Kmart/Sears headlines '05 changes

DSN Retailing Today, June 13, 2005 by Debbie Howell

A series of monster deals such as Kmart's merger with Sears and ongoing shakeups in struggling sectors such as toys and the department store industry transformed the retailing landscape this past year, reducing the pool of billion-dollar chains to fewer players.

While deal-making picked up a frenzied pace in 2004, especially among the large chains, bankruptcies and liquidations tapered off from 2003, indicating a healthier retail economy despite all the talk about shoppers cutting back because of high gas and fuel prices. Several companies went public, while others reverted to private status in some cases.

The surprise news of the year was undoubtedly the union of Kmart and Sears to form a $55.8 billion retail company that is the fourth-largest in the United States, bouncing Target out of that spot. The struggles of each retail brand have been well-documented, including Kmart's bout in bankruptcy, leaving the future murky as to how the new Sears Holdings will fare. But Eddie Lampert, Kmart's chairman who is now in charge of the combined company, has worked wonders making Kmart profitable again despite ongoing sales declines.

More fallout from the Sears deal is likely in the coming year as the new company forges its direction, experimenting with new off-mall concepts called Grand and Essentials. Many retail experts suspect the Kmart banner will fade away in time, especially given Sears' intention to convert several hundred Kmart stores to a Sears format.

A high level of maneuvering also took place in the department store sector this past year. Federated Department stores acquired longtime rival May Co., doubling in size to a $30 billion company with stores in 49 states. The deal, which is still pending, came a year after May itself bulked up through the purchase in July 2004 of Marshall Field's from Target.

Other deals in the channel include the pending purchase of Texas-based Neiman Marcus by two private equity firms, Belk's pickup of 47 Proffitt's and McRae's stores from Saks and the acquisition of Barneys New York by Jones Apparel Group. Also this past year, Target unloaded its struggling Mervyn's mid-tier chain in a sale to Sun Capital Partners.

Reshaping the drug store landscape was JCPenney's divestiture of its Eckerd division. CVS and Brooks Pharmacy shared in the spoils, with CVS claiming the title of top drug chain as a result of 1,260 Eckerd stores acquired while Brooks, a division of Canada's Jean Coutu Group, picked up 1,539 Eekerd units and became the No. 4 drug retailer.

Ongoing troubles of toy retailers brought more upset in 2004. KB Toys, in bankruptcy since early 2004, has now closed more than 600 of its original 1,240 units and has yet to file a reorganization plan, bringing into question that chain's viability. Leading toy chain Toys "R" Us, meanwhile, considered separating from its Babies "R" Us division but then reached a deal to be acquired by a consortium of retail investors headed up by private equity firm Kohlberg Kravis Roberts. And Disney called it quits in toy retailing, selling its 313-store Disney Stores chain in November to The Children's Place.

Sizable deals occurred as well in the video rental business, with Movie Gallery purchasing 2,027-store Hollywood Entertainment in spite of a failed bid by rival Blockbuster. Movie Gallery more recently purchased VHQ Entertainment, a 61-store Canadian chain.

In apparel retailing, Forever 21 picked up teen retailer Gadzooks at a bankruptcy auction, The Dress Barn grew through its acquisition of 477-store chain Maurice's, Casual Male bought Rochester Big & Tall and The Finish Line reeled in 37-store Hang Up Shops, which operates Man Alive stores.

International deals of note in 2004 included The Home Depot's purchase of Home Mart in Mexico, Circuit City's expansion in Canada through its 1,002-store InterTAN buy and Wal-Mart's acquisition of Brazilian supermarket chain Bompreco. Staples showed a strong appetite for foreign markets, picking up two mail-order companies in Europe and Globus Office World, a United Kingdom retailer.

With money to burn in 2004 on deals, this sign of a healthier retail economy translated into a lighter year in bankruptcies and chain liquidations. The number of Chapter 11 filings tracked by DSN Retailing Today dropped from 14 in 2003 to 10 last year, a significant reduction from the ravages of 2001 when a record 21 retailers went bankrupt. Through the first half of 2005, four more retailers have joined bankruptcy status.

Of 14 high-profile bankruptcies dating back to January 2004, only four have brought liquidation: Frank's Nursery, Scotty's, One Price Clothing and Factory 2-U. Frank's, once the largest lawn and garden specialty chain, had been on a downward spiral for several years when the company decided to liquidate at the time it filed for bankruptcy. Factory 2-U, an off-price retailer, also had been struggling to revive its business and was purchased at bankruptcy auction by an investment group that includes National Stores.