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LANDLORDS PREPARE TO RECLAIM SPACE

PREDICTIONS OF A HIGH NUMBER OF STORE CLOSINGS IN 2008 WEIGH HEAVILY WITH RETAILERS BUT OFFER OPENINGS FOR MALLS

By Jennifer Hopfinger

Each year begins with a raft of store closures, but the weakening economy has made it a particularly severe season this time around.

Atop a disappointing holiday season, in January U.S. retailers suffered their worst month for same-store sales in nearly four decades; they posted a scant 0.5 percent growth rate overall, with many department stores and apparel chains posting declines. Retailers typically announce store closings in February, after a poor holiday performance. The numbers this past February, though, were unusually large.

Ann Taylor, Charming Shoppes, Movie Gallery, Talbots and Wilsons The Leather Experts are only some of the retailers that have announced store closings so far this year. Though the majority of this year's announcements may have already been made, the stage is nevertheless set for a large increase in stores closures versus last year. ICSC anticipates a 25 percent increase, which would be the highest number of closings since 2004. U.S. store closings were down 3 percent last year compared with 2006.

As Americans struggle to pay their mortgages and to gas up their cars, discretionary spending takes the fall. In some cases, retailers haven't just closed some underperforming stores but an entire concept, as in the case of Talbots. Home furnishings and apparel chains seem to be particularly vulnerable, and as retailers move out, enclosed regional malls will probably be particularly affected, says Nina Kampler, executive vice president of strategic retail and corporate solutions at Hilco Real Estate, a Northbrook, Ill.-based advisory firm. Landlords in Europe appear to be less affected than their U.S. counterparts, judging by the comparatively few large closure announcements there so far this year, says Yvonne Court, London-based head of European retail research and consultancy at Cushman & Wakefield. Still, Europe is not without its own high-profile retailers experiencing difficulties, Court says. The Works Retail, one of the U.K.'s largest discount bookstore chains, entered “administration” (similar to bankruptcy in the U.S.) in January, and the fate of its 317 stores is uncertain. British footwear chain Dolcis also went into administration that month. The chain closed about half its 185 stores. For the most part, though, store closings among European retailers remain within the normal range, and many chains are actually looking to expand, Court says.

Indeed, even some of the U.S. retailers that are cutting back at home are ramping up abroad, Starbucks among them. On the home front, Starbucks says it plans to close about 100 stores this year, and even the roughly 1,175 stores the chain says it will open represent a 34 percent decrease from last year. The company says it anticipates opening fewer than 1,000 stores in the U.S. next year. Abroad, however, Starbucks says it will open some 975 stores this year and about 1,000 next year. On a conference call in December, Starbucks CEO Howard Schultz said 2009 could mark the first time that the company's international store openings outpace the U.S. rollouts. Demand in the Czech Republic has been strong, he said, which bodes well for Starbucks' expansion plans in Poland and Hungary. “European landlords should have no trouble filling vacancies,” said Court. “Demand for space is very strong, and many retailers are looking for opportunities to grow their businesses. Vacated stores, provided they are in decent locations, won't be empty long.”

In any case, high demand for space in Europe makes retailers reluctant to close stores in the first place. “There is such a struggle to find good locations that retailers will try, try, and try again before giving up on a store, because they don't want to give up the space,” said Boris van Haare Heijmeijer, head of European retail at Cushman & Wakefield. “European landlords are in a very good position right now.”

Not to say landlords in the U.S. are necessarily in a bad position. Most of the announced store closings that will affect General Growth Properties are in strong centers where demand for space is high, said Robert A. Michaels, the firm's president and COO, on a conference call in February. The firm anticipated many of the closings and has re-leased the spaces or at least started the process, Michaels said. U.S. and foreign retailers alike will seize the opportunity to secure space in these centers, he said, so General Growth will end this year at the same level of occupancy as it had at year-end 2007.

“There have been more store-closure announcements than usual so far this year, but I wouldn't call it a disaster in any way,” said James Bieri, president and CEO of Bieri Co., a Detroit-based consulting firm. “Some companies are having difficulties, but many retailers are doing quite well and will be looking to expand into the vacated space.”

Daniel B. Hurwitz, president and COO of Developers Diversified Realty Corp., made a similar prediction. “While there is clearly a slowdown of new store growth for the less successful merchants, the most successful will use the current environment to their advantage by stealing market share from their struggling competitors,” Hurwitz said on a conference call.

Bieri points to apparel chain Abercrombie & Fitch as an example of a solid performer in expansion mode. Abercrombie & Fitch says it plans to increase gross square footage by 11 percent this year, primarily through opening 110 stores in North America. Coach, too, will be opening stores — about 40 in North America this year, amounting to a square-footage increase for the year of about 20 percent.

Some retailers, though, are grappling with problems that have as much to do with weakness of concept as with weakness in the economy. “If retailers have the right concept, they're going to do well,” Bieri said. “Times like these force retailers to figure out what the consumer really wants, and if they're able to do that successfully, then they can really take off.” By and large, closures represent an opportunity to eliminate weakness, which can only help the retailers and tenants alike, he says.

Kampler agrees. “We're going to see healthier retail businesses as a result of these store cutbacks,” Kampler said. “It's going to be painful for a couple years, but we will be better off in the long run.”