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Montgomery Ward drops out of crowded retail field

CHICAGO - Montgomery Ward's decision to shut its doors may have been a gloomy way to ring in the New Year, but retail analysts and owners alike say the news isn't necessarily bad for the industry.

In closing its 250 Wards stores, the Chicago-based company will no doubt leave shopping center owners scrambling to fill space in the short term. However, Montgomery Ward's departure from the retail industry also will enable shopping malls to find stronger tenants to replace the 128-year-old department store chain, which had been struggling for several years. Owners also will likely be able to charge higher rents when they lease Ward's vacated space.

Santa Monica, Calif.-based Macerich Co. is one of several REITs that owns malls with Wards anchors. Six out of Macerich's 44 malls contain Wards stores, but COO David Contis says the store closings won't have much impact on the company's bottom line.

"They were not a great operator," says Contis. "Wherever they are, even in our portfolio, they do significantly less business than any of the other anchors. They don't even make the top 1% of our income."

He says the Wards store closings will give Macerich the opportunity to fill the space with better operators. "There's probably an opportunity there. Like anything else, the strong get stronger and the weak fall away," he says, adding that it's too early to discuss the company's plans for the vacant space.

Bradlees Inc., a Braintree, Mass.-based retailer, also announced bankruptcy the same week as Montgomery Ward. The company plans to close its 105 stores within two months.

The end of the line On December 28, Montgomery Ward announced that it had filed for Chapter 11 bankruptcy protection and that its 250 stores and 10 distribution centers would close over the next several months. CEO Roger Goddu said weak holiday sales and a "very difficult" retail environment made the Chapter 11 filing unavoidable. "Although our remodeled stores continue to produce positive sales trends, we have not delivered the necessary financial result to warrant completion of our total company turnaround strategy," he said in a statement.

The company launched a new business strategy in 1998 after emerging from bankruptcy. Unveiling a new prototype and scrapping its specialty store concept, the company attempted to regain the middle-class shoppers it had lost. Despite the capital resources available from General Electric Co.'s GE Capital unit, which acquired a 50% stake in the company in 1999, the company was not able to compete against seasoned retailers such as Sears and J.C. Penney, or newer competitors such as Target, Kohl's and Wal-Mart.

"The graveyard for celebrated retailers is getting quite crowded," says Frederick Marx, a partner at Farmington, Mich.-based Marx Layne Public Relations Co. He attributes Ward's failure to the increasingly competitive retail field.

"Montgomery Ward had been hemorrhaging in the last couple years. In some cases, though, they had improved their properties. It's one of those things where time ran out," he says. "Obviously, the competitors had gotten that much better, whether it be Target or Wal-Mart or Kohl's or Bed Bath & Beyond. Every classification that Wards was in, somebody else was doing it better."

Montgomery Ward's demise was no surprise to Bernard Sosnick, a retail analyst with New York-based Fahnestock & Co. Given the company's poor performance and the ever-growing list of competitors, the downfall was inevitable, he says.

"This industry has been over-stored for many years, and we've been through a period of extraordinarily strong economic growth and growth in consumer spending," he says. "Yet there are some retailers that haven't seen even a dollar's increase in total sales. So that's an indication of the severity of competition and the fact that new stores are siphoning sales from old ones."

Howard Makler, chairman and COO of Huntington, Calif.-based Excess Space Disposition Inc., also saw Ward's demise coming. "They were on the decline for quite some time. They weren't exactly the place where most people were going shopping," he says. "They really haven't been a player."

Opportunities One retailer's demise can be another company's lucky break. In essence, that's how some of Montgomery Ward's competitors will view the company's fall. Makler says a REIT owner he recently talked to about Ward's bankruptcy noted that he had been looking for a location for a Target store for two years. The Wards vacancies may make it possible for Target or other retailers to expand, says Makler.

And some shopping center owners will take advantage of the Wards closings to charge higher rents to new tenants. Marx notes that Ward paid extremely low "grandfathered" lease rates at many of its locations. Ward's lease rates averaged about $1 to $2 per sq. ft.

Although most of Ward's stores were in second-tier centers, Marx says owners will be able to charge higher rents than Ward paid. "While the centers might not be the gold-plated, magnet center of the region, they've got visibility from the street and good parking," he says. "In many cases, these are going to represent an opportunity for someone else."

Out of all the major REITs, Indianapolis-based Simon Property Group has the most Wards-anchored shopping centers. Twenty-five of the company's 176 malls contain Wards anchors, translating to 14.2% of its malls. Michael P. McCarty, senior vice president of research for Simon, estimates that the company collects $4 million in rent per year from Wards stores. However, McCarty says Simon should be able to replace those revenues easily.

"The fact that Wards is going to close all these stores could be characterized as almost a non-event for the shopping centers," says McCarty.

He notes that Simon had little difficulty filling the 11 stores vacated by Montomery Ward during its wave of closings in 1998.

"In nine out of the 11 cases we replaced Wards within six months of them closing, at significantly higher revenues," says McCarty. "We have demonstrated not just our ability, but any competent landlord's ability, to recycle the Wards space into more productive uses within a relatively short period of time."

Repercussions Makler says malls in small- and medium-sized markets will be impacted the most by the Wards closings. "It really depends where the center is located, and whether or not there are other national department stores that have been trying to get into those markets," he says.

In the short-term, neighboring stores in Wards-anchored centers also will be affected, says Marx. "When the lights go out - after the close-out sale - the small, ancillary stores will be impacted because there won't be as many people coming through the door because you've got a closed store at the end of the hall," he says.

Although the Montgomery Ward bankruptcy spells the end for another retail icon, the long-range outlook for the industry is by no means bleak, he adds.

"I don't think the Ward's bankruptcy is systematic," says Marx. "In the same week, Bradlee's pulled the plug on their operations, too. But these are companies that have struggled in a very crowded field."

1872 - Company founder Aaron Montgomery Ward launches the catalog industry with a single-sheet listing.

1875 - Ward's catalog introduces a "Satisfaction Guaranteed or Your Money Back" policy, which later becomes an industry staple.

1926 - Company opens its first freestanding store in Plymouth, Ind.

1939 - Ward's copywriter Robert L. May creates "Rudolph the Red-Nosed Reindeer" story and song.

1968 - Ward merges with Container Corp. of America.

1976 - Mobil Oil Corp. buys Ward.

1985 - Company discontinues catalog operations and unveils specialty-store format, introducing Electric Avenue, Lechmere and other stores.

1988 - Senior management initiates a $3.8 billion leveraged buyout of Mobil Oil.

1997 - Faced with diminishing profits and competition from stores such as Wal-Mart and Kmart, the company files for Chapter 11 bankruptcy protection.

1999 - Unveiling a new prototype and scrapping its specialty-store strategy, Ward emerges from Chapter 11 bankruptcy.

Dec. 28, 2000 - After disappointing holiday sales and a failure to match up with its competitors, Ward announces plans to close its 250 stores.

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