FROM THE DESK OF DEBORAH WEINSWIG

Retailers and Investors Seek To Unlock Value from Retail Real Estate This week, a group of four activist investors that own a sizable block of Kohl’s shares (9.5%) published a letter containing a list of critiques of the retailer’s management. The group of investors, comprising 4010 Capital, Ancora Holdings Inc., Legion Partners Asset Management and Macellum Advisors, offered financial targets and sought nine seats on the 12-member board to implement changes. Real estate features prominently within the letter’s key points, with the investors arguing that they could unlock $7–8 billion in value that is trapped within the balance sheet at Kohl’s. The investors further believe that a sale and leaseback transaction, combined with a large share-repurchase program, could raise the retailer’s earnings per share (EPS) by 25%. Along with the steady announcements of store closures, retailer bankruptcies and the jump in e-commerce penetration in 2020, this recent critique of real estate usage at a major US retailer highlights the interplay between retail and estate. Despite recent advances in e-commerce, in-store sales still accounted for around 79% of US retail sales in the fourth quarter of 2020, according to our analysis of Census Bureau data, underscoring its significance. Retailers and investors have taken many steps to unlock the value of their real estate, through subleases, outright sales and financial engineering—such as sale and leaseback transactions. One large real estate investment trust (REIT), Unibail-Rodamco-Westfield, is abandoning the US mall space entirely, with plans to sell its mall properties in 2022. Although financial engineering can improve EPS, pleasing investors, it does nothing to increase demand by improving the proposition at challenged retailers. Established more than 125 years ago, Sears is the consummate example of the interplay between retail, real estate and financial engineering. In 2015, Sears Chairman and CEO Edward Lampert spun off more than 235 of its properties into a REIT named Seritage Growth Properties (Lampert is currently the Chairman of its Board of Trustees), following the sale of brands and properties including Craftsman Tools, Lands’ End and Sears Canada. Lampert and his affiliated entities also lent Sears more than $1 billion, secured by the retailer’s assets. As the largest creditor to Sears, Lampert had an advantage in the bankruptcy process and his hedge fund, ESL Investments, was named the winner of the court-managed auction. The Kohl’s development represents just one of several recent attempts by hedge funds and activist investors to take control of retailers. Pershing Square Capital Management, which was founded by CEO Bill Ackman, invested $2 billion in Target shares in 2007, becoming the company’s third-largest shareholder. Ackman advocated that Target should spin off its properties into a separate REIT, whose properties Target would lease. Ackman was ultimately unsuccessful and divested his shares in 2011. In 2019, three of the four investors currently targeting Kohl’s also presented a similar plan to achieve higher EPS at Bed Bath & Beyond, although this proposal did not involve monetizing real estate. Macy’s is keenly aware of the value of its real estate holdings and has been executing a strategy to monetize them. Its North Star strategy aims to optimize the value of its real estate portfolio, by identifying and selling properties with real estate values that exceed their retail values. One option is to enhance existing properties: Macy’s management recently revealed plans to add 1.5 million square feet of office space in a tower constructed on top of its Herald Square flagship in Manhattan, according to an article in The Wall Street Journal. Back in 2016, hedge fund Starboard Value valued Macy’s real estate portfolio at $21 billion, which greatly exceeds Macy’s current market capitalization of $4.9 billion. Since 2016, the retailer has divested around $1.7 billion of properties, and that estimate is tied to real estate values at the time of the analysis. Moreover, Hudson’s Bay unveiled its HBC Properties and Investments division in October 2020, which aims to convert some of its real estate into mixed-use developments. The company owns or controls around 40 million square feet of gross leasable area across North America, at retail banners including Hudson’s Bay in Canada, Saks Fifth Avenue and Saks OFF 5TH. Despite the investors’ criticism, Kohl’s has demonstrated innovation in making use of its physical space to leverage retail segments. The company started accepting returned items from Amazon in 2017 and now accepts Amazon returns in all of its stores, in addition to selling Amazon consumer-electronics devices. This innovative idea increases traffic and favorably links Kohl’s with the e-commerce titan, representing a remarkable collaboration between two retailers. In 2019, Kohl’s announced a partnership with Aldi, in which the grocer would occupy space adjacent to its stores, driving traffic for both retailers. Kohl’s has also announced partnerships with WW International (previously Weight Watchers) and Planet Fitness. Further expanding its collection of partnerships, Kohl’s announced in December 2020 that it would open 200 “Sephora at Kohl’s” locations to drive traffic as well as extend its product breadth, attract a new type of shopper and expand its wallet share. This year is likely to be eventful in retail real estate, following the financial and operational damage that retailers endured in 2020 plus the continuation of last year’s consumer trends for the foreseeable future. We are optimistic that the creativity and flexibility we saw among both retailers and landlords last year will continue to translate into even more creative solutions this year.

US RETAIL AND TECH HEADLINES

Estée Lauder Raises Its Stake in Deciem Beauty Group (February 23) Company press release

• Estée Lauder has entered into an agreement to increase its ownership in vertically integrated, multi-brand company, Deciem Beauty Group. This will see an increase in its stake from around 29% to 76% in the first phase, with a cost of around $1.0 billion. The total enterprise is valued at approximately $2.2 billion. The transaction is expected to complete in its fourth quarter of fiscal 2021, ending June 30, 2021.
• Estée Lauder will acquire the remaining 24% ownership in Deciem in the second phase, after a three-year period. For the 12 months ended January 31, 2021, Deciem reported sales of $460 million.

Home Depot Reports Outstanding Fourth-Quarter Results; Expects Flat Comps for 2021 (February 23) Company press release

• Home Depot reported sales growth of 25.1% in its fourth quarter of fiscal 2020, versus 23.2% growth in the prior quarter. The company’s total comps grew 24.5%, versus 24.1% growth in the prior quarter. The company’s US comps increased by 25.0%, versus 24.6% in the prior quarter.
• For fiscal 2021, the company expects flat to slightly positive comps and an operating margin of at least 14%, on the assumption that the demand trend in the second half of fiscal 2020 will persist through fiscal 2021.

Macy’s Reports Weak Fourth-Quarter Results, Expects Double-Digit Sales Growth in 2021 (February 23) Company press release

• Macy’s reported a sales decline of 18.7% in its fourth quarter of fiscal 2020, versus a 22.9% decline in the prior quarter. Comparable sales decreased 17.0%, versus a 21.0% decline in the prior quarter. Digital sales were up 21%. In terms of category, the company reported that its beauty, causal apparel, home and jewelry categories performed well in the quarter.
• For fiscal 2021, Macy’s forecasts sales growth of 13.8–19.6%. Over the next three years, the company expects to witness continued double-digit growth in digital sales, with rising profitability in its digital channel.

The RealReal Reports Weak Fourth-Quarter Results; Expects First-Quarter 2021 GMV Growth (February 22) Company press release

• Luxury online and brick-and-mortar marketplace The RealReal reported a sales decrease of 10% in its fourth quarter of fiscal 2020, versus a 4% decline in the prior quarter. The company’s consignment and service revenue fell by 16%, while its direct revenue increased by 38%. The company’s gross merchandise volume (GMV) fell by 1%, versus a 3% decline in the prior quarter.
• For its first quarter of fiscal 2021, the company expects GMV of $301–310 million, representing 17–20% growth.

Walgreens Adds Third Partner for On-Demand Delivery Service (February 23) Chainstoreage.com

• Walgreens has entered into a partnership with online delivery platform Instacart to offer rapid delivery to its customers in Illinois—including services that deliver within one hour. This marks the company’s third on-demand delivery partnership in less than one year. Walgreens partnered with Postmates in March 2020 and DoorDash in July 2020.
• The Instacart delivery service will be available for tens of thousands of non-prescription products, including beauty and personal care items, household staples, and over-the-counter medicines. In the coming weeks, Walgreens plans to roll out the Instacart delivery service to all of its approximately 8,000 stores across 50 US states.

EUROPE RETAIL AND TECH HEADLINES

Frasers Group Expects $141 Million Hit Following Lockdown (February 23) Retailgazette.co.uk

• Frasers Group has announced that it expects to take a hit in excess of $141 million owing to the Covid-19 lockdowns on non-essential retailers in the UK. The majority of Frasers Group’s retail portfolio falls into the “non-essential” category. The continued lockdowns are likely to hit Frasers Group’s accounts, with impairments to freehold properties, fixed assets and right of use assets.
• “Given the length of this current lockdown, as well as potential systemic changes to consumer behavior and the risk of further restrictions in future, we believe this non-cash impairment could be in excess of $141 million,” Frasers Group reported.

Government Allows Non-Essential Retailers in England To Reopen from April 12 (February 23) Retailgazette.co.uk

• The government has confirmed that non-essential retailers in England can exit lockdown and reopen from April 12. The reopenings, which are part of “step two” of England’s lockdown exit roadmap, will also see the opening of all indoor leisure centers and gyms, outdoor hospitality and personal care services such as hairdressers and nail salons.
• A government spokesperson stated, “This step will reopen some sections of our indoor economy and more outdoor settings, restoring jobs and livelihoods and enabling people to access some of the activities and services which are most important to them.”

Shopify Partners with TikTok in the UK (February 23) Retail-week.com

• TikTok and Shopify have launched a partnership to help retailers and brands connect with new customers. Their UK partnership aims to help Shopify merchants create and run ad campaigns designed for TikTok’s audience.
• TikTok has over 100 million European users, which Shopify is looking to access through the partnership.

CBI UK Retail Sales Balance Improves Modestly from January (February 24) FXStreet.com

• The latest data release from the Confederation of British Industry (CBI) saw its UK Retail Sales Balance measure rise to (45) in February, up slightly from January’s eight-month low of (50). This outcome is, nevertheless, below the market expectation of (38).
• The survey’s measure of online retail sales reached a high, reflecting changing consumer habits amid lockdowns in the UK and suggesting that “retailers’ investments in online platforms and click and collect services may be paying off,” according to CBI’s principal economist Ben Jones.

Vollmart Opens Its First Store (February 23) Esmmagazine.com, Company news release

• Vollmart, a new hard-discount chain, has entered the Polish market with the opening of its first store on February 24, located in the city of Siedlce. Vollmart has plans to open stores in towns with a minimum population of 50,000 residents, offering 1,200 stock-keeping units (SKUs) in each of its outlets. Vollmart stores are designed to enable consumers to buy good quality goods at the best prices.
• “We are aware that in today's economic situation, price is often the main determinant of purchasing decisions. Hence, the adopted pricing policy is strictly controlled by us. We are convinced that customers looking for goods with the best quality/price ratio and willing to spend money wisely will appreciate our offer,” said owner of Vollmart Wiktor Sawosz.

Zalando Expands Its Presence in Scandinavia Through Zircle (February 22) Retaildetail.eu

• Zalando has expanded its secondhand webshop Zircle to operate in Scandinavia. The expansion is partly based on the result of a Zalando survey that revealed that half of the retailer’s Swedish and Danish customers would consider buying secondhand clothes in the next six months.
• The company has released a statement, stating that “all of this comes with the look, feel and convenience of Zalando, making more than 100,000 fashion items from well-known brands now available to all Zalando customers in these two markets in the Nordics.”

ASIA RETAIL AND TECH HEADLINES

Birkenstock Opens Largest Asian Store in Bengaluru (February 23) Fashionnetwork.com

• German footwear brand Birkenstock has opened its largest Asian store in Bengaluru’s Indiranagar area. The store is spread across 1,830 square feet and spans two floors, housing over 320 models from Birkenstock’s classic and seasonal collections.
• This follows the recent opening of Birkenstock stores in the Indian states of Chennai, Delhi, Hyderabad and Mumbai. Birkenstock’s regional manager for the Middle East, Africa and India, Jens Hattab, cited the “consumer appreciation” of the brand and launch of the Bengaluru store as a step toward strengthening the company’s presence in India.

Central Retail Launches Bookstore Concept B2S ThinkSpace (February 24) Insideretail.asia

• Thai conglomerate Central Retail has launched a new concept store, B2S ThinkSpace, in Bangok’s Central Chidlom shopping center. The opening follows Central Retail’s acquisition of COL Public Company, the parent company of Thai retail chains B2S, OfficeMate and Med E-Books.
• The new concept store spans approximately 10,760 square feet and features a “book cave” with over 10,000 books on display. In addition, the store holds over 60,000 SKUs of stationery and art supplies.

Flipkart To Focus on Loyalty Programs for India Growth (February 19) Livemint.com

• Walmart-owned e-commerce platform Flipkart plans to focus on loyalty programs and its fashion segment to boost its growth in India. In Walmart’s post-earnings briefing, Flipkart Group CEO Kalyan Krishnamurthy said, “Flipkart Plus, which is a very unique local loyalty program, is one very big priority.”
• Flipkart also sees huge growth potential in the fashion segment, which is “under-penetrated digitally,” according to Krishnamurthy. The e-tailer plans to expand its fashion portfolio by acquiring manufacturing and distribution rights for international brands.

Ingka Centres To Leverage IKEA as Anchor Store (February 19) Company press release

• Ingka Centres, the Ingka Group arm that focuses on shopping centers, has announced plans to use IKEA as its anchor store for its next retail-led destination, based in the Indian city of Noida. The news follows Ingka Centers’ acquisition of development land spanning approximately 514,900 square feet.
• Ingka Centres’ Managing Director Cindy Anderson said, “India is an exciting and dynamic market, and today’s acquisition is a key milestone in our strategic vision to transform the business in response to the changing retail environment.”

Nreal Set To Launch Mixed Reality Products in the US and Europe (February 23) Technode.com

• Chinese mixed reality (MR) glasses manufacturer Nreal is set to launch its products in Europe, in partnership with Telecom carriers Vodafone and Deutsche Telekom. The glasses will also be available in the US by April 2021, in collaboration with an undisclosed telecom partner.
• Nreal will also launch an enterprise edition of MR glasses, which can be worn over existing pair of glasses. The startup is working with automotive manufacturers, tourism companies and universities to try to incorporate the use of enterprise edition MR glasses into workspaces.