Kohl’s bets big on California
The chain’s gamble is about to be tested as it moves into 30 former Mervyns sites in California.
By Andrea Chang

September 23, 2009

When Mervyns called it quits last year, many in the recession-battered retailing world were surprised when Kohl’s Corp. rushed to take over dozens of the failed chain’s locations.

Both department stores sold a similar mix of mid-priced apparel, accessories and home furnishings. There was a significant overlap in the customers who shopped at Mervyns and Kohl’s. The retailers’ stores were even alike in size and layout.

On Sept. 30, Kohl’s bold move will be put to the test when it opens 35 stores in former Mervyns locations, 30 of them in California.

If the chain succeeds, its gamble could pay off not only for the roughly 5,000 workers it has hired but for communities around the state.

“Any time you create jobs, there is a multiplier impact,” said Chapman University economist Esmael Adibi. “The person who gets that income spends it in restaurants, clothing, cars, appliances and other places. The income has to be spent somehow, so that generates by itself further economic activity.”

Still, Kohl’s faces many of the challenges that led to the collapse of Mervyns and other retailers. With California’s unemployment rate at 12.2%, people are cutting back on spending for clothing and accessories.

“The moderate-income consumer is feeling the pinch,” said retail analyst Richard Jaffe of Stifel, Nicolaus & Co. “If you’re a two-income household earning $50,000 a year and now it’s a one-income household earning $25,000 a year, you’re not shopping. The money isn’t there.”

One thing is certain: Kohl’s is making a big bet on California. The retailer spent about $250 million to convert the Mervyns stores, and the acquisition will bring its statewide total to 121 stores — almost as many as Mervyns had here before its demise.

That will increase the company’s California footprint by one-third in a single day, adding locations in places including Redondo Beach, Sun Valley and Whittier.

Kohl’s has been eyeing California for years, waiting for the right real estate to become available. The fact that it made its move while others were retrenching was no accident.

“We see this as a great opportunity to actually go the other way,” Chief Executive Kevin Mansell said in an interview. “Let’s take advantage of other people’s weakness; in fact, let’s get aggressive.”

The Menomonee Falls, Wis.-based retailer, with more than 1,000 stores nationwide, will face heavy competition in California from department stores JCPenney and Macy’s, discounters Target and Wal-Mart and off-price retailers Ross and T.J. Maxx.

“It’s a state where they’re largely under-penetrated,” said Michelle Clark, a retail analyst with Morgan Stanley. “It’s an attractive market, but there are a lot of players.”

But analysts said the chain has already proved that it can weather the recession, noting that Kohl’s has managed its inventory well, slowed its rate of new store openings and offers an attractive lineup of private, national and exclusive brands at low prices.

Kohl’s has also regularly beat Wall Street’s monthly sales estimates this year, posting a 0.2% sales increase in August at stores open at least a year, known as same-store sales and considered an important measure of a retailer’s health. Analysts polled by Thomson Reuters had expected a 1.7% decline.

The company’s results have been even better in California, Mansell said. Over the last year, he said, the chain’s California locations have seen double-digit same-store sales increases — the best results out of all 49 states where the chain has stores.

For its most recent quarter, Kohl’s profit fell 3%, to $229 million. Still, that’s better than many of its peers in a down economy.

Since Kohl’s first entered the California market six years ago, it has attracted fans who say they like the chain’s low prices, extensive coupon offerings and selection.

“It’s like every time I come there’s something on sale, and I always leave with something,” said Art Hernandez, 46, a logistics manager from Cudahy who bought clothes and towels from the Alhambra Kohl’s this week. “It’s within my budget, so it’s perfect, especially in times like these.”

The retailer also boasts exclusive merchandise lines from several big names, including fashion designer Vera Wang, pro skateboarder Tony Hawk and reality television star Lauren Conrad.

Kohl’s is “able to take a line and make it accessible,” Conrad, whose LC Lauren Conrad apparel brand officially launches Oct. 1, said in an interview. “It’s great to have a line that doesn’t limit the amount of people who can buy it.”

For some shoppers, however, Kohl’s can’t take the place of Mervyns.

“I had five things in hand but I only got one — they didn’t have my sizes,” said Blanca Hatem, 43, a speech pathologist who was shopping at the Alhambra store. “I miss Mervyns. It’s harder now that they’re out of business.”

But Mervyns’ collapse was Kohl’s gain, opening up dozens of premium locations around the state at bargain prices.

The chain usually spends about $11 million to build a store from the ground up, but it cost only an average of about $7 million to convert a former Mervyns to a Kohl’s, Mansell said.

Besides the considerable cost savings, the locations are also bringing Kohl’s to more desirable markets. Many of the chain’s current stores had to be built in outlying suburbs.

“Instead of having to open up stores on the edge of town in an empty field, they’re now able to open on the 50-yard line in the center of town — both demographically and traffic-wise very favorable,” Jaffe of Stifel, Nicolaus & Co. said.

Many are predicting that the retail picture won’t improve for several more months, but Mansell said the chain would like to expand to 1,400 stores in the next few years and would again target California for growth.

“Does Kohl’s think the consumer is more open to spend? No,” he said. “But that doesn’t mean we can’t be very successful. It just means more and more of our business will come at the expense of others.”

Maybe they’ll reopen…

Yet for some reason the one near me is not closing, yet they have terrible business.

RICHMOND, Va., Nov 03, 2008 /PRNewswire-FirstCall via COMTEX News Network/ — Circuit City Stores, Inc. (NYSE: CC) today provided an update on its liquidity position and its previously announced ongoing comprehensive business review. Due in part to its deteriorating liquidity position and the continued weak macroeconomic environment, the company has decided to take certain restructuring actions immediately, including closing 155 domestic segment stores, reducing future store openings and aggressively renegotiating certain leases. The company also is considering all available options and alternatives to restructure its business.

Business and Liquidity Update

Over the past several weeks, a number of factors have impacted severely the company’s liquidity position. These factors include the following:

– Waning consumer confidence and a significantly weakened retail environment have impacted negatively the company’s sales and gross profit margin rate to a greater degree than management had anticipated previously.

– Following the company’s second quarter results announcement, the company’s liquidity position and the sharply worsened overall economic environment led some of Circuit City’s vendors to take restrictive actions with respect to payment terms and the credit they make available to the company. Additionally, the recent disruption in the financial markets has contributed to certain of the company’s vendors experiencing insurmountable challenges with obtaining credit insurance for the company’s purchases. As a result of this and other considerations, certain of the company’s vendors have set more restrictive payment terms than in previous quarters, including in some cases requiring payment before shipment. Vendors also have limited the credit available to the company for purchases, including in some cases not providing customary increases in credit lines for holiday purchases. While management is working diligently to secure the support of its vendors and believes it has maintained good relationships with these important partners, the current mix of terms and credit availability is becoming unmanageable for the company.

– To date, the company has been unable to collect an income tax refund of approximately $80 million that the company believes it is owed from the federal government.

– Due primarily to the weakened economic environment and its potential impact on the timing of sales of the company’s inventory and costs and expenses associated with such sales, a recent third-party appraisal conducted for the company’s asset-based credit facility resulted in a reduction of the estimated net orderly liquidation value of the company’s inventory. This valuation adjustment was made despite the mix of merchandise remaining consistent with the previous appraisal in November 2007. This reduction has led to a lower borrowing base and reduced availability for the current period compared with what the company had expected previously.

James A. Marcum, vice chairman and acting president and chief executive officer of Circuit City Stores, Inc. said, “Since late September, unprecedented events have occurred in the financial and consumer markets causing macroeconomic trends to worsen sharply. The weakened environment has resulted in a slowdown of consumer spending, further impacting our business as well as the business of our vendors. The combination of these trends has strained severely our working capital and liquidity, and so we are making a number of difficult, but necessary, decisions to address the company’s financial situation as quickly as possible.”

Domestic Segment Real Estate Actions

As a result of the company’s ongoing asset productivity assessment and working capital situation, the company has determined to take the following initial actions with respect to its domestic segment real estate portfolio and strategy:

– Close 155 stores and exit certain markets: Circuit City plans to close 155 stores that are underperforming or are no longer a strategic fit for the company. The stores identified for closure are located in 55 U.S. media markets, of which Circuit City will exit 12 U.S. media markets.

The list of closing stores can be found by visiting the company’s investor information home page at http://investor.circuitcity.com and clicking the link regarding today’s announcements. The company expects that impacted stores will not open on Tuesday, November 4, and the store closing sales will begin on Wednesday, November 5. The company expects the sales to be completed no later than calendar year end.

For fiscal 2008, the stores that are being closed generated in total approximately $1.4 billion in net sales. When results were viewed at the individual comparable store level, the closing stores, as compared to the stores remaining open, on average had lower net sales, a lower close rate and a lower gross profit margin rate. The stores, on average, were also unprofitable when marketing expenses were allocated to the individual store-level results.

Circuit City will continue to honor its customer commitments and serve its guests through 566 stores in 153 U.S. media markets, via its Web site at http://www.circuitcity.com and via phone at 1-800-THE-CITY (1-800-843-2489). During this transitional period, Circuit City is executing a plan to minimize disruption to the operations of stores that are remaining open. No international segment stores are closing as a result of the real estate plans announced today.

– Further reduce new store openings: The company has revised its store opening plans for the current fiscal year and will not open at least 10 locations that were previously expected to be opened. The company still expects to open up to two incremental stores during the remainder of fiscal 2009. As previously announced, other than existing commitments, management intends to suspend store openings beginning in fiscal 2010.

– Renegotiate certain existing leases: Circuit City intends to begin immediately renegotiating certain of its existing leases with the goal of significantly lowering rents. In some cases, the company may choose to negotiate with landlords to exit leases if rents are not reduced. The company also plans to work with landlords to terminate the leases for the stores included in today’s closing announcement, as well as leases for a number of inactive locations that were closed previously and for the locations that are no longer being opened.

As a result of the store closures, Circuit City expects to reduce store operating, payroll and marketing expenses. The store closures will result in a reduction of approximately 17 percent of the domestic segment workforce. The company also expects to incur charges in fiscal 2009 associated with the above real estate actions. The company is currently evaluating the benefits and expenses associated with these changes, which are subject to the outcome of negotiations and store closure agreements. Presentation on the financial statements is currently being evaluated for accounting treatment.

“We deeply regret the impact today’s announcement will have on our associates, our guests and the communities where these stores are located. We truly are grateful to each of our associates for their many contributions to the company. We are also grateful for the loyalty and support we have received from our guests in the impacted communities. Circuit City will continue to serve guests through 566 stores in 153 U.S. media markets, via its Web site at http://www.circuitcity.com and via phone at 1-800-THE-CITY (1-800-843-2489),” concluded Marcum.

Evaluating All Options

As a result of unfavorable macroeconomic conditions and the company’s deteriorating liquidity position, the company is considering all available options and alternatives for the business. Consistent with this evaluation, the company will continue to take appropriate actions to conserve cash, reduce expenses and improve liquidity. In addition, the company is continuing to evaluate additional near-term cost reduction initiatives that may be necessary to address its financial condition. The company is also in negotiations with its lenders and other third parties regarding various financing alternatives.

The company plans to operate its business without interruption while it engages in discussions with its lenders and works with advisors to determine the most appropriate restructuring alternatives. The company can make no assurance that the discussions will result in any agreements or transactions.

Cutting through the corporate speak, yes they are cooked. *sizzling grill sound*