This Week in Retail: Fitch Projects Modest Growth for Retailers

August 11, 2010

 

Fitch Ratings sees increased stability for ratings of U.S. retailers through the end of the year, according to its summer 2010 Retail Register report. In fiscal 2011, total sales are expected to grow 4% for the 27 companies under Fitch's coverage. This reflects modest growth in consumer spending, coupled with benefits from share consolidation achieved during the recession.

"Many U.S. retailers used the recession as an opportunity to make changes to their operations as well as take better control of their operating costs and spending on capital projects to preserve liquidity," said Karen Ghaffari, managing director at Fitch. "These changes helped retailers build stronger liquidity positions and leaner cost structures, which have contributed to improved bottom lines."

For the upcoming back-to-school sales period, Fitch expects positive same store sales growth in apparel and other discretionary categories that are in line with recent trends. This reflects easy comparisons to the prior year through September 2010 and favorable albeit muted growth in consumer spending.

Fitch expects sales will continue to show year-over-year positive growth through the end of 2010 with retail sales for the companies under coverage expected to be up 3% for fiscal 2010.

Ratings in the sector fared relatively well through the recession with the ratings of all but one of the U.S. retailers returning to within one notch of the levels they were pre-recession.

Further rating activity will be driven primarily by sales levels achieved which will be a key factor for profitability and credit metrics. Market share position will be significant in determining whether a company has been fundamentally weakened or strengthened by the recession, as this will be an important rating consideration.

Discounters are expected to continue to benefit in 2010 from consumers looking to maximize value on all purchases, including food and consumables as well as general merchandise. While food and consumable sales continue to be strong, Fitch expects discretionary purchases in departments like apparel and home to pick up as the economy improves. This is expected to result in positive low single-digit comparable store sales.

Fitch expects revenue growth for the supermarket operators will continue to be pressured in 2010 primarily due to ongoing price competition in the sector. Gradual improvement in the pricing environment is expected as the economy strengthens and consumers show increased willingness to accept modest price inflation.

Top-line growth at drug retailers is expected to remain steady or improve modestly in 2010, with overall industry prescription sales growth at about 2% annually, offset somewhat by weakness in front-end sales.

Department store sales are expected to be up about 1% in 2010 and 2011, versus Fitch’s expectation of a decline 1% to 2% in 2010 published at the beginning of this year. Fitch rated department stores are expected to see above industry average growth of 3% in 2010 and 2% in 2011. The improved outlook represents year-to-date performance, with first-quarter revenues up 4.8% and second-quarter results expected to be up 4% as easy comparisons continue through August. For the second half of 2010, Fitch remains cautious on its outlook and total revenue growth is expected to be approximately 2%. These expectations reflect sales weighted comparable store sales growth of close to 5% reported in the first quarter, 3% expected in the second quarter, and a 1% increase expected in the second half of 2010.

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By: Suzanne Mulvee, Real Estate Strategist
Couple of trends jump out from the retail leasing data: First, frugality is a thriving business; deep discount shops Big Lots, Dollar Tree, Family Dollar, and Dollar General accounted for more than 1.2 million SF of leasing activity in the first half of the year. Second, service providers are actively taking retail space, especially cell phone companies, which as a group accounted for over 300,000 SF of new retail leases.

Any leasing is welcome when availability rates are near 10%, but to landlords, these tenants don't stand as tall as traditional retailers. Discount retailers, like Dollar Tree, Goodwill, and Big Lots, are not going to pay top dollar for retail space. It may also be more difficult to match these tenants up with other retailers to generate cross-shopping. The service providers have their own drawbacks - without goods on their shelves, they just don't take up a lot of room. So these tenants are less likely to plug holes left empty by traditional retailers.

Indeed, few retailers actively leasing space today match the profile of those gone dark (furniture, apparel, and electronics), which suggests that landlords have few obvious choices for filling dark space.

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Cedar Shopping Centers Inc. through its joint venture with RioCan Real Estate Investment Trust acquired Exeter Commons, a 361,000-square-foot shopping center in Exeter Township, PA, for $53 million, excluding closing costs and adjustments.

The sales price represents $148 per square foot on 356,000 square feet that was owned or approximately a 7.75% cap rate.

The Philadelphia-area property, completed in 2009, is anchored by a 171,000-square-foot Lowe's Home Improvement Center and an 82,000-square-foot Giant Food Stores supermarket, with leases extending to 2029 exclusive of renewal options.

The purchase price was funded by a $30 million loan from New York Life Insurance Co. at 5.3% for a term of 10 years, with amortization on a 30-year schedule.

Port Washington, NY-based Cedar's portion of the balance, constituting approximately $5 million, was funded from its existing secured revolving credit facility for stabilized properties.

Brad Nathanson, a vice president of investments and a senior director of Marcus & Millichap's National Retail Group in Philadelphia, represented the seller, Exeter JV Associates LP and also procured the buyer.

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Cash America International Inc. agreed to purchase a 39-store chain of pawn lending locations owned by Maxit Financial LLC in Washington and Arizona under the names Pawn X-Change and Maxit. Terms were not disclosed.

"Increasing our pawn lending storefront locations remains a priority for Cash America and we believe that this acquisition will enhance our presence in these two important markets in the United States through increased revenue and greater market coverage," said Daniel R. Feehan, president and CEO of Cash America. "With the inclusion of the Maxit locations, Cash America will have added 244 pure pawn locations to our business over the last two years."

The addition of the Maxit stores will significantly increase Cash America's storefront pawn lending locations in both markets, where Cash America had five pawn lending locations in Washington and 11 company-owned and seven franchised pawn lending locations in Arizona as of June 30, 2010.

For the 12-month period ended June 30, 2010, Maxit had total revenue of approximately $54 million (unaudited). Eight of Maxit's 39 locations have been opened during the last 18 months.

Upon completion of the transaction, Fort Worth-based Cash America will have added 244 pawn lending locations, net of closures and excluding the introduction of pawn lending into existing consumer loan facilities, to its storefront platform over a 24-month period, representing close to a 25% increase in pawn locations over that period.

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Charter Hall Retail REIT in Sydney, Australia, contracted to sell two U.S. centers for a combined $23.7 million: Orchard Square in Atlanta, GA, and Franklin Square in Frankfort, KY.

The combined price reflects June 2010 valuations at a weighted average capitalization rate of 8.84%. Settlement is due to occur by the end of September.

In line with the REIT's strategy of re-weighting its portfolio to Australia, the net proceeds from the two sales of ($11.2 million) will be repatriated for assets in Australia.

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General Motors concluded the dealer arbitration process and effective Nov. 1, will have a network of about 4,500 U.S. dealerships to sell and service customers for Chevrolet, Buick, GMC and Cadillac vehicles.

Many of these dealerships are participating in a major facilities upgrade program, with more than 300 updates already completed and about 1,000 projects scheduled through the end of 2010.

Although GM's new dealer network is about 25% smaller than in early 2009, it remains the nation's largest. During its restructuring last year, GM offered wind-down agreements to 2,064 Chevrolet, Buick, GMC and Cadillac dealers that the company determined needed to transition one or more of those brands from the dealer network by Oct. 31, 2010, when the dealer agreement expires.

In June, 2009, GM had 6,049 dealerships selling eight brands, with 87 brand combinations.

The upgrading initiative, which began in October, 2009, is accelerating; dealerships are now upgrading their stores at the rate of about 100 per month. Major elements of the image upgrades include customer-friendly features such as work areas with phone and lap top computer power outlets, Wi-Fi and a cafe area with refreshments.

To support this effort, GM is updating or installing new signs at Chevrolet, Buick, GMC and Cadillac dealerships across the U.S. The signs feature a more contemporary design and reflect the current image guidelines for each brand.

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By: Randyl Drummer
In one of the largest retail redevelopments of recent years, The Macerich Co. reopened Santa Monica Place as a 524,000-square-foot open-air retail center in Santa Monica, CA, anchored by Bloomingdale's and Nordstrom.

Following the $265 million redevelopment of the mall, which was originally designed 30 years ago by iconic L.A. architect Frank Gehry, the three-level project is 92% leased with Nordstrom and Tory Burch opening Aug. 27, Tiffany & Co. slated to open in September, and The Market at Santa Monica Place planned for the first half of 2011. Retailers opening alongside Bloomingdale's this past week included Louis Vuitton, Barneys Co-op, Nike, CB2, Ted Baker, Betsey Johnson, Disney, Hugo Boss, Michael Kors, Juicy Couture and Kitson LA.

Macerich chairman and CEO Arthur Coppola said the opening is a highlight in a year that has reflected generally stronger operating conditions for the company. In the second quarter, the Santa Monica-based REIT saw solid and improving results, with strong occupancy gains, positive same-center NOI growth and positive re-leasing spreads.

The strong leasing demand for Santa Monica Place "demonstrates that retailers will respond to a project with vision, location and top-quality execution even during challenging economic times," Coppola said.