Last year was a rough one for many retailers. But it left three storied brands — Kmart, FAO Schwarz and RadioShack — virtually limping into 2003. Once, each was the top name in its field. Now, all have been ravaged by niche competitors and category killers alike. And the knocks could get harder in 2003 when, Merrill Lynch Economics predicts, growth in consumer spending is unlikely to exceed 2.4 percent, down from an estimated 3.1 percent in 2002.
Many developers say it's only a matter of time before Kmart is a memory. But the Troy, Mich.-based retailer is armed with $2 billion in financing and a new CEO, Julian Day, as it plans to exit Chapter 11 protection this spring. Meanwhile, Day is undoing much of the work of former Chief Executive Officer Chuck Conaway, including cutting back the number of Super Ks to 52, from a peak of 124. It's an admission of defeat by Wal-Mart.
Kmart landlords are prepared for the worst. In January, the chain announced the closings of 326 more stores. New Plan Excel Realty is losing more than $2 million in annual rent as Kmart closes six stores in its portfolio. The developer already factored closures into its 2003 FFO guidance, and it has reduced Kmart's rent at six of its 29 locations. Developers Diversified Realty is courting replacements for its three empty Kmarts, and Kimco Realty Corp. has already signed Costco to one shuttered Kmart.
New developments may also suffer if tenants choose vacant Kmarts over new space. The reason: Rent of $3 to $8 per square foot, compared to $14 per square foot in new construction. Bill Anderson, a principal at Pinnacle Realty & Development in Durham, N.C., says that “TJ Maxx, Staples and Ross are going to be all over those” empty shells until 2005.
Big boxes have beaten down toy retailer FAO Inc. The King of Prussia, Pa.-based company, which includes FAO Schwarz, The Right Start and Zany Brainy brands, lost 90 percent of its stock value in 2002.
It filed for Chapter 11 protection in January, and was notified just days later that its shares would be delisted. The most immediate cause of Schwarz's woes: Wal-Mart's rise in toy retailing, with 20.2 percent of the market in 2002, up from 14.1 percent in 1994.
Zany Brainy is the company's weakest link. For the third quarter of 2002, when the parent posted a $24 million loss on sales of $89 million, same-store sales were down 25 percent. Same-store sales were down 10 percent at the flagship FAO Schwarz stores. Of FAO's 80 pending store closures, 55 will be Zany Brainys. Additionally, FAO is focusing on its flagship stores and introducing new products across its three chains.
Burned in 2002 by a $240 million decline in satellite TV sales, RadioShack posted $1.5 billion in sales for the year — a 1 percent decline from 2001, when sales were down 6 percent.
Promising to grow earnings per share by 13 to 15 percent by 2005, RadioShack is phasing out big-ticket items and going back to its roots: selling accessories and small items more suited for its 7,000 small-format stores. Says Andy Zeinfeld, senior vice president of RadioShack's real estate division, “We're a convenient store for our customers' everyday needs and wants.”
A new “Best To Shop” store design is also in the works. The concept features brighter colors and lighting, central checkout, products available for trying out and 300 extra square feet of floor space. After a successful test run in Tucson, Ariz., RadioShack rolled out a cheaper version of the format in the Jacksonville, Fla., market, and it will expand to another 227 locations in 2003.
New format or not, CIBC World Markets analyst Dan Wever expects only a 7 percent growth in earnings per share for 2003. Best Buy consistently does double digits. But RadioShack is not scaling back on real estate: 48 of the Best to Shop outlets will be new openings.