Growth Talk

Q&A with industry expert stresses expansion, not contraction

Despite the latest announcement that Movie Gallery would shutter all 1,900 of its Hollywood Video stores, there appears to be a  slowing down of the bad news and a more-than-slight ramping up of the good news. As retailers and shopping center developers prepare to descend upon Las Vegas next weekend for the ICSC’s annual RECon show on May 23-25, many are looking to concentrate on, and leverage, the apparent economic upswing.

Chain Store Age talked with Andy Graiser, co-president of Melville, N.Y-based real estate advisory firm DJM Realty, about the growth indicators he is currently seeing.

CSA: Would you say that growth is actually becoming a topic of discussion among retailers?

Graiser: Absolutely, and it’s a significant part of our day to day conversations. Retailers are focused on growth rather than on shedding locations -- big change from last year.

CSA: Talk about some of indicators you’re seeing with your current retail clients that demonstrate a focus on growth.

Graiser: Dollar Tree is an excellent example -- and not the only one -- of a retailer that is well-equipped to grow. When there is surplus real estate in the Chapter 11 and distressed arenas, Dollar Tree will approach us to discuss what locations they want; then it’s effectively up to us to figure out how to do a transaction.

With Dollar Tree, we were involved with almost 200 of their new stores by reassigning the leases to them in various Chapter 11 and non-Chapter 11 cases. Dollar Tree has been very opportunistic and very fast to react to an opportunity. In Chapter 11, the process moves lightning fast and they have been one of the few players we work with that can keep up with the pace. Dollar Tree has a management team that moves fast and is accessible 24-7 -- and their lawyer puts in the same hours -- making sure these deals get done. It has been a great partnership.

CSA: What about Comp USA? In that instance, didn’t you -- through your parent company Gordon Brothers Group -- buy the company last year?

Graiser: Yes, we acquired Comp USA in December 2007. We bring in many areas of expertise when we buy a company. We bring expertise on debt, equity, intellectual property, inventory, taxes, vendor and employee issues, and of course real estate -- which is what was involved in the Comp USA deal. We bought the inventory, the fixed assets, and the real estate, and coupled with our ability to move quickly allowed us to perform a number of transactions and exit out quickly. Certainly the real estate was one of the biggest pieces to resolve, and if we couldn’t have resolved the real estate we would not have bought Comp USA.

CSA: Tell me more about the Comp USA transaction and resolution.

Graiser: First of all, there were a lot of pieces to handle. We first needed to take care of several issues relative to the debt. No one wanted a bankruptcy, so we bought the debt. We had to see what we could do with the fixed assets and the intellectual property since there was value in the name as well.

We felt we had the ability to get the vendors and landlords in line through a composition agreement which effectively was a Chapter 11 outside of a Chapter 11. At the same time we needed to quickly analyze what locations the prospective replacements wanted.

We negotiated with the vendors and the landlords to create a settlement that was a  percentage of what an actual Chapter 11 claim would be, but more than they would have gotten if Comp USA went into Chapter 11. All the creditors did a lot of homework and due diligence in a very transparent process, which ultimately led to a successful negotiation with these stakeholders.

For us to do this deal  properly, we needed to understand who the interested tenants would be. We talked to 30 different retailers who were likely candidates for the space. We did deals with Tiger Direct which opened a group of Comp USA stores, we did deals with Staples, Michaels, Best Buy, Circuit City and PetSmart. We sold or subleased 70 locations. This was all about determining the value of a portfolio and then targeting a potential audience. We created a good opportunity for the retailers who wanted to grow.

This was a great example of how retailers can grow, by taking over second generation space. None of these companies wanted to buy Comp USA -- how many retailers would come in, buy the debt, deal with the employee issues, and all the other headaches that come with acquiring a company? -- and that’s why this worked so well. We came in and bought  the company and got rid of all the complications and made things simple for the prospective replacement tenants.

CSA: I understand that you have advised Forever 21 in its growth strategy.

Graiser: Forever 21 brought us in as advisors to help evaluate the portfolio of Mervyn’s. We worked very closely with Forever 21 in picking locations, analyzing the markets where competitors were, and working with them on negotiating the transaction to buy the Mervyn’s locations. We were hired at the beginning of the process because we knew the real estate so well. We sat down with Forever 21 and reviewed the various markets and helped map out the growth strategy. Forever 21 was very strategic, aggressive and smart in pursuing this opportunity We supported them with the real estate analysis and helped with the negotiations. In a separate transaction we also sold eight Gottschalks locations to Forever 21, which clearly demonstrates this retailer’s ability to grow.

CSA: With the recent news that all Hollywood Video stores will close, do you know yet what Gordon Bros. and DJM’s role will be?

Graiser: For Hollywood Video, we were retained by the company as advisors to help restructure all the leases. Candidly, we are exploring other opportunities here, and can’t do anything until we really understand  how the liquidation will be done. There’s some real good real estate here.

CSA: Do you expect expansion, rather than contraction, to become more of a mantra in 2011?

Graiser: The contraction will come from those smaller chains that are struggling. In addition, we will see fallout from those retailers that have leases coming up for renewal. If the retailers are not getting the  rent concessions they need to operate that store going forward, they will let these leases expire. A lot of retailers are closing stores at natural expiration.

I think casual dining has a long way to go and I think we’re going to see fallout in that category. I think the smaller supermarket chains will start falling as well, which we’re already starting to see. I believe we will also see fallout among the smaller furniture retailers.

What I see as a positive right now is that many retailers built up a lot of cash last year by cutting costs and right sizing inventory, and now that the debt markets have opened up a little they can borrow some additional money.  I think that between the cash that’s built up and the increased borrowing ability, some liquidity is being created that may help some of these retailers survive the storm and begin to grow.

On the growth side, we’re not just seeing it with the dollar stores -- which are growing -- but in high-end categories and in the outlet sector. Companies such as Dollar Tree, which is rolling out its new concept Dollar Stop, and value-oriented retailers such as T.J. Maxx and its growing A.J. Wright concept, are being joined on the higher end by Saks Fifth Avenue, which is looking for locations, and by some of the specialty retailers such as Rue21 which is also starting to grow.

And I will tell you that these growing retailers are not overpaying for their real estate. Careful, strategic growth is the name of the game.

CSA: What is your final takeaway that really tells us that retail growth is in the works?

Graiser: We are starting to advise some of our retail clients where some of the growth opportunities and market opportunities are. We are giving them real-time insights so they can start thinking about growth. Since retailers  are starting to ask about growth opportunities, we are cautiously optimistic that we may be seeing a recovery!

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