Holiday Retail Outlook

Holiday Retail Outlook December 2012

This material is intended for information purposes only and does not constitute investment advice or a recommendation. The information and opinions contained in the material have been compiled or arrived at based upon information obtained from sources believed to be reliable, but we do not guarantee its accuracy, completeness or fairness. Opinions expressed reflect prevailing market conditions and are subject to change. Neither this material, nor any of its contents, may be used for any purpose without the consent and knowledge of AEW.

Where Do We Stand Heading into 2013?

2



U.S. U S GDP growth rate near 2%, 2% job growth averaging 150K per month and unemployment now below 8%



The ECB, Fed and BOJ are coordinated and committed to open ended accommodation d (Q (QE))



Low prices and cheap financing make housing a potential bright spot for 2013



But the so-called “fiscal cliff ” and debt ceiling extensions are rapidly approaching



U.S. expected to be back in recession in 2013 if mitigating compromises are not made soon



Household H h ld balance b l sheets h t are much h improved i d over the th pastt year, but b t uncertainty over tax rates and general economy must be on consumers’ minds this holiday season

AEW Research Conference Call: Holiday Retail Outlook

Consumer Sentiment Remains Low Consumers still gloomy about current conditions

CONSUMER CONFIDENCE INDEX 200 180 160

Expectations about the future have improved b t remain but i volatile and below prerecession levels

140 120 100 80 60 40 20

1978 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2011 2012

0

Current Conditions Source: Conference Board

3


Expectation for Future

U.S. Households Still De-Leveraging Household H h ld d debt bt to liability ratio now back to prerecession level

Household net worth nearly back to prerecession i peak k as well

28.0%

$70.0

26.0%

$65.0

24.0%

$60.0

22.0%

$55.0

20.0%

$50.0

18.0%

$45.0

16.0%

$40.0

14 0% 14.0%

$35 0 $35.0

12.0%

$30.0

10.0%

$25.0

8 0% 8.0%

$20 0 $20.0

6.0%

$15.0

4.0%

$10.0

2.0%

$5.0

0.0%

$0.0

H Household h ld N Net W Worth h Source: Federal Reserve

4


S i Savings R Rate

Li bili to A Liability Asset R Ratio i

Retail Sales Growth (Year-Over-Year Through November) 2008

Total

2010

2011

2012

(10.9%)

1.6%

7.0%

7.5%

3.4%

(6.5%)

1.2%

5.2%

7.3%

2.9%

Motor Vehicles & Parts

(26.4%)

3.5%

14.4%

8.4%

5.4%

Furniture & Home Furnishings Stores

(15.1%)

(7.9%)

1.7%

4.4%

6.2%

Electronics & Appliance Stores

(8.7%)

(5.3%)

(1.7%)

4.0%

(1.0%)

(10.5%)

(9.2%)

5.0%

5.0%

5.4%

1.5%

0.9%

3.0%

5.4%

2.6%

(4.8%)

(5.5%)

1.8%

(2.6%)

(3.1%)

1.3%

(0.9%)

4.9%

6.7%

6.0%

(7.5%)

11.4%

11.6%

17.8%

19.7%

Total ex Motor Vehicles & Parts

Building Materials & Garden Stores Grocery Stores Department Stores Food Service & Drinking Stores Online Sales

Source: Commerce Dept.

5

2009


Retailer “Dashboard” The “New Reality” Th E The Economy 

Fundamentals slowly improving while sentiment remains on roller coaster –

Fiscal cliff, Sandy, Elections, Euro crisis and turmoil in Middle East delivered 24/7

–

HH net worth and incomes improving albeit unevenly

–

Cautious sense of a housing recovery 

–

Hurricane Sandy – lost sales in heavily populated NY/NJ area largely offset Thanksgiving sales gains

Despite November drop, consumer confidence improving but skittish 

Focus on fiscal cliff – 25% in CC survey note fiscal cliff – only survey to record more concern over fiscal policy in last 50 years was 2011 debt ceiling “debate”

The Consumer

6



Hunker down mode – cautious, cautious patient and deliberate



Net worth, retirement plans, home values and employment concerns leave little room for impulse, especially for middle income consumers



Value is kingg – spread p of cheap p fashion,, online comparison p shopping pp g and “showrooming”



Quickly embracing increasingly powerful mobile devices such as smart phones and tablets to research and locate products, compare prices and, sometimes, make purchases



Bl k F Black Friday id –expanded d dh hours shift hif sales l while hil customers cherry h pick i k promotions i


Retailer “Dashboard” The “New Reality” Th R The Retailer il 

Significantly improved financial health and stability – “grind it out” mentality



Took economic “reset” of ‘08/’09 seriously and re-engineered business models to remain profitable in a protracted period of economic stagnation and increased competition



Initial focus on rationalizing store fleets and improving inventory management supports full embrace of a seamless, multi-channel, “customer centric” business strategy



Online sales ggrowingg q quicklyy – ggrowth opportunity pp y and a competitive p necessityy but tailoring approach to profitably satisfy customers expectations is fraught with technical challenges



“Bricks ‘n Clicks” links virtual and physical storefronts with increasingly complex BOH inventory and fulfillment systems to create a seamless multichannel shopping experience –

7

Research and order items through any channel (store, desktop, mobile), fulfill through customers’ preferred means (home delivery, store pick-up), and use data from transactions to customize marketing and promotional messages


Quotes from the Front Q The Great Recession – Then and Now Then… Then •

“We do not expect that the difficult economic conditions are likely to improve significantly in the near future, and any continuation or worsening of the credit crisis, or even the fear of such a development, could intensify the adverse effects of these difficult market conditions.” (Nordstrom – November 2008)

Now…

8

•

““…there’s h ’ still ill a llevell off uncertainty i out there h iin terms off when h customer behavior could bounce back to its normal trend. So we’re just being cautious.” (Nordstrom - November 2012)

•

“Our research with guests indicates that they are continuing to shop with discipline, focusing on lists and budgets and occasionally splurging on discretionary items. Notably in the third quarter we saw an increase in trips focused only on need need-based based items items.” (Target)


Quotes from the Front Q The Great Recession – Then and Now

9

•

““…consumers remain i cautiously ti l optimistic, ti i ti as th they perceive i the th path th to t recovery to be a bumpy one…of those homeowners who continue to delay home improvement projects, the majority report a lack of income growth as the primary reason, and almost half cite a reluctance to use financing.” (Lowe’s)

•

“…the economic picture in the U.S. is far from rosy. Of particular concern to me is the likely payroll tax increase slated to kick in at the beginning of the year. Anything that takes money out of the pockets of our customers creates a more challenging business environment. I certainly expect that our political leaders won’t lead us over the fiscal cliff, but we’ll manage through whatever economic circumstances we find ourselves in.” (Finish Line)


Holiday 2012 – Key Themes 

Black Bl kF Friday/Cyber id /C b Monday M d results l highlight hi hli h k key challenges h ll - and d opportunities i i - in i retail –

Little net demand creation – shifted sales around, as expanded hours pulled Holiday sales forward and replaced portion of sales previously lost to Sandy

–

Cautious shoppers, meanwhile, put off purchases and wait to cherry pick Thanksgiving promotions… and then they buy for themselves

–



10



80% reported “self-gifting” – deliberate, well-researched purchases



Department p stores most frequently q y shopped pp ((53.5%)) q quality, y, branded apparel pp at 30%-50% off – with online at 43.8% and discount stores at 39.4% close behind

Online sales continue to take share from stores - average total spend for the Thanksgiving/Cyber Monday weekend increased 6.3% to $423 while average online spend increased 14.3% to $172, increasing share from 37.8% to 40%

Total fourth quarter retail sales (excluding autos, gas and food) expected to increase 4.1% to $682 billion, above 10 year average of 3.5% but below 5.6% growth recorded in 2011 –

E-commerce E commerce (desktop and mobile) sales expected to grow 16-19% 16 19% with mobile devices driving up to 25% of this growth

–

4Q 2012 could mark first time e-commerce sales exceed 10% of total sales (up from 7.7% in ’10 and 8.4% in ’11) - Amazon and E-Bay represent ~ 30% of online market


Holiday 2012 – Key Themes 



11

Value V l reigns i supreme – cheap h fashion f hi iin the h malls, ll expanding di ““made d ffor outlet” l ” product and targeted online promotions limit full price sell-through and challenge margins –

Proliferation of cheap, disposable fashion – F21, H&M, and growth of outlet channel challenges price points and brand relevance

–

Disposable/fast/cheap fashion also raising the bar on fashion flow – more SKUs, more experimentation chasing trends vs. focused bets on core trends and signature looks

–

Online search via desktop p and mobile greatly g y facilitates comparison p shopping pp g across channels,, forcing retailers to constantly recheck pricing and promotions 

Consumers use mobile and desktop search apps to comparison shop 24/7 from home, work or in the store



Retailers monitor competition p - can q quicklyy adjust j p pricingg on website and e-mail special p offers to customers



Pricing niche remains in exclusive, branded product, but knock-offs appear quickly

Multi-channel retail – bricks ‘n clicks - picking up steam –

Customers embracing online shopping, shopping enabled by proliferation of mobile devices devices, particularly tablets, that take advantage of retailers improving ability to support and consistently deliver an effective “multi-channel” shopping experience

–

While stores remain 90% of sales and a critical part of the multi-channel strategy, online is growing faster – where is the balancing point???


Quotes from the Front Q State of the Retail Industry – Holiday 2012

12

•

“If If you ask me today what is the best market in the world [it] is back to the United States, U.S. is the one that is performing the best…the retailers that have stayed in business are pretty strong right now and when you look at our customer base, very strong, don’t see any sort of imminent bankruptcies or even people close to that like it was in ’08 08 and ’09. 09. Europe is not the same way. way.” (Li & Fung)

•

“I don’t know what the optimism is about…there’s something not right when we put a buck into the Internet and make twice as much money as opening a store.” (Mickey D l – J. Drexler J Crew) C )

•

“…everything is on sale all the time and shipped for free. Retailers have shifted their pricingg structures…down…outlet stores are ggrowingg faster than full p p price stores [and] ‘Flash sales’…and all other kinds of on-sale online models are proliferating at the speed of light. What’s more, if you wait two seconds, your smart phone will beep with an ad or a friend telling you where you can get whatever it is you’re thinking of buying, cheaper.” (The Robin Report)


Quotes from the Front Q State of the Retail Industry – Holiday 2012

13

•

““This industry, ““Thi i d the h retail il industry, i d continues i to change h dramatically d i ll and d rapidly. It will never go back to what it was, and we’ve seen the consequences for those that have not changed fast enough. There is no choice, which is why we will continue to accelerate our transformation.” (Sears Holdings)

•

“Sandy was much larger and much more severe than Irene. As a result, more people experienced more significant damage and financial loss. Even today, net, many residents are still struggling to restore their property and their lives. lives It It’ss for those reasons that we’ve assumed we will not recover those sales losses.” (DSW)

•

“I think there is a difference in shopping patterns...the big days are becoming bigger and bigger and the little days are becoming less significant. When they’re supposed to come out, they come out like crazy and they get bored a lot of the time on the rest of the days.” (Express)


Comparable p Store Sales (($ pper square q foot)) Regional Mall REITs

2004

2005

2006

2007

2008

2009

2010

2011

Rolling 12- Month 2012

General Growth*

$410

$437

$453

$462

$438

$406

$446

$505

$541

Macerich

$391

$417

$452

$467

$441

$407

$433

$489

$511

Simon**

$427

$450

$476

$491

$470

$433

$494

$536

$562

Taubman

$477

$508

$539

$555

$533

$498

$564

$641

$681

Green=Prior Green Prior Peak Sales Year

*GGP Sales post 2011 reflect Rouse spin-off **Simon Sales after 2010 Include Outlet Centers

14


Comparable p Store Sales Selected Specialty Retailers

Oct ’08

Nov ’08

Dec ’08

Fiscal Year 2008

(20.0%)

(28.0%)

(24.0%)

(13.0%)

(23.0%)

7.0%

5.0%

(6.0%)

1.0%

(5.0%)

12.0%

8.0%

10.0%

1.0%

(9.0%)

(2.0%)

(12.0%)

(11.0%)

(17.0%)

(10.0%)

(4.0%)

(1.0%)

3.0%

12.0%

Buckle

14.5%

15.0%

13.5%

20.6%

7.8%

1.2%

8.4%

3.2%

Children’s Place

4.0%

(7.0%)

5.0%

2.0%

(2.0%)

(2.5%)

(2.5%)

1.1%

Gap (All N. America)

(16.0%)

(10.0%)

(12.0%)

(12.0%)

(3.0%)

1.0%

(4.0%)

4.0%

Victoria’s Secret

(10.0%)

(9.0%)

(9.0%)

(9.0%)

(6.0%)

14.0%

14.0%

9.0%

Bath & Body Works

(7.0%)

(16.0%)

(11.0%)

(9.0%)

(1.0%)

5.0%

6.0%

6.0%

Abercrombie & Fitch Aeropostale American Eagle

15


Fiscal Year 2009

Fiscal Year 2010

Fiscal Year 2011

YTD ‘12

Comparable Co pa ab e Store Sto e Sa Sales es Selected Department Stores

16

Oct ’08

Nov ’08

Dec ’08

Fiscal Year 2008

Bon-Ton Stores

(11.1%)

(16.0%)

(5.8%)

(7.4%)

(5.4%)

0.9%

3.2%

0.3%

Dillard’s

(8.0%)

(9.0%)

(5.0%)

(7.0%)

(10.0%)

3.0%

4.0%

4.0%

JC Penney

(13.0%)

(11.9%)

(8.1%)

(8.5%)

(6.3%)

2.5%

0.2%

(22.3%)

Kohl’s

(9.0%)

(17.5%)

(1.4%)

(6.9%)

0.4%

4.4%

0.5%

(0.5%)

Macy’s

(6.0%)

(13.3%)

(4.0%)

(4.6%)

(5.3%)

4.6%

5.3%

3.1%

Neiman Marcus

(26.8%)

(11.9%)

(27.5%)

(21.4%)

(0.1%)

8.1%

7.9%

5.4%

Nordstrom

(15.7%)

(15.9%)

(10.6%)

(12.4%)

(7.2%)

7.9%

8.2%

6.7%

Saks

(16.6%)

(5.2%)

(19.8%)

(6.1%)

(14.7)

6.4%

9.5%

4.3%


Fiscal Year 2009

Fiscal Year 2010

Fiscal Year 2011

YTD ’12

Comparable Co pa ab e Store Sto e Sa Sales es Selected Off-Price Retailers

Oct ’08

Nov ’08

Dec ’08

Fiscal Year 2008

Costco

2.0%

1.0%

2.0%

8.0%

3.0%

4.0%

6.0%

7.0%

Sam’s Club

3.6%

3.5%

0.1%

3.6%

1.4%

1.7%

5.1%

4.1%

(4.8%)

(10.4%)

(4.1%)

(2.9%)

(2.5%)

2.1%

3.0%

3.2%

2.2%

3.4%

1.9%

3.2%

(0.2%)

(1.6%)

0.2%

2.1%

Ross

(2.0%)

(2.0%)

0.0%

2.0%

6.0%

5.0%

5.0%

2.0%

TJX

(6.0%)

(12.0%)

(5.0%)

1.0%

6.0%

4.0%

4.0%

7.0%

Target Wal*Mart Stores

17


Fiscal Year 2009

Fiscal Year 2010

Fiscal Year 2011

YTD ‘12

YTD 3Q 2012 Results: Specialty Retailers Abercrombie

YTD ’08

YTD ’09

YTD ’10

YTD ‘11

YTD ‘12

YTD ’08

YTD ’09

YTD ‘10

YTD ‘11

YTD ‘12

Net Sales

$2.5B

$2.0B

$2.3B

$2.8B

$3.0B

$1.7B

$1.4B

$1.5B

$1.7B

$1.8B

Gross Margin

67.6%

64.4%

63.9%

62.7%

62.5%

51.6%

55.0%

57.2%

56.6%

56.8%

SG&A

55.2%

68.9%

60.3%

57.0%

57.7%

46.1%

53.3%

49.6%

47.9%

47.5%

Operating Income*

12.4%

(4.2%)

3.8%

5.9%

4.8%

5.5%

(1.9%)

7.5%

8.6%

9.3%

EBT

12.8%

(4.0%)

3.7%

5.8%

4.6%

5.5%

(2.0%)

7.4%

8.6%

9.3%

Cash**

$298M

$523M

$618M

$488M

$370M

$80.7M $134.1M $223.6M $139.6M $166.5M

Inventories

$505M

$347M

$512M

$679M

$536M

$274.5M $211.2M $231.9M $278.2M $270.4M

*Operating income before interest expense and income taxes **Includes cash and marketable securities

18

Ann Taylor


YTD 3Q 2012 Results: S Specialty l Retailers R l GAP

Urban Outfitters

YTD ’08

YTD ’09

YTD ‘10

YTD ‘11

YTD ‘12

$10.4B

$10.0B

$10.3B

$10.3B

$10.9B

$1.3B

$1.35B

$1.6B

$1.7B

$1.9B

Gross Margin

38.9%

40.7%

41.0%

37.7%

40.2%

40.7%

40.1%

41.8%

36.7%

37.0%

SG&A

27.8%

28.3%

27.6%

27.3%

28.0%

22.9%

23.7%

23.5%

24.1%

24.5%

Operating Income*

11.0%

12.3%

13.3%

10.4%

12.5%

17.8%

16.3%

18.3%

12.6%

12.5%

EBT

11.3%

12.3%

13.4%

9.9%

12.5%

18.3%

16.7%

18.4%

12.9%

12.5%

Cash**

$1.6B

$2.2B

$1.6B

$1.4B

$1.7B

$199.0M $418.4M $503.6M

Inventories

$2.2B

$2.0B

$2.2B

$2.3B

$2.3B

$252.3M $234.5M $289.3M $367.4M $395.4M

Net Sales


19


YTD ‘08

YTD ‘09

YTD ‘10

YTD ‘11

YTD ‘12

$130M $362.7M

YTD 3Q 2012 Results: D Department S Stores Nordstrom

YTD ‘08 Net Sales

YTD ’09

Macy’s

YTD ‘10

YTD ‘12

YTD ’08

YTD ‘09

YTD ‘10

YTD ‘11

YTD ‘12

$5.97B

$5.7B

$6.5B

$7.3B

$8.2B

$16.9B

$15.6B

$16.7B

$17.7B

$18.3B

Gross Margin

35.5%

35.3%

37.0%

37.7%

37.3%

39.9%

39.9%

40.4%

40.1%

40.1%

SG&A

27.3%

25.8%

26.4%

27.1%

27.6%

36.7%

37.4%

35.9%

33.7%

33.2%

Operating Income*

10.4%

9.5%

10.6%

10.5%

9.7%

2.9%

1.2%

4.5%

6.4%

6.9%

8.8%

8.2%

9.4%

10.9%

10.0%

0.4%

(1.5%)

1.8%

4.5%

5.2%

Cash**

$68M

$484M

$1B

$1.4B

$1.2B

$300M

$489M

$715M

$1.1B

$1.3M

Inventories

$1.3B

$1.2B

$1.3B

$1.5B

1.65B

$6.9B

$6.4B

$6.5B

$7.2B

$7.2B

EBT


20

YTD ‘11


YTD 3Q 2012 Results: D Department S Stores JC Penney

Sears***

YTD ’08

YTD ’09

YTD ‘10

YTD ‘11

YTD ‘08

YTD ‘09

YTD ‘10

YTD ‘11

YTD ’12

$12.7B

$12.0B

$12.0B

$11.8B

$9.1B

$18.3B

$16.8B

$16.3B

$15.3B

$14.7B

Gross Margin

38.7%

39.9%

40.0%

38.7%

34.5%

28.4%

29.6%

28.6%

27.2%

28.4%

SG&A

30.2%

32.3%

32.2%

31.8%

36.2%

26.1%

27.5%

27.9%

28.4%

28.5%

Operating Income*

5.9%

2.3%

3.1%

0.6%

(6.2%)

(1.0%)

(0.9%)

(2.0%)

(4.0%)

(1.4%)

EBT

1.8%

0.7%

1.5%

(0.8%)

(8.1%)

N/A

N/A

N/A

N/A

N/A

Cash**

$1.6B

$2.1B

$1.7B

$1.1B

$525M

$1.2B

$1.47B

$790M

$591M

$622M

Inventories

$4.5B

$4.0B

$4.3B

$4.4B

$3.4B

$11.4B

$10.8B

$11.2B

$10.9B

$9.6B

Net Sales

YTD ’12

*Operating income before interest expense and income taxes **Includes cash and marketable securities *** Sears Domestic except cash and inventory (Sears Holdings 2011 and 2012 results adjusted fro spin-off of Sears Hometown and outlet stores)

21


YTD 3Q 2012 Results: Big Box Home Depot

YTD ’08

YTD ’09

YTD ’10

YTD ’11

YTD ’12

YTD ’08

YTD ’09

YTD ’10

YTD ’11

YTD ’12

$56.7B

$51.6B

$52.9B

$54.4B

$56.5B

$18.8B

$21.1B

$22.1B

$22.3B

$22.2B

Gross Margin

33.6%

33.7%

34.2%

34.3%

34.5%

24.0%

24.8%

25.8%

25.3%

24.7%

SG&A

24.0%

23.3%

22.8%

22.3%

21.8%

20.7%

21.8%

22.5%

22.7%

22.4%

Operating Income*

7.2%

7.9%

9.1%

9.8%

10.6%

3.3%

2.7%

3.3%

2.6%

1.3%

EBT

6.4%

6.9%

8.2%

9.0%

10.0%

3.3%

2.6%

3.2%

2.3%

1.1%

Cash**

$874M

$2.7B

$1.4B

$2.2B

$2.5B

$544M

$670M

$843M

$2B

$680M

Inventories

$11.9B

$10.8B

$11.0B

$10.7B

$10.9B

$6.1B

$5.7B

$6.3B

$6.4B

$6.3B

Net Sales

*Operating income before interest expense and income taxes **Includes cash and marketable securities ***Best Buy results through 2Q 2012

22

Best Buy***


YTD 3Q 2012 Results: Big Box Target

YTD ’08 Net Sales

YTD ’09

Kroger

YTD ’10

YTD ’12

YTD ‘08

YTD ‘09

YTD ’10

YTD ’11

YTD ’12

$45.4B

$45.2B

$46.7

$48.6B

$50.6B

$58.7B

$58.2B

$62.B

$69B

$72.6B

Gross Margin

33.2%

33.4%

33.1%

32.3%

32.0%

22.6%

23.4%

22.4%

20.9%

20.4%

SG&A

20.8%

20.8%

20.9%

21.5%

21.1%

17.7%

18.5%

17.8%

16.6%

16.0%

Operating Income*

7.1%

6.8%

7.4%

7.6%

7.3%

3.1%

1.0%

2.6%

2.5%

2.7%

EBT

5.7%

5.5%

6.2%

6.3%

6.2%

2.4%

0.4%

2.1%

2.0%

2.2%

$918M

$864M

$936M

$821M

$1.5B

$280M

$517M

$758M

$215M

$435M

$9.1B

9.4B

$9.6B

$9.9B

$9.5B

$5.4B

$5.3B

$5.3B

$5.5B

$5.5B

Cash**

Inventories

*Operating income before interest expense and income taxes **Includes cash and marketable securities ***Best Buy results through 2Q 2010

23

YTD ’11


E-Commerce – Multi-Channel Retailers Take Ownership 



S Seamless l multi-channel li h l shopping h i is i the h Holy H l Grail G il off retail il –

Basically four storefronts – full line store, E-Commerce (desktop), M-Commerce (mobile app) and outlet – supported by an increasingly integrated BOH sourcing, inventory management, and fulfillment platform

–

Customer can engage with retailers using any storefront or combination of storefronts – store to affirm product choice, web to research products, pricing and availability, and either channel to order for home delivery or in-store pick-up

–

Improved websites and data mining techniques pose new opportunities to anticipate new f h fashion and d product d trends, d communicate directly d l with h customers with h customized d offers ff that h reflect their buying behavior, and also identify new store opportunities

–

New skill set for retailers – merchant meets techie – setting up and operating a high quality multi-channel shopping platform is far more difficult than most imagine Link storefronts across channels



BOH fulfillment has to combine a traditional “push” store replenishment system with a customorder DTC “pull” system



Customers expect easy to navigate, fast web sites, deep product selections, competitive prices, a quick k and d secure checkout h k process, and d free f next day d delivery! d l

While stores remain a profitable and critical part of any retailers’ business model, online sales continue to grow double digits –

24



90% of retail sales are made from traditional stores with well-established p profit metrics


E-Commerce – Multi-Channel Retailers Take Ownership



–

Same store sales S l have h recovered d slowly l l while hil annuall online li sales l continue i to grow at a low-tol mid double digit pace

–

Finding balance between stores and online channels largely dependent on type of merchandise, customer base and fulfillment capabilities

–

Store fleet “rationalization” of last several years has largely run its course, with most retailers focused on improving customer experience and integrating stores into multi-channel offering with renovations, “right-sizing” and in-store technology upgrades

Effect on Bricks and Mortar – Friend or Foe? –

Friend to branded product, adjunct to mass market merchandise and foe to commodities and “digitizable” products (CDs and books)

–

More positive where goods are customized, have high fashion, fit and style attributes and the overall in-store buying experience is an important part of the retailers’ image 



25

Key is increasing customer interaction and fulfillment – keep salespeople on salesfloor helping customers and always fulfill the order

Bottomline – while still only 10% of sales, e-commerce is a potent force that, combined with a well-designed, well designed, well-executed well executed fulfillment platform, is a critical component of any successful retailers’ business model going forward


E-Commerce Direct-to-Customer Sales Growth and Penetration vs. Store Growth – 2011 DTC Sales Growth

DTC % of Total Sales

% Sales Growth

% GLA Growth

Abercrombie & Fitch

36%

13%

17.7%

0%

American Eagle O f Outfitters

15%

12%

4.6%

1%

Ann Taylor

28%

11%

9.7%

6%

Express

39%

10%

6.1%

3%

GAP

20%

11%

((3.5%))

((3%))

Lululemon

85%

11%

38.3%

32%

Williams Sonoma

12%

44%

1.8%

(4%)

JC Penney

0%

9%

0%

0%

Kohl's

37%

5%

1.0%

2%

Macy's

40%

7%

3.8%

(1%)

Nordstrom

30%

9%

10.0%

4%

Target

10%

2%

4.0%

1%

W l*M Wal*Mart

20%

2%

5 3% 5.3%

3%

Specialty Retailers

Department Stores

Mass Merchants

Source: IBM Digital Analytics Benchmark

26


Quotes from the Front Q Competitive Strategy – Where Do We Go From Here?

27

•

“…in the next five,, 10 yyears,, the bulk of our ggrowth will come online. That does not negate our core full-line stores – it really is the heart and soul of our business. But where the growth is coming from is online and we’re really working hard to have that functionality.” (Nordstrom)

•

“Inventory will make you sick and real estate will kill you.” (Limited)

•

“Retail Retail is detail…very detail very few retailers in my judgment understand the store side of the business.” (Limited)

•

“What’s most important p is the product. p Businesses can get g overlyy focused on technology and forget about those core things she’s looking for. And we don’t think at least for our business that technology drives a lot of emotional content, which…is the most important aspect of our business.” (Limited Brands)

•

“…coming off 2008 and 2009, I think that the business probably lost perspective of what a healthy brand…looks like and therefore what one of the measures of a healthy brand…is how much – what percentage – of your units go through at regular l price. i This Thi h has b been th the b bestt year we’ve ’ h had d iin a llong ti time.”” (G (Gap))


Quotes from the Front Q Competitive Strategy – Where Do We Go From Here?

28

•

“They come b “Th back k tto b buy thi things b because th they really ll k know th the diff difference between b t a value price and a cheap price. They know what cheap clothes look like, and we have to depend on that. We have to depend on the customer not wanting to look cheap.” (Express)

•

“…we’ll continue to focus on speed to market…but we will not be fast fashion. We’ll be relevant fashion…We’ll be looking to the streets on what they’re wearing, blogs on what they they’re re talking about, in social media about what they they’re re sharing to get a pulse on our customer.” (Aeropostale)

•

“…we can eventually be bigger than Simon Properties as we add stores in the market, which then gets you where you say ‘how do you value something like this?’ Are you owning old JC Penney or are you owning JCP, which is a start-up with pretty dynamic economic potential? Now, Simon is valued at $72 billion today, General Growth is at $33.8 billion. But we’re in kind of the same business, and we’re valued at $7 billion.” (JC Penney)


E-Commerce – Reading g the Thanksgiving g g Weekend Tea Leaves 

29

IBM survey iindicates di online li sales l increased i d 20.7% 20 7% on Black Bl k Friday F id and d 30.2% 30 2% on Cyber Monday –

Despite solid sales gains, survey found that customers do extensive research and price comparisons online before buying, with over 80% of purchases made from a desktop connection i

–

Average online order value declined nearly 5% to $181 on Black Friday and fell 6.6% to $185 on Cyber Monday

–

Low conversion rates – depending on day and merchandise category, conversion rates (% of web sessions that result in a sale) varied from 3% to 6%

–

Average session lasted 6 to 7 minutes, down 10% to 20% from visit times recorded in 2011; the number of pages viewed per session was relatively flat overall at approximately 7 ½ pages, with customers browsing on approximately 45% of all sessions

–

Online shoppers placed items in their shopping carts in only 11.5% to 13.7% of their sessions, abandoning approximately 2/3rds of those shopping carts at check-out

–

While online visits conducted via a mobile device increased by over 2/3rds to nearly a quarter of overall traffic, sales made through the mobile channel represented only 13% to 16% of online sales, with lower conversion rates (2.7% and 3.6% for Black Friday and Cyber Monday, respectively) than desktop users


E-Commerce – Reading g the Thanksgiving g g Weekend Tea Leaves



30

–

The use off iPh Th iPhones and d iP iPads d iincreased d significantly i ifi l – iPad iP d traffic ffi doubled d bl d to 9.75% 9 75% off overall ll web traffic on Black Friday, while iPhone traffic increased over 60% to 8.7% of all mobile site traffic.

–

Online sales generated through social networks continued to fall, representing less than half a percent of online sales

Reflecting strong efforts by several department stores to offer seamless multi-channel shopping, online department store sales increased nearly 45% on Cyber Monday, with average orders increasing 54% to $174 and shopping cart abandonment rates f lli from falling f 75% last l year to 65% in i 2012


E-Commerce - Black Friday/Cyber Monday E-Commerce E Commerce Metrics - 2011/2012 Total U.S. Sales Black Friday y

Black Friday y

% Change g

Cyber y Monday y

Cyber y Monday y

% Change g

2012

2011

y/y

2012

2011

Y/Y

Total U.S. Sales Increase Y/Y Transaction Metrics

20.68%

30.25%

Items/Order

5.56

6.37

(12.7%)

8.34

7.31

14.1%

Average Order Value

$181

$190

(4.7%)

$185

$198

(6.6%)

Conversion Rate

4.58%

4.57%

0.22%

5.83%

5.71%

2.10%

New Visitor Conversion Rate

3.72%

3.55%

4.79%

4.74%

4.39%

7.97%

Conversion Metrics

Shopping Cart Sessions Shopping Cart Abandonment Rate Session Traffic Metrics

11.50%

11.30%

1.77%

13.68%

12.98%

5.39%

65.66%

65.53%

0.20%

61.85%

62.31%

(0.74%)

Average Session Length

6:36

7:26

(10.54%)

7:06

7:30

(5.33%)

Bounce Rate

34.92%

33.10%

5.50%

32.77%

31.51%

4.00%

Browsing Sessions

47.49%

47.23%

0.55%

48.09%

46.90%

2.54%

7.24

7.59

(4.61%)

7.63

7.74

(1.42%)

Mobile % of Sales

16.26%

9.84%

65.24%

12.91%

6.58%

96.20%

Mobile % of Site Traffic

24.04%

14.33%

67.76%

18.42%

10.75%

71.35%

Mobile Bounce Rate

40.48%

41.31%

(2.01%)

39.42%

41.44%

(4.87%)

Mobile Conversion Rate

2.72%

2.78%

(2.16%)

3.62%

2.99%

21.07%

iPhone Traffic

8.71%

5.38%

61.90%

6.92%

4.06%

70.44%

iPad Traffic

9.75%

4.75%

105.26%

7.13%

3.27%

118.04%

Social % of Sales

0 34% 0.34%

0 53% 0.53%

(35 85%) (35.85%)

0 41% 0.41%

0 56% 0.56%

(26 79%) (26.79%)

Page Views Per Session Mobile Metrics


31


E-Commerce - Black Friday/Cyber Monday EC E-Commerce r Metrics M tri - 2011/2012 Department Store Sales Black Friday 2012

Black Friday 2011

Total US Department Store Sales Increase Y/Y

% Change y/y

Cyber Cyber Monday 2012 Monday 2011

16.83%

% Change Y/Y 43.11%

Transaction Metrics Items/Order

3.49

3.42

2.0%

2.81

2.92

(3.77%)

Average Order Value

$195

$122

59.7%

$ 174

$ 113

54.31%

C Conversion i R Rate

3 99% 3.99%

3 44% 3.44%

15 99% 15.99%

4 25% 4.25%

3 69% 3.69%

15 18% 15.18%


3.66%

2.64%

38.64%

3.76%

2.91%

29.21%

Shopping Cart Sessions

10.12%

13.47%

(24.87%)

10.70%

12.26%

(12.72%)

Shopping Cart Abandonment Rate

64.32%

76.27%

(15.67%)

63.84%

73.93%

(13.65%)

6:37

8:23

(21.07%)

6:38

8:18

(20.08%)

Bounce Rate

27.32%

23.54%

16.06%

24.32%

24.50%

(0.73%)

Br Browsing i Sessions S i

44 10% 44.10%

50 81% 50.81%

(13 21%) (13.21%)

47 17% 47.17%

51 42% 51.42%

(8 27%) (8.27%)

8.12

11.08

(26.71%)

8.38

10.59

(20.87%)

Conversion Metrics

Session Traffic Metrics Average Session Length

Page Views Per Session


32


E-Commerce - Black Friday/Cyber Monday EC E-Commerce r Metrics M tri - 2011/2012 Apparel Sales Black Friday 2012

Black Friday 2011

Total US Apparel Sales Increase Y/Y

% Change y/y

Cyber Cyber Monday 2012 Monday 2011

17.47%

% Change Y/Y 25.33%

Transaction Metrics Items/Order

2.41

2.50

(3.60%)

2.35

2.47

(4.86%)

Average Order Value

$147

$140

5.20%

$143

$141

1.56%

C Conversion i R Rate

2 98% 2.98%

3 24% 3.24%

(8 02%) (8.02%)

4 00% 4.00%

4 13% 4.13%

(3 15%) (3.15%)


2.25%

2.37%

(5.06%)

3.18%

3.05%

4.26%

Shopping Cart Sessions

9.16%

9.58%

(4.38%)

10.98%

10.82%

1.48%

70.25%

67.72%

3.74%

66.26%

64.37%

2.94%

Conversion Metrics

Shopping Cart Abandonment Rate Session Traffic Metrics Average Session Length

6:37

8:23

(21.07%)

6:38

8:18

(20.08%)

Bounce Rate

27.32%

23.54%

16.06%

24.32%

24.50%

(0.73%)

Br Browsing i Sessions S i

44 10% 44.10%

50 81% 50.81%

(13 21%) (13.21%)

47 17% 47.17%

51 42% 51.42%

(8 27%) (8.27%)

8.12

11.08

(26.71%)

8.38

10.59

(20.87%)

Page Views Per Session


33


The Changing Retail “Storefront”

34



Customers can shop C h multiple l i l ““storefronts” f ” – physical h i l store, website b i accessed d via i desktop d k (E-Commerce) or mobile device (M-Commerce), in-store mobile apps and social networks (S-Commerce) - with major platform design and operating challenges



Immediacyy brought g about byy the internet ggenerally, y and mobile devices in p particular, has dramatically increased consumers’ expectation that requests, complaints or inquiries will be dealt with immediately regardless of channel, device, location or time –

Delivering on promise is another matter...but, like recent improvements in “standard” retail operating p g models,, retailers are focused on improving p g these capabilities p

–

Difficult to navigate sites, with poor graphics, limited product information, slow page downloads and confusing checkouts are the same as a poorly run traditional store except that discouraged online customers can exit one store’s website and enter another’s quickly and easily with just a few clicks on their iPad while at home in their pajamas

–

Online shopping currently characterized by low conversion and high “bounce” rates – small percentage of visits result in a sale and customers leave quickly if they are not satisfied

–

Over 2/3rds of shopping carts are abandoned at checkout!!


The Changing Retail “Storefront” 

C Customer expectations i vs. technical h i l reality li –



35

Website platform has to be up to the task – bandwidth and platforms to quickly deliver high quality data, handle extreme traffic peaks along with efficient and easily navigated check-out, purchase confirmation, shipping and order tracking capabilities 

FOH website has to seamlessly coordinate with BOH fulfillment



Online platform also has to handle orders from a rapidly proliferating array of devices and applications with differing levels of technical compatibility



Smaller retailers outsource e-commerce to Amazon or EBay

–

Especially challenging with mobile devices –slower than desktops, with smaller screens, evolving shopping and check-out functions, and proliferating apps

–

iPad and tablets a game-changer for mobile – portable, faster, better screen resolution

Ultimate challenge to retailers – build and sustain a multichannel storefront to compete in an increasingly global marketplace –

Integration of online and bricks and mortar shopping changes definition of trade area – no longer compete with just the other players in the same town or region

–

While logistically Whil l i i ll and d legally l ll complicated, li d expect retailers il to increasingly i i l use online li capabilities bili i to compete globally


Quotes from the Front Q Bricks and Clicks

36

•

“The beautyy of what we have here with the e-commerce site is that we can test these categories quickly online, decide which of the classifications are working the best before we roll them out to stores.” (Williams-Sonoma)

•

“…we we’ve ve been spending a lot on the infrastructure to assure that we can accumulate and mine all the data that we’re gathering and to assure that that data maintains the highest level of security and privacy.” (Nordstrom)

•

“Starting in fiscal year 2014, we will no longer report URBN comparable store or directto-consumer net sales rates. We will continue to report comparable retail segment net sales, which combines our stores and direct-to-consumer channel. This change reflects the changes we see in consumer behavior and our growing ability to present each brand as an omni-channel i h l experience. i With the th growth th off mobile bil and d online li sales l that th t can occur anywhere including inside one of our stores, combined with our offer to customers to return products to any store or to the fulfillment center, the line between store sales and direct-to-consumer sales has become increasingly blurred.” (Urban Outfitters)

•

“…this initiative allows us to fulfill customer demand from any of our points of inventory supply including each fulfillment center and all of our stores. During the third quarter, $23 million of direct-to-consumer initiated demand was filled from the stores. Without this hi initiative, i i i i we estimate i that h one-half h lf off that h demand d d would ld have h been b lost l due d to outof-stock positions in our fulfillment centers.” (Williams-Sonoma)


Quotes from the Front Q Mobile Devices – Friend or Foe?

37

•

“The adoption “Th d ti off smartt phones h with ith b barcode d scanning i software ft and d internet i t t access has h the potential to substantially alter consumer behavior in the retail environment. With this technology, consumers can quickly and easily compare prices across retailers while in store or online, or locate an item that is out of stock.” (Federal Reserve Board)

•

“Just like learning a new skill where people start with curiosity, move to deliberate practice and ultimately move to doing it instinctively…how people shop today is changing and it isn’t just the younger generation that is benefitting from iPads, Facebook and d online l retailing. l As A shopping h and d marketing k tools l become b ubiquitous, b easier to use and more integrated into our society, everyone’s lives are being impacted by them, young and old alike.” (Ed Lampert – Sears Holdings)

•

“We have rolled out free in-store WiFi across the chain allowing guests to research products and use our apps while they’re shopping in our stores. And we’ll continue to integrate digital features into our fourth quarter marketing, incorporating QR codes in our store signing and marketing vehicles” (Target)

•

“In store, we’ve created QR codes for each of our top 20 toys which allow guests to purchase items by scanning the codes on store shelves and having them shipped anywhere in the U.S. U S for free. free ” (Target)


BOH Inventoryy and Supply pp y Chain Management 

IIntegrating i inventory i systems across distribution di ib i platforms l f (store ( and d direct-todi customer) to fill orders and deliver products to multiple customers ordering from multiple storefronts is more complex than it appears



Multi-channel distribution systems y fundamentallyy different than traditional “push” p replenishment systems used by many retailers – must combine “push” store replenishment system with “pull” systems used by dedicated online retailers –

Push systems designed to efficiently supply steady stream of goods to an established network of distribution centers and stores accordingg to a standard schedule 

–

38

‘08/’09 inventory debacle forced retailers to rethink these systems – better control merchandise flow, avoid overstocks and stockouts while increasing inventory turn – move toward a ‘pull’ inventory system

DTC systems y are completely p y different – all orders are customized, each one specifying p y g different items, in different quantities, at different times going to different addresses 

Extreme peaks in DTC demand – huge volume of Cyber Monday orders that have to be picked, packed and shipped in 1-3 days



Challenging g g staffingg (“surge” g labor at p peaks), shipping pp g (new DOT rules capping pp g trucker drivingg hours go into effect July 2013), and margin issues



1/3rd of internet purchases were shipped for free 5 years ago – now more than half are shipped for free with a minimum purchase of $50-$75


BOH Inventoryy and Supply pp y Chain Management 

IIn addition, ddi i the h centralized/regional li d/ i l “distribution “di ib i center”” model d l iis changing h i – retailers il require seamless access to all their inventory regardless of location or channel –

Previously inventory “silos” – separate inventories for in-store, catalogue and internet – stock-out in one store could not be filled by inventory gathering dust in the catalogue warehouse 100 miles away or another h store 10 miles il away

–

Retailers moving to fully integrated inventory systems that, in effect, allow customers to source goods from retailers’ entire inventory, no matter where the inventory resides 



39

Proliferation of “ship from store” and “pick, pack and ship” programs

“The Last Mile” in the distribution chain allows retailers to offer customers the most convenient delivery options – an important competitive advantage –

More options than ever – ship to home, ship to work, ship to local store for pick-up

–

IIn-store t pick-up i k model d l favored f d by b retailers t il – utilize tili existing i ti store t replenishment l ih t system, t avoid id additional shipping costs/charges, get customer into store for add-on purchases and handle returns


Quotes from the Front Q Inventory Planning, Sourcing and Inflation

40

•

“…we we’ve ve been talking about how inventory can be viewed more seamlessly from a customer perspective between channels…the big shift for us is how do we start treating our inventory that’s seamless to a customer across channels of online and specialty and across geographies.” (Gap)

•

“we had more frequent flows of merchandise. That’s enabling us to buy fashion to sell out and to be in stock on our continuous products. It’s giving us the opportunity to actually appear to the customer that we’re flowing a lot more product and a lot more innovation to them, h but b in i fact, f we’re ’ doing d i so while hil also l managing i iinventories i d down..”” (A (American i Eagle Outfitters)

•

“…we’re workingg to become faster and we’re doingg that with conservative p plans,, shorter lead times and more dollars open to chase, which we have said is 60 to 105 days…we’ve invested more in brand-specific design talent. And in terms of fashion component, we’re reacting quickly to runway and street.” (Abercrombie & Fitch)

•

“…if you go back a few years at the TJX level, we were turning at…nine times a year, and…at the end of last year…we were between 10 and 11…right now we’re trending…to be approximately 12.” (TJX)


E-Commerce – Retailer Initiatives 

Full Steam Ahead – Integrating Stores and Online Channels –

Nordstrom – mobile POS supports in-store service and fulfillment; ahead of curve on integrating inventory across platforms as well as mining customer data to identify trends and personalize marketing outreach

–

Macy’s – integrate store inventory across channels, My Macy’s localized initiative, and investments in mobile technology in-store 



41

Herald Square store renovation integrates latest technology (in-store mobile content, LED signage and interactive displays) with traditional charm (wood escalators, traditional display windows and exterior awnings)

–

Williams-Sonoma – fine-tune web site content, graphics and product information, integrate web ordering and store pick-up, mobile apps to aid in-store product research – expect DTC to represent 50% of sales in five years

–

Staples – do or die; business customer base prefers ease and convenience of placing routine orders on-line; testing lockers with Amazon

Significant Investments Underway –

Wal*Mart – direct competition with Amazon; major R&D investments –has spent over $300MM acquiring $ q g tech firms,, such as Kosmix,, which it has folded into WalmartLabs to create platforms and business models built on mobile technology.

–

Urban Outfitters – integrate mobile technology into store environment and web – “anything you see in store you can order on your handheld”; 3% of Q3 on-line orders fulfilled from stores via new “pick, p p pack and ship” p program p g

–

Best Buy – avoid becoming Amazon’s “showroom” – expand website SKU’s, sharpen pricing and enhance in-store pick up (40% of online orders picked up in-store)


E-Commerce – Retailer Initiatives 

W b it Largely Website L l Freestanding F t di –



42

Dick’s - look to expand but patient, channel mainly for clearance (poor margins)

Limited E-Commerce –

Target – silent for now; experimenting with QR/mobile technology in stores

–

Ross/TJX – strong inventory systems in-place, but overstock business does not lend itself to fully integrated e-commerce platform – more likely for clearance

–

Costco – silent, situation similar to Ross/TJX


Quotes from the Front Q E-Commerce – Multi-Channel Retail

43

•

““…the th multi-channel lti h ld dynamic i iis where h we’re ’ actually t ll buying b i inventories i t i specifically ifi ll for online as well as we’re buying for store. And the most efficient way to do that is to place the inventory where the demand is, and to the extent we’ve got good information, good history, we’re able to do that relatively well.” (Nordstrom)

•

“We absolutely know we have a large opportunity in small sizes across the stores and online. And interestingly, our multichannel initiative has really brought that to light.” (Ann Taylor) light.

•

“…you got to be careful who you imitate. So Amazon is a very large business and certainly by many measures a very successful business. But you didn’t see them on our operating income chart about who we’re aspiring to from an operating income basis. You got to be careful of who you follow because they may be pursuing a model that doesn’t work or certainly may not work for us.” (Limited Brands)

•

“Polaris, our search engine developed in-house by our technology teams, is improving conversions by 10% to 15%. In October we announced our same-day delivery pilot in four cities, with customers receiving their orders within hours of placing an order. order ” (Wal-Mart) (Wal Mart)


JC Penney and, Macy Macy’ss – A Tale of Two Department Stores JC P Penney “Great Lurch Forward” under leadership of former Apple retail executive

44



Transform JC Penney from a promotional, limited service department store into a specialty department store featuring over 100 branded stores offering “fair” fair everyday prices and limited promotions



While most department stores feature a handful of “licensed departments” (Polo, Nautica, cosmetics), JC Penney’s strategy is more similar to that of a regional mall



Massive undertaking with over 1,100 stores and 65 million square feet of selling area – 11% of selling area transformed to date



36 month transformation – use cash from “old” JC Penney to fund creation of the new “JCP” JCP –

significant clearance, inventory reductions and limited promotions have significantly reduced sales, customer traffic and cash

–

8 new shops in place to date, including Sephora, Mango, IZOD, Levi’s, Arizona Jean and Liz Claiborne – new stores reportedly generating sales of $270 per square foot versus old JC Penney average of $135 per square foot

–

Town square vision, with streets (wide aisles), individual stores and a central square


JC Penney and, Macy Macy’ss – A Tale of Two Department Stores 

“Most start-up p retailers are constrained byy what? Space. p They’ve y ggot to build stores. We aren’t space constrained. We were strategy constrained…[when complete] we will have 64 million square feet of space built out into specialty stores from the kind of brands you find in the mall…that are finally presented in the specialty store environment” ((Ron JJohnson))

Macy’s Macy’s y strategy gy takes traditional department p store retailingg – branded merchandise sourced by centralized buying teams with a handful of leased departments – and integrates it into a seamless multichannel marketing, fulfillment and inventory management platform

45



Integrated inventory and fulfillment across channels – source inventory from DTC warehouses or “ship from store” to fulfill customer orders both online and in stores



Engage shoppers in-store with mobile devices – Backstage Pass integrates Quick Response (QR) codes into in-store promotions on exclusive branded product



Personalized, highly targeted marketing and promotion – “My Macy’s” localization initiative based on historic buying patterns of over 30 million shoppers in customer database



Leverage heritage and brand equity with state of the art ee-commerce commerce and mobile capabilities


Retail Real Estate 





46

G Grocery Anchored: A h d –

Growing appreciation for higher quality organics and specialty items vs. strong value orientation for standard food-stuffs

–

Strong grocers “OK” but remain under attack from Wal-Mart at low end and Whole Foods, Fresh Market and others at upper end…avoid the middle of the barbell

–

Dollar Stores thriving; Mom and Pops remain under pressure

Power Centers: –

Beware th B the shift hift to t online li sales l – showrooming h i a reall concern unless l retailer t il embraces b th the change with better fulfillment, sharp pricing and services

–

Transition to “power village” a significant positive – incorporate more food and restaurant uses that drive additional traffic and reduce reliance on boxes

–

Overhang O h ffrom b box closures l – Linen’s, ’ C Circuit, Mervyn’s ’ – slowly l l b being absorbed b b d in in-fill f ll locations while lingering in former growth areas; beware of downward co-tenancy creep

“A” Malls –

Better gget better,, especially p y those in strongg markets with better anchors and an improving p g mix of better merchants and restaurants

–

Multi-channel initiatives by better retailers – including department stores – ensure malls will retain key role in creating strong brands and customer fulfillment

–

Venue of choice for fast growing specialty concepts

–

Owners increasingly renovating centers and remerchandising with stronger retailers


Retail Real Estate 



“B/C” M Malls ll –

“Only game in town” increasingly pressured by online channel with excellent fulfillment

–

Moderate to severe downward pressure for those with weak anchors

–

Successful turnarounds by JC Penney and Sears could be significant positives

–

While lack of new construction remains a positive, repurposing old boxes is challenging

–

Maturing debt at high LTV remains major threat

Lifestyle y Centers –



47

Only best in class survive wave of sales based kick outs

Outlet Centers –

Ownership substantially consolidated as concept completes transition from clearance to “made f outlet” for l ” branded b d d product d

–

Value orientation and brands increasingly resonate with customer


Quotes from the Front Q Real Estate Strategy

48

•

“The b “Th bestt use off our capital it l iis iin new store t openings. i Th That’s t’ where h we’re ’ getting tti th the most productivity.” (Chico’s)

•

“We We continue to remodel our stores…we don’t don t want to wake up someday and have a tired old chain.” (Dick’s)

•

“…we continuously evaluate the footprint of our ecosystem and we always continue to evaluate our stores. We’re approached all the time. We listen…Sometimes if something is worth more to somebody else than it is to us, we’ll obviously take advantage of that…if we do make a decision to exit a marginally performing store, we’re not literally exiting a community because we still can provide these customers that we served choices through the website.” (Sears Holdings)

•

“We know that our store network is a big advantage compared to pure online retailers and it serves as a foundation for our seamless omni-channel retailers, omni channel experience…our plans call for a 15% square footage reduction in North America over the next three years.” (Staples)


Quotes from the Front Q Real Estate Strategy

49

•

““…omni-channel i h l says we will ill ttake k care off th the customer t whenever h and d wherever h h he or she wants it. So we are very bullish on the bricks and mortar business, and that is to a great extent pending our ability to make good deals with the Landlords.” (Finish Line)

•

“we continue to open stores and will continue to open stores as long as we believe that there are store locations that have the kind of demand that will support the store. The stores still are very profitable and we don’t don t have any intention of giving up stores. We don’t think right now that the web business has displaced potential locations. We do not see that happening.” (Williams-Sonoma)

•

“We’re opening more stores than we’ve ever opened before, signed 45 stores in the last 12 months and we’re growing faster. So that’s our primary focus…to accelerate our growth and to transfer some of that cash into stores that will increase value for our stakeholders.” (Whole Foods)


Biographical Information MICHAEL J. J ACTON, ACTON CFA, CFA Managing M i Director, Di t AEW Research R h Michael J. Acton, CFA, is a Managing Director of the firm and Director of Research at AEW with responsibility for overseeing the activities of AEW Research, the firm’s highly regarded in-house research group. Mr. Acton joined the firm in 1990 and has 26 years of experience as an economic analyst and forecaster. He is a standing member of the firm’s Investment Committee, Management Committee and Risk Management Committee. The resources of AEW Research are an integral part of AEW’s investment process and Mr. Mr Acton works closely with senior professionals in all areas of the firm to develop investment strategies that match clients’ risk/reward objectives with market opportunities. Mr. Acton is also a member of the firm’s Compliance Committee. Prior to joining AEW, he was with DRI/McGraw-Hill where he managed the Metropolitan Area Forecasting Service. He is a graduate of Bates College (B.A.) and holds the designation of Chartered Financial Analyst.

Please feel free to contact Mike regarding any of the information contained herein

[email protected] @ or 617-261-9577 50

RONALD M. PASTORE, Director, Direct Investment Group Mr. Pastore heads AEW’s retail investment management group, overseeing a $3.3 billion portfolio of retail assets including super regional malls, urban specialty centers and grocery-anchored neighborhood centers. Mr. Pastore is the managing partner for separate ventures that own Chicago’s Woodfield Mall and Arden Fair in Sacramento, California, and formerly held similar positions on behalf of clients for Union Station and Georgetown Park in Washington, Washington D.C. D C Mr. Mr Pastore served on the partnership committee of the Taubman Realty Group and was a key player in the restructuring of the Taubman UPREIT in 1998. In addition, Mr. Pastore advised the LDS Church in Salt Lake City, Utah on the redevelopment of its downtown property holdings into City Creek Center, a 20 acre, open-air mixed use center anchored by Nordstrom and Macy’s, 500,000 square feet of in-line retail, over 500 housing units, and a network of covered walkways, water features and public spaces. City Creek Center held its grand opening in March 2012 2012. Mr Mr. Pastore joined AEW in February 1993 from Himmel/MKDG Himmel/MKDG, where he held positions in retail asset management, site selection, strategic planning and concept development. Prior to working at Himmel/MKDG, Mr. Pastore was a consulting city planner responsible for financing and managing infrastructure improvement and downtown revitalization projects throughout the northeastern United States. Mr. Pastore is a graduate of Bowdoin College (B.A.), Harvard University’s Kennedy School of Government (Masters in City and Regional Planning) and MIT’s Sloan School (M.B.A). He is a member of the International Council of Shopping Centers (ICSC). (ICSC)


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