Bon-Ton and Sears Post 1st Quarter Losses

by Evan Clark
From WWD Issue 05/20/2011

Sears Holdings Corp.’s $170 million first-quarter loss Thursday reinforced the year’s financial theme thus far: chains catering to lower-income consumers are struggling to gain traction as higher food and gas prices drain away dollars for discretionary purchases.

While the budget-minded Sears Holdings reported its loss, midtier off-pricer Ross Stores Inc. boosted profits by 21.5 percent. But regional department store firm The Bon-Ton Stores Inc. was not able to catch the magic that drove shoppers to Macy’s Inc. and Dillard’s Inc. during the quarter and posted a higher loss.

Shares of Sears fell 2.6 percent to $73.86 Thursday, as Ross dropped 1.3 percent to $80.78 and Bon-Ton declined 3.1 percent to $10.81.

Lou D’Ambrosio, Sears’ president and chief executive officer since February, said the company “fell short on executing with excellence.”

D’Ambrosio said under his watch, “Everything will begin and end with the consumer experience.”

“We agree, which is why we have an underperform” rating on the stock, said Credit Suisse analyst Gary Balter. The analyst gave D’Ambrosio’s appointment the thumbs up, but made clear how much work the chain still has to do.

“The service experience at Sears domestic and Kmart is about the worst of any retailer in America today, with many stores understaffed, except in appliances at Sears; signage poor; cash registers closed; in-stock inconsistent, and pricing at Kmart uncompetitive,” Balter said.

The $170 million loss attributable to Sears translated to $1.58 a diluted share, and compared with earnings of $16 million, or 14 cents, a year earlier. Adjusted losses of $1.39 a share came in 17 cents worse than analysts expected.

Revenues slipped 3.4 percent to $9.71 billion from $10.05 billion as U.S. comparable-store sales fell 3.6 percent. Sears is trying to both revitalize its apparel business and reduce the space it devotes to the segment.

Ross, which courts department and specialty store customers with branded offerings at lower prices, drove first-quarter profits up 21.5 percent to $173 million, or $1.48 a diluted share, from $142.3 million, or $1.16, a year earlier. Profits came in 1 cent ahead of analysts’ estimates. Sales for the quarter rose 7.2 percent to $2.07 billion from $1.93 billion on a 3 percent comp gain.

Ross ended the quarter with inventories up 29.1 percent over a year earlier and has a business model that allows it to bide its time with those goods as full-price chains try to raise their own prices to counter higher cotton and labor costs.

“The one thing that isn’t clear is how this will all play out,” said Michael Balmuth, vice chairman and ceo of Ross. “Typically changes of pricing like this are a disruption in the industry and in the past it’s been good for off-price.”

At Bon-Ton, first-quarter losses widened to $36 million, or $2.01 a diluted share, from $23.5 million, or $1.33, a year earlier. Adjusted losses of $1.48 a share were 6 cents worse than analysts expected. Revenues fell 1.6 percent to $664.5 million from $675.2 million on a 1.2 percent comp drop.

The first quarter ended April 30 for all three companies.

Retailers Fall Short as Shoppers Cut Back

New York Times
By Bloomberg News
Published: May 19, 2011

Falling sales and rising costs have an effect on the first quarter for Sears and Gap,

Although The New York Times is charging for some of their content, readers coming through links from search engines, blogs and LinkedIn will be able to read any article without restriction.
Click here to read the entire article at www.nytimes.com:
Retailers Fall Short as Shoppers Cut Back

Sears Has Another Huge Loss

Wall Street Journal
By Matt Jarzemsky

Sears Holdings Corp. swung to a loss for its fiscal first quarter on continued weak sales.

"Unfavorable weather, economic pressures facing our customers, and comparisons to last year's government-sponsored stimulus program relating to the purchase of appliances," hurt the latest results, President and Chief Executive Lou D'Ambrosio said in a prepared statement.

The department-store operator has suffered with lower same-store sales at its namesake stores, though its Kmart chain has generally performed better. Its earnings have slumped amid reduced revenue in recent quarters. Sears recently forecast a big loss for the latest period.

Sears reported a loss of $170 million, or $1.58 a share, for the quarter ended April 30. A year earlier, it posted a profit of $16 million, or 14 cents a share. Excluding items such as mark-to-market losses and domestic pension expenses, the company posted a loss of $1.39, compared with a year-earlier profit of 16 cents. Sears had predicted a loss of $1.35 to $1.81 a share for the latest quarter.

Revenue fell 3.4% to $9.71 billion.

Gross margin slid to 26.8% from 28.2% amid the introduction of instant free delivery at the Sears in the U.S. and increased markdowns at Sears Canada. Merchandise inventories were $9.9 billion at the end of the quarter, up from $9.3 billion.

The company said earlier this month domestic same-store sales fell 3.6% overall, including declines of 5.2% at Sears and 1.6% at Kmart.

Sears -- Where America DOESN'T Shop

Life Not So Well Spent At Sears and Kmart

Fortune
By Kit R. Roane

Eddie Lampert has long been known as a value-investing wizard. So why has he sucked the life out of Sears?

Things have been so bad for so long at Sears Holdings Corporation, which includes the iconic brands Sears and Kmart, that shareholders could be forgiven for doing a double-take when The Wall Street Journal came out last week with Lampert's latest mea culpa, under the headline "Tears for Sears," a line that has been recycled by the Journal and others almost as often as Lampert has delivered mea culpas.

Watching the company's performance under Lampert is even more vexing considering how his laser focus and tough love have worked wonders at other holdings, such as AutoZone. The management at Gap Inc. is probably shaking in their summer shoes wondering which Lampert will be visited upon them now that he's acquired a 5.6% stake there.

They better hope it's not the dark lord laying waste to Sears, whose marketing tagline about the joys of shopping there -- "Life Well Spent" -- seems increasingly ironic. Investors have Sears' earnings to look forward to next week. But they've already been given the wind-up: same-store domestic sales have declined 3.6% in stores open at least a year, and an expected profit for the April quarter is turning into a loss of between $1.35 and $1.81 a share. Although Lampert says that continuing unemployment and other macro issues hurt Sears' performance, he admits, "In many of our businesses, even in a tougher environment, we ought to be doing a lot better."

Few would disagree. Gary Balter, an analyst for Credit Suisse, was blunt in his response, telling clients that the results signal "increasingly dire prospects for Sears."

Sears and Kmart were struggling well before Lampert took control of the chains. The rise of Wal-Mart, Target, Home Depot, Lowe's, Best Buy, and most recently Amazon, were making them competitively irrelevant. The problem is that, under Lampert, retail performance at the combined companies appears to have gotten worse.

Last week, Sears' new CEO, Lou D'Ambrosio, outlined what the company calls a "high-level plan" for improving performance. The former tech company executive, who has no retail experience, will be focused on leveraging Sears' "underleveraged brands and assets," according to Kimberly Freely, a Sears spokesperson who responded via email. And "[m]ost importantly, providing an extraordinary customer experience in store, online and at home!"

There's no time like the present to get moving on improving that experience. But it's hard to see the company's latest promises as a eureka moment sure to pull Sears out of its retail tailspin.

While many things have been re-tooled in the past (CEOs and chief marketing officers, to name two) and other changes are being floated (most recently finding a new home state that might offer Illinois-based Sears a cheaper tax deal), Lampert still seems more interested in juicing per-share earnings through stock buybacks (another one was just announced) than he is in rebuilding his brands, particularly the once-storied Sears.

"There's the occasional blip -- Eddie Bauer, Sears Blue Crew, new Kmart fashion brands -- but that's about it," says Wendy Liebmann, CEO of the consultancy WSL/Strategic Retail. "If not for Kenmore, one wonders where the business would be at all."

Steve Hoch, a marketing professor at the University of Pennsylvania's Wharton School, is even less charitable. Asked about Sears Holdings, Hoch pauses for a second, then says, "What an atrocity that is, just unbelievable. The stores look like they are from the Eastern Bloc."

In Hoch's view, Lampert made a crucial miscalculation by treating Sears and Kmart, which were merged together in 2005, as distressed real-estate plays instead of extremely challenged retailers that would need to expand in order to survive. "He thought he could basically squeeze blood from a stone," says Hoch, noting that Lampert has raised prices and reduced spending in order to increase current profits at the expense of future growth.

"The investment thesis for retail is very simple. It is one word and one word only: growth." He adds, "The people who have made money in retailing all have a growth story."

For example, when KKR bought Dollar General in 2007, they spruced it up, gave the stores a new look, brought in retail veterans and invested in the company's private label program. Then, after an ambitious expansion, they took it public in 2009. Growth remains the name of the game, and retailers being targeted by private equity players and hedge funds tend to have a good niche, a good story and room to expand.

There's plenty of activity brewing in the retail space, it's just passing Sears by. Tween Brands was bought by Apollo Capital Management for $157 million in 2009. Gymboree was taken private by Bain Capital in a $1.8 billion deal last October. This March, TPG Capital took J. Crew private for a second time (the private equity shop previously took over J. Crew in 1997, and made a killing when it later sold its shares to the public in 2009). Several retailers, including Limited Brands and Ross Stores, made it on UBS's buyout target list last month.

Lampert was reportedly interested in J. Crew as well, but investors have most recently focused on the February disclosure that he's nibbling on the Gap, which includes brands such as Banana Republic and Old Navy. The retailer's stock shot up more than 5% on the news, then quickly fell last week after the company reported disappointing February same-store sales.

The hedge fund guru hasn't laid his icy finger on Gap yet, so it's hard to blame him for that retailer's problems. But Lampert's interest may mean he still hasn't learned much from the Sears' disaster. Sure there might be value in Gap, but where's the growth? As Hoch puts it succinctly, "there are too many Gaps already."

Sears Sales Of Web Pornography -- Deliberate?

Wall Street Journal
By Miguel Bustillo

Sears Holdings Corp. has apologized to customers after a religious group discovered that pornographic movies could be purchased by minors and others through the Sears.com website.

The family-oriented department-store chain said the videos violated its standards for online merchandise and are no longer being offered for sale.

A Sears spokesman claimed that the postings -- involving titles with names such as "My Craftsman Power Tool" -- were "in error" and not an attempt to boost flagging sales at the struggling department store chain.

The gaffe underscores the challenges traditional retail chains face as they try to expand online selections to counter the rise of Amazon.com Inc.

Sears Holdings, the parent of Sears and Kmart stores, lets other companies sell products through its website in exchange for a slice of the proceeds. That strategy accounts for roughly a third of Amazon's revenue, and store chains including Wal-Mart Stores Inc. and Best Buy Co. are also attempting to replicate it.

Sears attributed the sale of the sexually explicit DVDs to a mistake by a vendor partner whom it declined to name.

"We have a very clear policy that states the types of products we are not willing to sell. It includes pornography in every form," Sears's online president, Imran Jooma, said. The policy also prohibits offering human remains, live animals, firewood and lottery tickets.

Sears said it doesn't monitor every item offered for sale via Sears.com but instead employs computer scans and manual keyword searches to ferret out violations of its guidelines.

Online-only sellers like Amazon have also attracted criticism for some of the products among their vast offerings. Amazon removed the e-book "Pedophile's Guide to Love & Pleasure" last November amid boycott threats.

Sears Holdings, whose sales have declined every year since hedge-fund investor Edward S. Lampert combined Sears and Kmart in 2005, is aggressively transforming itself into an online retailer to try to end its decades-long slide. But it warned earlier this month that it will report weak first-quarter earnings May 19. It blamed declines in comparable-store sales of 1.6% at Kmart stores and 5.2% at Sears stores, which more than offset a 22.4% increase in online sales.

The Sears porn movies were first discovered by the American Family Association, a nonprofit Christian group. Randy Sharp, the director of special projects, said the group began complaining to Sears in August, after it found posters it deemed sexually explicit for sale on Sears.com.

Mr. Sharp said the group later spotted actual porn videos on the site and ordered some of them to confirm the contents. After it complained to Sears, it received form-letter denials.

But Sears took action last Friday, Mr. Sharp said, after he showed that hundreds of such movies could be purchased on the website by searching for "mature" film. According to Mr. Sharp, "There were a few seconds of awkward silence" before the official said, "Oh, we didn't know that was there." The movies were then removed from the site within minutes, Mr. Sharp said.

Tears for Sears

Wall Street Journal
By John Jannarone

At the end of this year's annual letter, Sears Holdings Chairman Edward Lampert thanked shareholders for their "patience and trust." Unfortunately, they may need a lot more of it.

Sears shares fell 9.9% Tuesday on a first-quarter update. The retailer, which includes the Sears and Kmart brands, saw sales at domestic stores open at least a year decline 3.6%. While worse than consensus expectations for department stores Kohl's and J.C. Penney, it is hardly a change of pace. Domestic same-store sales at the Sears brand have declined every year in the past decade.

The bigger worry is that sales declines are preventing Sears from turning a profit. The company expects to lose between $1.35 and $1.81 a share in the April quarter, against previous consensus estimates of a three-cent profit.

Since taking over in 2005, Mr. Lampert has tried to reduce expenses. That helps compensate for weaker sales, and the company continues to buy back shares. But the strategy has likely made shopping at Sears less appealing and prevented the company from joining the sales recovery alongside rivals.

A rare bright spot for Sears is a 22.4% increase in online sales during the quarter. Yet that only added 0.5 percentage point to the domestic same-store sales figure.

Unless Sears comes through with a bumper Christmas, even Mr. Lampert's remaining disciples will have their faith tested.

Sears Eyes Apparel Rejig

by Denise Power
From WWD Issue 05/04/2011

Even as Sears Holdings Corp. aims to lure back apparel shoppers, the retail behemoth wants to scale back the space devoted to the category.

“We have, in my opinion, way too much space for the amount of apparel business we do,” Sears chairman Edward S. Lampert told shareholders Tuesday at the firm’s annual general meeting at its headquarters here. “We have a lot of space dedicated to apparel that’s been underutilized for too long. No matter how good our apparel people do, we cannot get to the level of productivity we should be at simply by working harder. It is incumbent on us to repurpose that space.

“We are in the best malls in the U.S.,” he added. “If we want our customers and the community to shop at our end of the mall, then we need to have the brands they want to shop for. If they don’t want to buy what we sell, or buy enough of what we sell and there are other companies that can fit in and do it better, why shouldn’t we partner with them (on leases). We think we can partner with a whole lot of companies.”

Recognizing it strayed from traditional apparel shoppers “too quickly” last year, according to president and chief executive officer Lou D’Ambrosio, Sears is aiming to win them back and broaden its base with new brands in the year ahead.

The Kardashian Kollection, due in Sears stores this August, will appeal to a “whole new audience,” D’Ambrosio told shareholders. He said the social media force of celebrity sisters Kim, Kourtney and Khloé will inform the chain about new ways to engage shoppers.

The ceo, who joined Sears on Feb. 23, conceded that there had been some “hiccups along the way” as the company assembled its apparel team in San Francisco under John Goodman, executive vice president of apparel and home. Now, with the group in place, “we have very high expectations for what that business is going to generate for this company,” he added.

Specific apparel missteps D’Ambrosio cited at a briefing that followed the two-and-a-half-hour meeting included the neglect of traditional brands, failure to take markdowns in a timely fashion and too much inventory in Kmart stores. Merchandise inventories rose to $9.1 billion for the year ended Jan. 29, up from $8.7 billion a year earlier.

“We became too focused on the new buyer with the new lines,” such as Kardashian Kollection, aimed at 17- to 35-year-old women, and the edgy UK Style by French Connection launched in March, D’Ambrosio said. Sears will be reinvesting in its traditional Laura Scott apparel brand for working women, he added.

Sears has lease agreements with Forever 21, expected to move soon into Sears’ 43,000-square-foot space at South Coast Plaza in Costa Mesa, Calif., and an agreement with Whole Foods, which will take over 34,000 square feet of space in Greensboro, N.C., next year.

Sears Issues Q1 Outlook

by David Moin
From WWD Issue 05/03/2011

Sears Holdings Corp. reported Monday that for the first fiscal quarter ended April 30, domestic comparable-store sales declined 3.6 percent and that a net loss for the first quarter of between $145 million and $195 million, or between $1.35 and $1.81 per diluted share, is expected.

Kmart’s comps sales were down 1.6 percent; Sears’ fell 5.2 percent.

Appliances had the sharpest declines, while apparel experienced slow spring-summer sales due to weather that was worse than last year. However, home, sporting goods, jewelry and footwear categories continued to generate sales growth, Sears said. In the quarter, the company started including sears.com and kmart.com results in its comparable-store figures for the first time. Internet sales on sears.com and kmart.com items shipped directly to customers (as opposed to picked up in store) increased 22.4 percent.

Sears Canada expects to report a comparable-store sales decline of 9.2 percent for the quarter. Sears, which holds it annual meeting today, also said its board approved the repurchase of up to $500 million of the common shares, in addition to the $86 million worth of shares available for repurchase under the existing program.

Unhappy With Sears' Service? Please Do Not Threaten To Blow Up The Store

The Consumerist
By Chris Morran

No explosions, please.

We've probably all been driven to the point of anger by horrendous customer service. Some of us have probably even said things in the heat of this anger that we didn't mean. But in a day and age when taking a photo on a plane is considered suspicious activity, you can't just go threatening to blow up a Sears because you're ticked off. But that's exactly how the police ended up at the house of an 80-year-old California man over the weekend.

According to police, the man had called Sears to complain about some repair service he'd received when he was transferred to a Florida call center. This apparently pushed him too far into the red.

"He made a comment about bombing the Laguna Hills Sears store," and Orange County Sheriff's Sergeant told the OC Register. "He thought he was getting the runaround."

After police questioned the man at his house, he admitted to making the threat. Authorities determined that he hadn't intended on making the Sears go boom, so no arrest was made.

One could imagine this story could have ended differently if the customer wasn't 80 years old or if the police hadn't exhibited common sense. So remember: The next time you're at the explosion-threatening point of your customer service nightmare, make it a perfectly safe and legal executive email carpet bomb. (But really, just refrain from using the term "bomb" whenever you're talking to customer service.)

Haggar's Two-Pronged Growth Plan

by Jean E. Palmieri
From WWD Issue 04/14/2011

Haggar Corp. has some big plans for the fourth quarter, when it will unveil a dual-pronged product launch that will significantly expand its position within the nation’s department stores.

First up is Life Khaki, a new, higher-priced line of men’s khaki pants designed to appeal to a younger customer. In addition, the Dallas-based manufacturer will launch Haggar Heritage, an exclusive collection for Macy’s that will bolster the store’s dress pant assortment. Both labels will be introduced at the end of the year and roll out in 2012.

“This is a great opportunity to broaden the core Haggar brand and expand into square footage we’ll never occupy with our core Haggar product,” said Tim Lyons, president of sales for Haggar Menswear.

These initiatives come two years after Paul Buxbaum took the helm as chief executive officer of the firm. Buxbaum, whose experience has been in liquidation and restructuring of distressed companies, stressed that it was never his intention to dismantle Haggar. “I came here because I thought there was an opportunity,” he said. “Haggar is an iconic brand, and I thought it had great promise and upside. It’s sort of like the Good Housekeeping seal. It just needed to be cleaned up, redirected and put back on the highway to health.”

The company, which was founded in 1926, was publicly held until 2005, when Perseus LLC, a merchant bank and private equity fund management company, along with Infinity Associates LLC and Symphony Holdings Ltd., bought the brand for about $212 million.

Its primary customer is a man over 45, but Haggar is targeting a thirtysomething guy with these new products. “We feel very strongly that we have the Baby Boomer covered with our historic Haggar programs,” Buxbaum said.

Lyons said that in a recent survey, the label had an 87 to 90 percent awareness level. “And we spoke to thirtysomethings and found there’s no aversion to the Haggar brand,” he said. “They just have a very neutral position.” The research company said that although Haggar didn’t have to overcome any negative perceptions, “we didn’t do anything that appealed to them either.”

So Life Khaki was conceived.

“They think like 35-year-olds. So we need to take care of our existing customer and aggressively bring something else for the younger guy.”

The label will be sold first at J.C. Penney, then at Kohl’s, Belk and Sears, Lyons said, launching in about 1,000 doors. Haggar is hoping it will be sold in more than 3,000 doors by Father’s Day of 2012. It will offer three fits: relaxed, straight and slim.

The company is also using all recycled product for its Life Khaki brand, another key talking point for the younger customer. Hangtags include slogans such as: “Live a great life”; “Life is what you make of it,” and “Life is comfortable.” “We just want you to feel good,” Lyons said. “The models are cool and the final pièce de résistance is that it has a great hand.”

Buxbaum said that when the label is expanded into a full lifestyle brand, “I don’t see why it can’t be a $100 million business.”

Although both lines will launch as bottoms only, the plan is to eventually add tops, Lyons said, in categories such as woven shirts, knits and sweaters. The company has licensees for knit and woven tops, leather, outerwear, sweaters and hosiery.

Heritage, which is based on archival elements of the brand and will include a new crown H logo, will be added to around 270 Macy’s doors for fall, Lyons said. “We wanted to give Macy’s a more fashion-forward aspirational line.” It will offer more detailing than traditional Haggar product, such as top stitching, ornamentation and updated pocketing details. “It denotes a cooler, hipper flavor for the brand,” he said.

Marc Mastronardi, group vice president and divisional merchandise manager for men’s sportswear, pants and big & tall for Macy’s, said that the exact plan for the launch has not yet been determined, but it will be tested in a limited way for fall in the classification dress pant department. “It will add another customer to our store,” he said. Haggar’s core dress pants sell well at the store, he said, but they’re “fairly basic. There’s an opportunity to get into more fashion dresswear. That’s something we didn’t see in our business today, so the future could be very big and very bright.”

Buxbaum said it was hard to come up with a volume projection for the line, adding: “We hope to get as much out of it as possible. Maybe $20 million to $40 million? It’s hard to say.”

Haggar’s core product, which is sold in around 4,000 doors, generally retails for $30 to $40 out the door, Lyons said. Life Khaki will sell for $36.99 to $39.99, while Haggar Heritage will be $39.99 to $59.99. The Macy’s product will offer “more embellishment,” Buxbaum said.

Lyons said the marketing plan for the introduction of both labels is still being conceived, but traditional ads will be supplemented by initiatives under the “digital platform,” which is key to attracting the younger guy.

In addition to launching these two new labels, Haggar also recently acquired certain private label assets from Neema Clothing Co. “The acquisition will bolster our clothing business and will be a nice additive to the dress side,” Buxbaum said. “We’re looking to expand that side with retailers as well. We have strong relationships with major retailers, get high grades for replenishment and have a good sourcing business. We can leverage that to help others.”

The company also produces Gramicci, an outdoors brand, and is the licensee for Kenneth Cole bottoms. “We have a very broad platform,” Buxbaum said.

Although he declined to provide a volume figure for Haggar — before going private, Haggar reported annual revenues of just under $500 million — Buxbaum said it is profitable and on “very solid footing.”

He said that although Haggar is “lean and mean,” it’s open to adding to the portfolio. “Our goal is to look at opportunities and see what we can add to our platform that is accretive to our business,” he said. “So we’re looking for other deals.”

In addition, Haggar is looking at India and Asia as potential expansion opportunities, Buxbaum said.

“Our view as a company is to continue to grow and be as profitable as we can,” he said. He declined to comment on the long-term plan for the firm, deferring to John Glazer, a managing director of Perseus, for questions about going public again or being sold. Glazer said Perseus does not comment on assets within its portfolio.

Buxbaum said the last 18 months have been “very strong” for the company. “Even in difficult times, we’re blessed to be in value-priced product with the right fit.”

Lyons concluded: “It’s a good strategy — strong execution and divine providence.”

Sears to Roll Out Beauty to Key Stores

by Faye Brookman and Andrea Nagel with contributions from Molly Prior
From WWD Issue 04/12/2011

Sears is getting serious about beauty.

The retailer said Monday it plans to reenter the beauty arena with full-fledged departments in 100 of its busier stores over the next several months. And while department store beauty is a competitive world, Sears’ move comes just in time according to a number of industry observers who assert the market is ripe for presenting drugstore-type beauty brands in mall anchors.

The new beauty departments began rolling out in March, said one supplier carried within the store-in-store concept; initially the rollout had been planned for January.

The beauty centers stock established drugstore beauty brands such as L’Oréal, Cover Girl, Maybelline, Revlon and Physicians Formula, as well as skin care, fragrance and nail care items. But there are also masstige-type brands such as Ahava, Lumene, Dermalogica, Burt’s Bees and StriVectin, said industry sources. Sears has yet to attract a true prestige beauty brand, but the hire of cosmetics buyer Jerri Koplowitz, formerly of Macy’s, could help the retailer develop relationships with the upscale set.

Each beauty center utilizes red, white and glass fixturing accented by lights, testers, bright signage and a consultant to suggest makeup tips. Displays are raised on a platform, complete with a drawer for overstock underneath. Above the department is a circular red sign that simply reads, “cosmetics.”

“They have done a nice job with what they have to work with,” said one source, noting the centers are located next to the jewelry department. “They are going to be monitoring it and if it goes well they will add another 100 stores next year.” One industry source said Sears expects to outfit 400 stores with the beauty department by the end of 2012. There are 890 full-line Sears-branded stores in the United States and Canada.

In response to research that found women missed buying cosmetics there, in August 2009 Sears circled back into beauty when it opened 13 full-service beauty departments in select malls. According to Sears, the departments were “well received” by customers. Sears has dipped in and out of cosmetics over the years, with the splashiest attempt being its Circle of Beauty private label concept in the late Nineties. The effort was yanked in 2001. Sears also was one of several midtier department stores slated to receive Avon’s retail line BeComing, but the direct seller abandoned the effort in 2003. Sears did not return calls for comment Monday.

What makes the concept somewhat workable, said industry experts, is that since most drugstore chains have moved out of malls, Sears would be one of the few mall-based retailers stocking mass brands.

“That’s exactly what they were aiming for,” said the beauty supplier.

Another vendor said the objective is to develop an exclusive beauty concept in mall-based stores that combines mass, midtier, specialty and prestige brands. The thinking is that having all these tiers under one nameplate would give Sears an advantage over department store anchors. It would also help attract a more youthful shopper, or women 18 to 40 years old.

Tom Winarick, owner of The Strategy Studio, an industry consulting firm specializing in domestic and international retail distribution, said, “You can probably count the number of mall-based drugstores on both hands and feet these days, as freestanding stores have been the direction for the past few years. It will most definitely offer the consumer access to the price point in a higher traffic mall environment. Ultimately success will be based on the department location within each store and the environment they create. The convenience will be there, it will just be a matter of executing a compelling shopping environment that will draw the consumer to buy.”

Industry consultant Allan Mottus agreed, asserting that drugstores have gone to a stand-alone format since most of them need to provide drive-thru pharmacy capability. Sears, he said, is also looking for additional gross margins.

“All big box stores are being challenged today as more categories come under attack by e-commerce and discounters. Beauty is not an expensive category to stock for retailers as product turnover and gross margins are sufficient to entice women shoppers who are limiting trips to stores because of high gasoline costs. Sears’ sales in its traditional categories, such as appliances, have been under attack and the addition of beauty can only be considered an asset,” Mottus said.

One beauty executive familiar with Sears’ test said beauty is working for all of the vendors. While there was training to support brands, it appears the names most known already to shoppers are what customers want as they walk through Sears. It is too hard to build a following for a more masstige line, the source said. Others commented that it has been a long time coming for expansion, leaving them to wonder just how successful the program has been.

The Retail Megadeal Is On The Rise Again

by Evan Clark
From WWD Issue 03/28/2011

Not only is the retail mergers and acquisitions market continuing to heat up, but the megadeal is back on the table.

Certainly there’s enough money out there for both deal size and valuations to balloon.

Chris Meyer, director at McKinsey & Co., said private equity firms have as much as $100 billion that could be invested in retail.

“It’s a big number,” he said. “The funds are feeling pressure to put that money to work.”

And growth is the order of the day.

“If you believe that growth in consumer spending is going to be muted versus what it was during the last decade, retailers are going to figure out how to compete in what is essentially a share war,” Meyer said. “Folks are going to pay a premium for those assets that have some real growth potential in them.”

It’s hard to compare one deal with the next on overall size — retailers have a varying number of stores, different management teams, brands and so on. To level the field, bankers look at multiples, which typically are determined by dividing a company’s enterprise value — the value of its stock and debts minus cash on hand — by earnings before interest, taxes, depreciation and amortization for the previous 12 months.

In specialty retail, the $3 billion acquisition of J. Crew by TPG Capital and Leonard Green & Partners equated to about nine times EBITDA, while Gymboree Corp. went for about eight times, according to Thomson Reuters. That means that Aéropostale Inc., one of several companies that has been said to be a buyout candidate for months, is still attractive from a valuation perspective. Its stock is trading at a multiple of 4.12 times, so a buyer could pay current shareholders a healthy premium and still come in below the range established by the other deals in the sector.

There are plenty of companies with relatively low valuations in the sector. Gap Inc., for instance, trades at a multiple of 4.62 times. In February, Sears Holdings Corp. chairman Edward S. Lampert revealed that he had bought 5.8 percent of the company, or 35 million shares. (For more on current multiples across retail, see chart below.)

All the action is being spurred by a number of factors. The recovery is on surer ground, stock prices have come roaring back and financing is easily available. So observers believe multiples are bound to head up, as will the size of the deals.

“I don’t see any reason why there isn’t a $5 billion to $10 billion deal out there,” said David Shiffman, investment banker and managing director at Miller Buckfire & Co. “Because of the Fed policy, as it relates to interest rates, money is incredibly cheap and we’re back to seeing financial packages that look like they did pre-crash. Absolute levels of leverage are beginning to creep up as well.”

Just look at AT&T Inc., which last week secured a $20 billion bridge loan from J.P. Morgan to acquire T-Mobile.

“Deals like that excite the marketplace,” Shiffman said.

And the market had already proven to be rather excitable. So far this year there have been 53 retail buyouts in the U.S. totaling $9.31 billion — well ahead of the $1.61 billion in deals seen a year earlier, according to Dealogic.

“I don’t think there’s been a better time, really, for the M&A market,” said investment banker Elsa Berry, head of Houlihan Lokey’s cross-border consumer coverage. “It’s a unique time. Never before have you seen companies pile up so much cash. If you’re a public company sitting on a ton of cash and you’re not deploying it somehow, shame on you. You know what happens to those guys, they’re not independent for long.”

Companies across the spectrum are on the move. Walgreen Co. inked a deal to buy Drugstore.com, Revlon Inc. bought the Sinful Colors brand and Nordstrom Inc. acquired online private sale firm HauteLook Inc. for $270 million. In Europe, LVMH Moët Hennessy Louis Vuitton agreed to buy Bulgari for $6 billion and has been slowly amassing a stake in Hermès, which now stands at 20.2 percent.

Still, big deals can bring big challenges and the market still seems far from the days when rumors of a $100 billion buyout of Home Depot seemed credible enough.

To make a big deal work, the target company has to be in expansion mode to be worthwhile.

“There are still a number of companies to consolidate,” said Gilbert Harrison, chairman of Financo Inc. “One of the problems that you have to take a look at if you’re going to look at any of these companies seriously is, ‘What is the growth rate?’ If the company can’t continue to grow at 12 to 15 percent a year, there’s going to be a greater difficulty in getting payback. The bigger the company is, the harder it is to do that.”

And not all fashion mergers are Master of the Universe stuff.

Middle-market apparel producers — who usually count their sales in tens of millions of dollars, not hundreds of millions — are also busy consolidating, buying up friends and enemies as they cope with changing retail realities.

“They used to say, ‘I’m in Macy’s and J.C. Penney.’ Now they’re saying, ‘I’m in T.J. Maxx and Burlington [Coat Factory] and Stein Mart and the regionals,’” said Jack Hendler, president of Net Worth Solutions Inc. “There’s an overabundance of production. They’re looking to buy because they lost volume over time. Organic growth really does not exist unless you’re some mega-brand, a Polo, a Calvin [Klein], a Nike. Anybody else has extreme difficulty getting more shelf space and the only way they can do it is by making an acquisition.”

Hendler said more of the smaller companies need to be absorbed, making for larger, stronger vendors that can work more effectively with retailers.

“There are still companies that are clearly doing well and have found a niche and have an identity and keep remodeling and keep reenergizing their product categories,” he said. “Some of them have recognized that they’re unique, but are also getting tired of the difficulty in the market place. A number of healthy companies with real EBITDA [earnings before interest, taxes, depreciation and amortization] are looking for acquirers.”

Already some buyers and sellers have connected. In January, Kellwood Co. bought contemporary sportswear brand Rebecca Taylor and Perry Ellis International Inc. acquired Rafaella Apparel Group Inc. from Cerberus Capital Management.

The Rafaella deal includes $80 million and 106,564 warrants to purchase Perry Ellis stock. That makes for a multiple of about six times.

Hispanics Seen as Key Market

by Lisa Lockwood
From WWD Issue 03/23/2011

For some U.S. brands, growth might be in their own backyard.

With companies looking overseas for business opportunities, it might make more sense to take a closer look at the latest U.S. demographic data: Hispanics are the largest and fastest-growing minority group in America, with projected buying power rising from $1 trillion this year to $1.5 trillion in 2015, according to a study by the Selig Center for Economic Growth in the University of Georgia Terry College of Business.

“The Hispanic market alone, at $1 trillion, is larger than the entire economies of all but 14 countries in the world — smaller than the GDP of Canada but larger than the GDP of Indonesia,” said Jeff Humphreys, director of the Selig Center and the report’s author. According to the study, Hispanics spend more money on apparel, footwear, groceries and phone services, and less on alcohol, tobacco, health care, entertainment, education and personal insurance.

At present, there are 45.5 million Hispanics in the U.S., accounting for 15 percent of the country’s population, according to a 2010 Mintel Report on the Hispanic Consumer. The Hispanic population is projected to increase to 57.7 million, a 35.7 percent gain compared to only 5.8 percent growth in non-Hispanic population, from 2010 to 2015, according to the U.S. Census Bureau. By 2050, the U.S. Hispanic population is projected to reach 132.8 million — about 30 percent of the nation’s total.

According to the Selig Center report, the top 10 states with the largest Hispanic markets, in order, are California, Texas, Florida, New York, Illinois, New Jersey, Arizona, Colorado, New Mexico and Georgia.

Retailers such as Macy’s, Wal-Mart, Dillard’s, J.C. Penney, Kohl’s, Kmart and Sears have been paying close attention to the significant spending power of Hispanic shoppers. Stores have been aggressively courting the Hispanic customer with specific apparel collections; TV and radio ad campaigns, and bilingual direct mailers, credit card applications and in-store signage. Kohl’s, in fact, signed a megadeal with Jennifer Lopez and Marc Anthony for a lifestyle fashion venture, and Kmart will launch a Sofia Vergara young contemporary lifestyle collection for fall. Both lines are sourced by LF USA, a subsidiary of Li & Fung Ltd. Major apparel companies, such as Perry Ellis International have several men’s brands specifically targeted to the Hispanic consumer, but many of the other big women’s sportswear players don’t cater specifically to the Hispanic market.

“While we track demographic profile of our consumers by brand and are respectful to be culturally relevant in our model choices, we do not have a dedicated marketing platform for this audience,” said a Jones Group spokeswoman. “We believe that for the acculturated Hispanic consumer we offer product and marketing that resonates and are respectful of her buying power and loyalty like any of our consumers.”

PEI has a dedicated Hispanic business, and the numbers to back it up. “For every Anglo person who dies, one person is born. For every Hispanic who dies, there are nine births,” said Pablo DeEcheverria, senior vice president of marketing at Perry Ellis International. He said Hispanics represent “a very different market.”

“They shop more as a family than individually. They [men] buy more woven shirts than knit shirts,” he said. He noted that the Hispanic male tends to “dress up a little more, they’re more formal and family-oriented and willing to pay for value. Wovens are perceived as having more value [than knits].”

PEI works with retailers to determine their Hispanic merchandise mix, based on demographics. “We provide the demographics for them. We have the software and can analyze down to the door and can determine assortments and displays.” He noted that the company provides bilingual signage and direct mailers to the retailers. But, he warned, one can’t make generalized statements about Hispanic tastes. Retailers need to make distinctions among Mexican-Americans, Cuban-Amerians, Dominican- Americans, first generation, acculturated and nonacculturated Hispanics.

Among PEI’s men’s brands are Cubavera; Centro for Kohl’s; Havanera for J.C. Penney, as well as Solero and Cafe Luna. He noted that the Hispanic customer tends to be younger, with the median age being 27, opposed to the non-Hispanic customer’s median age of 39.

Retailers appear to be laser-focused on the Hispanic market. In 2009, Penney’s devoted $50 million, or 16.4 percent of its media spend, to the Hispanic market, whereas Wal-Mart Stores allocated $66.1 million, or 6.4 percent of its ad dollars, into Hispanic-specific advertising, and Macy’s earmarked $38.8 million, or 4.6 percent of its media spend, to the Hispanic market, according to Nielsen Co. Sears devoted $56.5 million, or 15.4 percent of its media budget, to the Hispanic market, said Nielsen Co.

When Penney’s opened its first store in Manhattan in 2009, a block away from Macy’s Herald Square flagship, it aggressively promoted the event via local Spanish-language media in New York. Kohl’s, which has developed apparel and home lines geared to the Hispanic consumer including actress-model Daisy Fuentes’ exclusive apparel and accessories collection, has run TV ads aimed at Latino consumers on programs including Univision primetime novellas, Despierta America and El Gordo y la Flaca.

Macy’s, too, has been hotly pursuing Hispanic shoppers as part of its My Macy’s campaign, which tailors the retailer’s assortments to the needs of local markets. My Macy’s develops merchandise — with specific colors and fabric weights — that reflect the needs and preferences of local tastes.

Martine Reardon, executive vice president of marketing and advertising at Macy’s, noted the company uses specific media to target the Hispanic consumer, such as People en Español, Latina, and Cosmo en Español. When the company runs “Find Your Magic” or its “Believe” campaigns, it will photograph Hispanic models and translate the copy in Spanish. In addition, Macy’s runs TV ads on Univision, Telemundo and the telenovelas. “There will be an organic integration into the story line,” she said. “We pretty much try to mirror the general market and give it an Hispanic flair. With the Hispanic population growing, we’re doing a deep dive in our database to understand all ethnicities.”

Reardon noted that there are several vendors that resonate with the Hispanic market, such as Lopez and Eva Mendes (in textiles), and Carlos Santana in the footwear market. “But it’s not just about a designer who may be Hispanic. Hispanic customers love bright colors and are very proud to show their bodies. They want sexy and fashionable clothing,” she said.

As a result of the My Macy’s initiative, the retailer has found that some stores are more Hispanic than others “especially in certain pockets of the country.” The Miami stores have a more Latin American influence, the Texas stores are more influenced by Mexico, and the New York stores have a Puerto Rican and Dominican Republic influence.

According to Reardon, the distinguishing characteristics of the Hispanic fashion customer include that they are fairly status conscious, loyal to the department store and loyal to brands that fit her well, and they love value and newness. “They’ll spend their disposable income on looking good and fragrances and beauty products,” she said.

Kmart, which in January unveiled its collection with Vergara, said it was targeting the Latino customer, as well as a mainstream audience.

John Goodman, executive vice president of apparel and home for Sears Holdings Corp., which operates Kmart, said in a WWD interview, “There is no question she has a big following in the Latino community and Kmart has a strong Latino segment to our customer base, which is very diverse. But she also brings a mainstream appeal.”

Closings Loom as Sears Holdings Continues to Struggle

Retail Traffic
By Elaine Misonzhnik

While the retail industry’s attention in recent weeks has been focused on Borders' Chapter 11 filing, there is another retail giant with a massive store portfolio that may be raising alarm bells in the near future.

For years now, Sears Holdings Corp. has been reporting declining sales at both its Sears and Kmart stores. Most recently, in the firm’s fiscal 2010, same-store sales fell 1.6 percent—dropping 3.6 percent at Sears and rising 0.7 percent Kmart. It was just the latest annual decline for the firm. Same-store sales fell 5.1 percent in 2009, 8 percent in 2008, 4.3 percent in 2007 and 3.7 percent in 2006. During that time span, Sears Holdings’ net sales dropped by nearly $10 billion, from $53.0 billion in 2006 to $43.3 billion last year.

Yet the firm survived the recession while many others failed. But the two brands have continually struggled to find a niche in the retail sector and ceded market share for years.

Observers questioned the tie-up of the two firms from the beginning and many still wonder whether the brands can survive long term. To a large extent, that might depend on what Sears Holdings decides to do with its real estate, according to five retail and retail real estate consultants interviewed by Retail Traffic. (Sears Holdings declined to comment.)

In spite of its lackluster performance, the Sears chain has several things going for it, including a well-known name and several well-respected consumer brands, including Craftsman tools and Kenmore appliances. If Sears Holdings puts more emphasis on its hard goods and either cuts down or improves its apparel offerings, it has a good chance of reinventing itself, says Craig Johnson, president of Customer Growth Partners, a New Canaan, Conn.-based retail consulting firm. In order to do so, however, Johnson notes Sears would have to shed about a third of its stores.

There appears to be less hope for the Kmart chain, which has failed to gain any market share in the discount game over the past decade against formidable competitors like Target and Walmart. Overall, Sears Holdings ranks as the ninth largest retailer in the U.S. by annual revenue—a steep drop after occupying the No. 1 slot for many years up to the 1990s.

As of January 2011, Sears Holdings operated about 3,500 stores in the U.S. The most valuable of these include 908 so-called “broadline” Sears stores, which are based in some of the best malls in the country. In addition, the company operates 1,287 specialty Sears stores, which are either freestanding or located in neighborhood shopping centers and 60 Sears Essentials stores, also a freestanding concept.

There are also about 1,306 Kmart stores located across the U.S., Guam, Puerto Rico and the U.S. Virgin Islands. Kmart stores are usually one-level freestanding buildings averaging 93,000 square feet in size.

Unlike Sears stores, most of the Kmarts are positioned in weaker locations in secondary markets, notes Jeff Greep, president of Jeff Green Partners, a Phoenix-based real estate consulting firm.

The consensus among the experts Retail Traffic spoke to is that this portfolio is too large to allow Sears Holdings to run a profitable retail operation. The good news is that observers believe a sizable portion of the stores can be subleased. The firm occupies locations at some of the best malls in the country. Sears Holdings owns many of the sites outright and has long-term leases at below-market rents on others.

“They have very desirable real estate, there is no question about that,” says George Whalin, founder of Retail Management Consultants, a Carlsbad, Calif.-based consulting firm. “When they started building those stores in the late 1950s and early 1960s, there were spaces available that aren’t available today. That real estate will be very desirable for retailers that are looking to expand.”

The question going forward will be whether there is enough demand to fill all of the spaces that get put back on the market. There are few expanding retailers and many available boxes at power centers today, which would cut into the potential pool of tenants to backfill excess Sears space, says Green. That might mean that some landlords will be left with empty anchor spaces if Sears Holdings does opt to shut locations.

Clean-up job

For the fiscal year 2010, ended Jan. 29, Sears Holdings reported that revenues declined $717 million, to $43.3 billion.

In his letter to shareholders, dated Feb. 24, Sears Holdings chairman Eddie Lampert acknowledged that the chains’ performance remains unacceptable and announced new initiatives to help drive sales in soft goods, including the launch of a Sofia Vergara fashion line at Kmart and UK Style by French Connection and the Kardashion Kollection lines at Sears.

Around the same time, Lampert announced the appointment of Lou D’Ambrosio, a former IMB executive and CEO of telecom equipment company Avaya, as the company’s new CEO. D’Ambrosio’s lack of experience with retail operations or, in fact, with any direct-to-consumer business, makes it seem like Lampert is looking to revamp the retailer’s entire business model, says Johnson.

That model is likely to focus on further cutting down the cost of doing business and whenever possible, subleasing unprofitable stores to other retailers, according to Whalin. Sears has already started doing this in 2010, first signing a deal with apparel seller Forever 21 for a 43,000-square-foot space at South Coast Plaza in Costa Mesa, Calif. and then a deal with Whole Foods for a 34,000-square-foot store in Greensboro, N.C.

In his letter to shareholders, Lampert indicated the company was seeking more third party retailers to lease its underperforming stores. In all, it closed 34 Kmart and full-line Sears stores in fiscal 2010.

Though Sears Holdings is behind many other department store chains in trying to trim its portfolio, ultimately the strategy is the right one, says Cynthia Groves, senior managing director of global corporate services with real estate services firm Newmark Knight Frank. She believes both Sears and Kmart have staying power, but need to drastically downsize their fleets.

“They are realizing that they have to look at their store size, the way the stores are configured, the number of their units,” she notes. “Lampert will use the real estate to turn the retail around. They go hand-in-hand.”

Real estate play

Given that many of Sears’ broadline stores are located in markets with high barriers to entry the company shouldn’t have too much of a problem finding takers for those units, says James Bieri, CEO and president of the Bieri Co., a Detroit, Mich.-based real estate consulting firm. Some of the same retailers that are expected to backfill Borders’ locations—Forever 21, Costco and Target—might jump at the chance to lease Sears locations, especially since it will save them the trouble of paying for a full store build-out.

Likewise, some of the Kmart stores might be picked up by discount concepts like Big Lots and Salvation Army, Bieri notes. In many cases, Kmart pays single-digit rents, so if an alternate retailer wants to be in a given market, it might be possible to sublease those stores.

The problem is that demand for new space is still out of whack with the amount of vacancies available in the market, says Green. Plus, a chain like Forever 21 would only want to sublease the space from Sears if there are a lot of years left on the original lease. In some cases, however, Sears will be facing expiring leases on underperforming stores and it will be forced to exit the property without providing the landlord with a new anchor.

“My professional gut is that they are at least 25 percent too large a company,” notes Green. Subleasing their stores, however, “definitely won’t take care of their entire portfolio. There are not that many alternate users out there, especially given the fact that so many power centers have abundance of vacancy.”

Spotlight On Social Commerce: Taking Stock Of The Social Department Store

SmartBlog on Social Media

There was a time when department stores were at the cutting edge of retail. They integrated services and pioneered mail-order catalogs. Their role in the economy changed during the 20th century — first with the rise of suburban malls and then with the advent of online shopping. But there’s no reason department stores couldn’t lead the way again with the rise of social commerce.

Normally, this series looks a single leading company’s practices in the social commerce space. But in this case, I think there’s value in comparing the different ways department stores have approached the challenge of social commerce. For simplicity’s sake, I’ll just be looking at traditional department stores. Discount department stores, outlet stores and warehouse clubs will have to wait for posts of their own.

J.C. Penney made headlines last December by linking its catalog to its Facebook page. The move was unusual in two respects. First, it’s a full retail experience that allows purchases to be made without leaving the social network. Most brands selling products through Facebook offer a limited selection or push you through to another website when the time comes to make a purchase. Secondly, many of the brands using Facebook as a sales platform are primarily online retailers, whereas J.C. Penney has more than 1,100 physical stores. There are plenty of exceptions to one rule or the other, but few brands defy both conventions.

It’s not a perfect social shopping application. J.C. Penney requires users to like the brand before they can view the store. The practice, sometimes called “like-gating,” isn’t inherently a bad idea. But if a brand is going to require users to make that connection, it should use that connection to provide value to the customer. At the moment, there’s no sign of personalization. The only social feature in the store in the ability to share an item with your friends. I might find that useful if I were trying to decide between two ties, for example, but there’s still a lot more the brand could be doing to bring “social” into its social commerce efforts.

Sears is frustrating because it has every element of a great social shopping experience, but it chooses to split that experience among several channels. It has brand engagement on its Facebook page, product reviews and community engagement on its MySears.com site and online shopping on its main page. The experiences aren’t integrated, so they all feel like one-third of the puzzle. Granted, it only takes one click to get from reviewing that lawnmower to buying it — but in a post-Amazon.com world, that’s not a click anyone should have to make.

Macy’s has opted to integrate product reviews on Facebook, but not direct online shopping. You’ll still need to click through to the store’s website if you want to buy that china set you’ve been reading reviews about. The comments I made about Sears apply here, though having a barrier between your social presence and your traditional website is more common than having a barrier between two halves of your website.

Dillard’s is much more conventional. You can’t buy anything directly from its page. You can engage with the brand and, if you feel inspired to check out their wears, you can click a “Shop Now” tag that offers you a choice of departments, than redirects to the appropriate page on the brand’s main website. That’s about a bare-bones as social commerce gets — I almost hesitate to use the term. But it’s worth mentioning because I think it sets a reasonable floor for online retailers. Even if your brand doesn’t have a huge Facebook presence or the money to develop a full social shopping app, you can still help fans who find you on Facebook migrate to your e-commerce site with minimal fuss.