Retail Traffic

Waiting for the Light

Bed Bath & Beyond is determined to press ahead with its expansion plans for 2008, which calls for more than 70 new store openings, including 60 Bed Bath & Beyond locations, 12 Christmas Tree Shops and several buybuy Baby stores.

The Union, N.J.—based chain, which sells upscale home products at more than 800 stores in the United States, has made the conscious decision to concentrate on its long-term growth prospects, according to Bed Bath & Beyond CEO Warren Eisenberg. The firm's plans will not be shaken by the holiday shopping season, during which the retail sector posted lackluster gains. “Although we are aware of the current macroeconomic environment, we feel, over the long term, that home goods is an extremely attractive retailing sector and we continue to strive to make Bed Bath & Beyond the first choice for enhancing the beauty and convenience of our customers' homes,” he told analysts during a conference call in January.

Eisenberg's attitude matches that of other big-box retail executives, most of whom, for now, are planning to maintain previously announced expansion plans. Target, Best Buy, Staples and Circuit City, for example, have made similar announcements pledging to keep up with announced store opening goals for 2008.

Still, despite the proclamations, some retail analysts think big-box retailers will ultimately have to adjust to a weakened retail climate and pull back on aggressive expansion schedules.

“What we see today in terms of December same-store sales is confirming a weak holiday season and we expect the weakness to continue deeper into the year,” says Frank Badillo, senior economist with TNS Retail Forward, a Columbus, Ohio—based retail consulting firm. “I expect that in the end, a lot of retailers will not meet their plans for 2008.”

For its part, Bed Bath & Beyond reported same-store sales growth of just 0.8 percent for the third quarter and lowered its guidance for the fourth quarter, citing the recent downturn in the housing market.

Macro factors

The picture is made more complicated by the macroeconomic analysis, which seems to change on a daily basis. Predictions that the U.S. would escape a downright slump with GDP growth of betwen 1.5 percent or 2.0 percent are now giving way to talk that recession is not only coming, but is already here. Merrill Lynch economist David Rosenberg, for example, in early January argued that the economy had already entered a recession after the monthly jobs report showed that unemployment had jumped from 4.7 percent in November to 5.0 percent in December.

A week later, even former Federal Reserve chairman Alan Greenspan got in on the act, forecasting the possibility of a recession at 50 percent this year, citing both the increase in the unemployment rate and the drop in manufacturing activity.

If recession does set in, that could force big-box chains to reassess their goals then, judging by how weak holiday sales came in even before a recession had set in. ICSC's index of same-store sales showed just a 0.9 percent gain in December, compared to an increase of 3.3 percent in 2006.

Meanwhile, the Deloitte Leading Index of Consumer Spending fell to a new low of 2.3 percent in January, from 2.61 percent in December, driven by falling home prices and a sharp increase in inflation. Deloitte researchers estimate that real wage growth was zero percent in November and note higher food and energy prices are also reducing consumers' purchasing power.

Consumer confidence is at a 15-year low, Andrew Kohut, president of the Pew Research Center, a Washington, D.C.—based opinion research group, told the New York Times on January 14.

“We are in a consumer recession. It is a very ugly situation and I think the worst is yet to come,” says Howard Davidowitz, chairman of Davidowitz & Associates, Inc., a New York—based retail consulting and investment banking firm.

Among those most likely to suffer will be home furnishings retailers, office supply giants and electronics chains, according to Craig Johnson, president of the New Canaan, Conn.—based consulting firm Customer Growth Partners.

Cautious optimism

Taking heed of the warning signs, Wal-Mart, Office Depot and Home Depot are proceeding with caution.

Home Depot has told analysts it will cut back on new store openings, after its downbeat sales forecast for 2007 turned out to be “not pessimistic enough,” says chairman and CEO Frank S. Blake. The Atlanta-based home improvement giant reported a 6.2 percent decrease in same-store sales and a 27 percent decrease in earnings for the third quarter of 2007. Things have gotten so bad, some landlords are offering to release tenants from their leases early, says Joseph C. French, national director of retail properties with Irvine, Calif.—based brokerage firm Sperry Van Ness.

TNS Retail Forward estimates Home Depot, which is close to saturation in the U.S. market with 1,943 stores, will open fewer than 90 new stores this year, compared to 115 in 2007. Instead of opening additional big boxes, the chain will concentrate on upgrading its existing stores.

Lowe's Cos., which plans to open as many as 155 stores worldwide in 2008, 40 in the U.S., seems to be in a better position. At the moment, the company has just 10 percent of the home furnishings market, with approximately 1,500 locations, but analysts say with its superior customer service, it has room to grow.

“Lowe's is a smarter company than Home Depot and they are looking beyond 2008,” says Johnson.

Those changes are coming in light of the continued slowdown of the housing market. In November, prices for existing home sales declined 3.1 percent, to $256,800, compared to $265,100 during the same period in 2006, according to the National Association of Realtors, while the Pending Homes Sales Index (PHSI) dropped 18.5 percent, to 73, compared to 89.6 in November 2006. Residential builders cut permits for future single-family home starts by 7.3 percent in November, to a seasonally adjusted annual rate of 884,000, the lowest rate since October 1991.

The downturn in the housing market has also had a negative impact on the office supply sector. Up to 15 percent of Staples, Office Depot and OfficeMax customers are independent brokers and small contractors, according to Johnson, and they won't be replenishing their office supplies anytime soon. In the third quarter of 2007, OfficeMax posted a same-store sales increase of just 0.8 percent. Staples saw same-store sales decline by 3 percent and Office Depot reported that sales were flat.

As a result, Office Depot scaled back its expansion plans for 2008 to 75 new locations from the previously stated 150. And OfficeMax, which trails its rivals in the $320 billion office products market, will open only 60 stores each year between 2008 and 2011, down from earlier plans for opening 95 stores per year during that three-year period.

“OfficeMax has its plate full dealing with its existing operations and would be ill-advised to pursue aggressive expansion in the midst of the current economic environment,” wrote Gabriel.

The office supply chain most likely to stick to its expansion plans, according to Johnson, will be Staples because it is a stronger overall operator and lacks a presence in several lucrative markets, including Las Vegas, Houston and Minneapolis. “They are still expanding, but they are doing it selectively; in the top 25 to 35 cities where they don't have a presence,” Johnson says.

Short circuit

Also facing tough times ahead is the electronics sector. Big-box specialty retailers Best Buy, Circuit City and CompUSA have faced intense price pressures from discount stores, including Wal-Mart and Target; as well as warehouse club operators BJ's Wholesale Club and Costco. In December, CompUSA, a 23-year-old chain, announced that it was closing all 103 of its stores. Circuit City, which operates 681 stores in the U.S., reported a same-store sales decline of 11.4 percent, on the heels of a 5.8 percent same-store sales decline in the third quarter.

As of January, Circuit City said it would not deviate from its 2008 expansion plans, which called for up to 63 new stores. However, two-thirds of them will have a smaller footprint, in the form of 20,000-square-foot stores called the City, as opposed to the typical 30,000-square-foot Circuit City locations.

The electronics category leader, Best Buy, which saw anemic same-store sales growth of just 1.5 percent in December, still plans to open 130 new locations in 2008. However, if the U.S. economy continues its downward spiral, it may put the brakes on its expansion plans.

“If we go into a recession, you are clearly not buying a new digital camera or a new computer or a new TV,” French says.


The prognosis gets murkier for the discount sector, however. While the opportunity to buy goods on the cheap might bring in extra foot traffic during an economic slowdown, according to Badillo, both Wal-Mart and Target might end up feeling the pinch like everybody else.

This holiday season already marked a low point for Target, which up until now has been outperforming the rest of the retail industry. The chain, which operates a fleet of 1,591 U.S. stores, reported a same-store sales decline of 5 percent in December, while rival Wal-Mart posted an increase of 2.4 percent. (Part of that was attributed to Wal-Mart's sales of groceries and gas as opposed to general merchandise.)

The shift in the retail calendar and a new emphasis on nondiscretionary spending was partly to blame for Target's flagging fortunes, wrote Morningstar analyst Joseph Beaulieu, but he thinks Target's cheap chic appeal will help it survive in a difficult economic climate. But it's also making changes on that front as it recently ended its five-year partnership with designer Isaac Mizrahi.

Things will become clearer later this month Target unveils its 2008 expansion plans during its fourth quarter earnings call, scheduled for February 26. Last year, the Minneapolis-based chain opened approximately 100 stores and Johnson expects the chain to announce a similar number of openings for 2008 during the call. However, as the year progresses, he says, Target may have to scale back its growth plans.

“With some of the challenges they had over the holiday season, I wouldn't be surprised to see them notch down their growth,” he notes.

Meanwhile, Wal-Mart, the world's largest retailer, announced twice in 2007 that it was scaling back the number of Supercenters it plans to open annually. The Bentonville, Ark.—based retailer, which operates 2,300 Supercenters in the U.S., cut its planned Supercenter openings for fiscal 2008 to 195, from 281 opened in 2007. Overall — including its Sam's Club and Neighborhood Market formats — the company will open 250 new U.S. stores in 2008.

Proceeding with caution

Despite registering some of the largest same-store sales increases in December, warehouse operators, BJ's Wholesale Club, Costco and Sam's Club, are being extremely cautious with any new openings.

In December, Costco posted same-store sales gains of 7 percent, BJ's went up 3 percent and Sam's Club, a division of Wal-Mart, had 1.3 percent growth.

Costco's 2008 expansion plans would add up to 30 new stores in North America. It operates approximately 388 stores in the United States. BJ's, with more than 170 clubs in the U.S., will open as many as eight domestic stores this year. And Sam's Club, which has 584 locations in the U.S., will open 15 new domestic stores.

Still, observers are nervous about the continued pace of openings in the big-box world. As the troubles in the economy continue to play themselves out in the retail sector, their guarded caution could prove to be the most prudent.

“The problem with big-box retailers is that you can compare them to a big aircraft carrier,” says French. “They are cruising down the ocean and even if they see some trouble 100 miles out, they can't stop.”

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