By and  on December 9, 2008

Some discount retailers see opportunity in the toxic stew of negative economic factors.

Off-pricers such as Bealls Outlet Stores Inc., Ross Stores Inc. and Dollar Tree Inc. all plan to expand even as department stores, apparel chains and independent boutiques retreat because of reduced consumer spending, rising unemployment, tight credit, falling home values and stock market declines.

Developers are intensifying their efforts during the deepening recession “to hook up with value-oriented stores, such as Family Dollar [Stores Inc.], Dollar General [Corp.] — stores that will do better” in this economy, said Mark Vitner, senior economist at Wachovia, who forecast that the holiday season will be the worst since 1982.

Ruth Coan, a partner in The Shopping Center Group, an Atlanta retail real estate brokerage firm, said activity remains healthy among a range of off-pricers.

“They can negotiate in properties where they may not have been able to before,” she said. “Even the Salvation Army and Goodwill have become major players. Some discounters are expanding into underserved and niche areas, such as ethnic markets.”

Among them is Cleveland-based Dots, a chain targeting an urban customer with $16 jeans, $20 dresses and $8 necklaces.

Dots has opened 30 new stores this year and remodeled five for a total of 412 by yearend. Keeping up the same pace next year, 30 approved deals are already planned for 2009, said a spokesman. Located mostly along the East Coast, Dots focuses on trade areas with populations of 75,000, such as Macon, Ga., and West Hartford, Conn., which have average household incomes of $45,000 to $65,000. Stores are between 4,000 and 5,000 square feet.

Discount stores, especially large operations, expanded significantly in 2008, and despite a slower pace for 2009, the numbers are still substantial. Eduardo Castro-Wright, president and chief executive officer of Wal-Mart Stores U.S., told a Morgan Stanley conference recently that the retailer had not exhausted growth opportunities in the U.S.

Although Wal-Mart Stores Inc. opened 218 new units last year, it will still launch 191 in the current fiscal year and 142 to 157 next year. Capital expenditures will fall from $9.1 billion last year to between $5.8 billion and $6.4 billion this year and potentially reach $6.3 billion to $6.8 billion in the next fiscal year. Still, Castro-Wright said, “It’s not accurate to say we have stopped growing in the U.S.”

Bealls, a Bradenton, Fla.-based chain with 443 stores in 14 states, plans to seize on retail closings and consumers’ quest for value to move into new markets and acquire brand names.

“Vacancies are all over, more pronounced in some areas, such as Phoenix, which is wildly overbuilt,” said Conrad Szymanski, president. Bealls will open six new stores in 2008, expand or relocate 14 — with some moving from 10,000-square-foot to 20,000- to 25,000-square-foot formats. “We’ve taken advantage of the fallout from retail store closings” for new sizes and formats, he said.

Bealls also is picking up deals on merchandise and brands that are new to the store after other retailers canceled orders this year. The offerings will help grow branded juniors, young sportswear and misses areas. Apparel, at 80 percent of inventory, has outpaced home goods and gifts. Year-to-date sales in upper-single digits should continue through 2008,Szymanski said.

Ross Stores, based in Pleasanton, Calif., has 908 Ross Dress For Less Stores and 57 dd’s Discount stores, targeting younger customers, in 27 states. In 2008, Ross will open 65 to 70 new stores, an 8 percent net growth. This year, the company’s earnings are up 24.9 percent to $208.1 million, or $1.57 a diluted share, and sales advanced 9.9 percent to $4.75 billion.

In 2009, new growth will be 5 to 6 percent, but “we will take advantage of vacancies if we can,” said a spokeswoman. Stores average 25,000 to 30,000 gross square feet. Apparel, mostly unlabeled department store brands priced 20 to 60 percent less than department stores, is 75 percent of inventory and the best-performing category year to date.

Dollar Tree, a Chesapeake, Va.-based chain, has 3,517 stores in 48 states and will open 212 new stores by yearend, and 20 Deals, a smaller concept, as it relocates 86 stores and closed 27 units. “Our long-term goal is 5,000 to 7,000 stores,” said Timothy Reid, vice president, investor relations. “With every item a dollar, our business is right for the time.”

Dollar Tree reported total sales for its fiscal third quarter were $1.11 billion, an 11.6 percent increase compared with $997.8 million last year. Comparable-store sales for the quarter increased 6.2 percent.

With a small assortment of apparel, health and beauty is among the best-selling categories, one that leads to multiple sales through build-a-basket gift basket promotions.

Brad Hunter, chief economist at Metrostudy, a West Palm Beach, Fla., consulting firm, said these retailers will benefit from severe burdens on shoppers.

“Consumers are cracking under the pressure of credit card debt and the drying up of cash-outs from home equity loans.” He said the surge in “substitution” shopping, for off-price and low-price brands began in the summer, but “I’m surprised it didn’t happen sooner,” he said.

While discounter sales are not immune from the gyrations of the economy, they are faring better than the more dramatic declines of some full-price retailers.

November same-store sales — even for discounters — were weaker than those in October and overall were the worst in decades. Wal-Mart is a major exception. Target Corp. was off 10.4 percent, The TJX Cos. Inc., 12 percent, Stein Mart Inc., 14.2 percent and Ross Stores 2 percent. However, Wal-Mart rose 3.4 percent and BJ’s Wholesale Club Inc. was up 6.2 percent.

In the current retail landscape, any sales gains are considered a victory. “Today, maintaining and staying the same is the new increase,” said Rob Mimms, president of Mimm Enterprises, an Atlanta real estate investment firm. “Growing and developing is great.”

As vacancies proliferate, retailers that remain are seeking givebacks at existing locations, including restructuring rents in midlease, Mimms said.

“Don’t let the Black Friday shopping rush fool you,” said Mike Magerman, senior vice president of Realpoint LLC, a Horsham, Pa., commercial mortgage rating agency. “We expect increasing vacancies and declining rental rates to continue through 2009, and possibly into 2010. I’d be surprised if any improvement starts before third-quarter 2009.”

In the 54 major markets that Realpoint tracks, the national average for commercial retail vacancies was 7.62 percent in the third quarter, compared with 7.44 percent in the same period last year.

“While the percentage increase is small, we’ve seen three straight quarters of increasing vacancies, beginning in the first quarter 2008, and we expect this trend to continue for the next year,” Magerman said.

Terry W. McEwen, divisional vice president of Poag & McEwen Lifestyle Centers LLC, a Memphis-based developer with 12 shopping centers nationwide, is postponing three projects. The biggest expansion was planned for Saddle Creek, a 142,000-square-foot Memphis lifestyle center built in 1987, which was to add 1.3 million square feet of office, residential and retail space.

“A $250 million mixed-use project is impossible to finance today,” McEwen said. Fashion retailers are “just trying to improve operations rather than expand, while discounters are doing better.”

Vacancies, combined with consumer caution, also are helping to generate more hybrid centers, creating a mix of luxury and discount stores that would have been considered less likely a few years ago.

“A mall used to be a mall and a strip center a strip center,” said Ivy Greaner, chief operating officer of RAM Real Estate, a commercial firm in Palm Beach Gardens, Fla. “Now we’re seeing mixing all over the place, often with high- and low-end tenants together.”

The Simon Properties-owned St. Johns Town Center in Jacksonville, Fla., which has 1.4 million square feet of retail space, features Target and PetSmart, as well as Louis Vuitton, Cole Haan and Coach. Overall sales are almost $700 a square foot, said Steven Cadranel, president of Ben Carter Properties, the Atlanta-based developer of the center. But a new addition set to open in 2012 with a 140,000-square-foot department store and luxury brands such as Gucci are proving more difficult to lease because of the recession.

Stores “are demanding concessions at an all-time high, including free land and capital,” Cadranel said.

While apparel specialty chain retailers such as AnnTaylor Stores Corp. and The Talbots Inc. filled much of the mall expansion in recent years, they are now closing stores or are in a holding pattern.

“Developers gave these stores too much power, and the category became too crowded and competitive,” said Ward A. Kemp, president of retail for Thomas Enterprises, an Atlanta-based developer. “As apparel chains slow growth, everybody’s looking for the next players, and consumers need to see the value.”

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