you see higher-income consumers faring versus others?

A: High-income households typically are more steady and resilient consumers in good times and bad, relative to other income classes. However, the last recession had a very pronounced negative impact on high-income spending—unusually so—and spending among these households also bounced back the strongest. Last October, the Bureau of Labor Statistics reported that 2009 annual spending per consumer fell from the prior year for the first time since those data were compiled back to 1984. A look at those statistics tells an interest story: The top 20% of all households by income account for a nearly 40% of all consumer spending. So, the high-end spending is vital to the economy and the retail sector. Even the second-highest quintile of income accounts for a larger consumption share (23%) than its income share. But it is also extremely important to realize that in 2009 not only did annual spending per consumer fall, but it fell across every income quintile—which never occurred before in the history of those data. So, generally the most insulated income segment of the economy—high-end income households—cut spending! This had a major impact on luxury spending, which was very hard hit during the recession.

We have seen that the luxury spending has rebounded the strongest of any retail segment, which is very likely because high-income households had so much pent-up demand during the recession which needed to be satisfied and they had the wherewithal to spend. On the other hand, the lower-end retailer—such as dollar stores—continues to benefit from some of the lingering weakness in pockets of the economy.

Q: What trends do you expect to see playing out in the retail space?

A: At the end of 2009, I believed that 2010 would be the year of the luxury retailer—which seemingly was borne out. At the end of last year, I predicted that this year would be the year of the discounter. Seemed strange, but the factors, I believed, were in place for that sector's upturn. That sector, largely because of Wal-Mart, has struggled, but I argued that the payroll tax reduction would help that segment's customer base most. It would not necessarily mean more people would flock to discounters, but the customer base would have more discretionary-spending power (this is true of improving employment too). Those conditions are largely true still, even as the sector seemingly is still struggling. However, I continue to hold to that view that the higher food prices are still likely to help discounters that have higher food content in their merchandise mix and more income will mean an increased spending basket at the discounters. The sales performance of mid-tier retailers is uneven and that is the next shift as employment continues to improve the bi-modal spending strength at the low-end and high-end retailers ultimately will converge towards the middle.

Q: Thanks.

Family Dollar's Profit Rises 9.8%

Wall Street Journal
By Matt Jarzemsky

Family Dollar Stores Inc.'s fiscal-second-quarter profit rose 9.8% as the retailer benefited from sales growth and continued expansion.

For the quarter ended Feb. 26, Family Dollar reported a profit of $123.2 million, or 98 cents a share, up from $112.2 million, or 81 cents, a year earlier.

Earlier this month, the Charlotte, N.C., dollar-store chain said sales rose 8.3% to $2.26 billion. Same-store sales climbed 5.1% because of higher customer traffic and a "modest" increase in the average transaction value.

The company raised the low end of its current-year earnings expectations by five cents and is now projecting $3.13 to $3.23 a share. For the current quarter, it expects a profit of 92 cents to 97 cents, compared with the Thomson Reuters estimate of 94 cents.

Family Dollar and its competitors benefited from the economic downturn as consumers sought value. The company has received a lift from store additions, beefed-up private-label offerings and more branded merchandise. Spring-like weather in February helped the latest quarter's sales, following winter storms the previous month.

Family Dollar this month spurned billionaire Nelson Peltz's buyout interest and said the activists investor's roughly $7 billion offer undervalued the company.

Family Dollar operated 6,888 stores as of the end of the quarter, up from 6,655 a year earlier.

Obituary: Daffy’s Founder Irving Shulman

MRketplace

Irving Shulman, who founded the New Jersey-based off-price Daffy’s chain in 1961, has died. He was 96.

Shulman opened his first Daffy’s store fifty years ago as Daffy Dan’s Bargain Town in Elizabeth, New Jersey. “He was basically a one-man show,” said daughter Marcia Wilson, Daffy’s chairman. “On weekends and during school vacations he would bring my brothers and me to work, sharing his love of the business.” In those early years, Shulman made trips to find goods in the garment district in the beginning of the week and put it on sale by the end of the week. He only retired from Daffy’s in December last year.

Today, Daffy’s has 17 stores and a Florence, Italy buying office. The retailer, which hired former Holt Renfrew boss Caryn Lerner as its new CEO earlier this month, said it’s scheduled to open new stores in Times Square and the Bronx later in the year.

Shulman was known for his creative marketing tactics. Daffy’s representatives recalled Shulman selling silver dollars for 88 cents. Another time, he put a mannequin on a store roof, posed as if about to leap off.

Shulman was married for 58 years to Shirley Weinstock, who died in 2000. He is survived by his daughter, Marcia Wilson; sons, Robert Shulman and Michael Shulman; eight grandchildren and two great-grandchildren. A funeral service was held on Sunday, March 27 in New York City.

Leonard Green Considers BJ's Wholesale Deal

Private-equity firm Leonard Green & Partners LP is looking into buying BJ's Wholesale Club Inc. and has entered into a confidentiality agreement to conduct due diligence.

A purchase would make BJ's, which sells its merchandise through membership-only clubs, a private company, the latest in a string of retail buyouts.

A regulatory filing March 21 outlined a confidentiality agreement—a private exchange between the two entities—in which BJ's said it would provide Leonard Green material to use in "evaluating a potential acquisition of the company."

It has been reported that Leonard Green was interested in buying the company, in which it already holds a 9.3% stake. BJ's couldn't be reached Tuesday morning. The company has indicated it doesn't plan to supply updates or make statements about what is going on unless a definitive move is recommended by a committee of independent directors or the process ends.

Private-equity interest in the retail sector has picked up recently, and Leonard Green has been an especially busy player. The Los Angeles buyout firm first reported its stake in BJ's last July, saying it intended to approach the company about going private; recently reached deals for fabric and crafts retailer Jo-Ann Stores Inc. and partnered with TPG Capital on its buyout of J. Crew Group Inc. The J. Crew deal, for $43.50 a share, or $3 billion, was at a 16% premium to where shares were just before the deal was announced.

Leonard Green also recently made an offer to buy 99 Cents Only Stores. That offer was at a 14.4% premium to shares' closing price the day before.

BJ's would likely fetch a percentage premium in the teens as well, analysts say, with the stock trading between roughly $40 and $50 for the past nine months.

Earlier this month, BJ's said its fiscal fourth-quarter profit dropped 81%, hurt by charges related to store closings, though revenue increased. Membership clubs have been reporting growth of late as customers look for deals.

Dollar General Profits Jump

by Evan Clark
Posted Tuesday March 22, 2011
From WWD.COM

Dollar General Corp., which boosted fourth-quarter profits by more than 150 percent, plans to continue to pick up market share this year as consumers hunt for bargains.

Fourth-quarter earnings increased to $222.5 million, or 64 cents a diluted share, from $87.2 million, or 26 cents, a year earlier. Sales for the quarter ended Jan. 28 rose 9.4 percent to $3.49 billion from $3.19 billion on a 3.8 percent rise in same-store sales.

Adjusted earnings of 65 cents a share topped analyst estimates by 6 cents.

The Goodlettsville, Tenn.-based chain, which already has 9,372 stores across 35 states, plans to open another 625 doors this year.

"We are off to a strong start in 2011," said Rick Dreiling, chairman and chief executive officer. "Even in a challenging macroeconomic environment, we expect to deliver strong financial performance in 2011, including top-line growth of 11 to 13 percent and same-store sales growth of 3 to 5 percent.”

This year, adjusted earnings are slated to rise to $2.20 to $2.30 a diluted share, ahead of the $2.14 analysts projected.