Heavy discounts help make for gains in October


New York City Many retailers reported solid gains in October as heavy discounting on cold-weather items prompted shoppers to spend amid unusually warm temperatures in much of the country. There were a few weak spots, however, with weak sales of seasonal merchandise at some retail chains. Overall, Thomson Reuters, which tracks same-store sales for a group of 28 national chains, said total sales for the group were expected to post a 1.6% increase in same-store sales for October.

Costco Wholesale Corp. and Limited Brands were among the chains that reported larger increases than Wall Street analysts expected. Macy’s also had a good performance, outshining J.C. Penney Co. and Kohl’s Corp., both of which suffered sales declines. Macy’s also raised its earnings outlook. Target Corp. had a small gain that inched above Wall Street estimates.

October is typically a slow month because it falls between back-to-school shopping and the start of the holiday shopping period. But shoppers appeared to take more of a breather than usual as they grappled with continued economic uncertainty.

“It was a promotionally driven month,” said Jharonne Martis, director of consumer research at Thomson Reuters, in an Associated Press report. “Warm weather hurt sales of fall merchandise. We expect discounting is going to be necessary to drive holiday sales.”

In the apparel segment, Zumiez said its same-store sales rose 21.5% in October, far above the 7.8% analyst estimate reported by Thomson Reuters.

Limited Brands turned in another strong performance, with a 9% increase in same-store sales.

Both Limited and Zumiez raised their third-quarter earnings forecasts.

Abercrombie & Fitch Co. said its sales rose 2% in October, below estimates, but quarterly revenue came in above analyst expectations.

For the quarter, revenue at stores open at least a year rose 7%, while net revenue rose 18% to $885.8 million. In related news, Abercrombie said starting in fiscal 2011, it will no longer report its monthly sales figures. Instead it will report its quarterly sales results on the first Thursday after the close of each quarter.

Among the retailers that did worse than expected in October was Hot Topic, whose same-store sales fell 8.5%. The figure fell 10.7% at namesake stores, but rose 2.9% at its plus-sized Torrid division.

In other apparel same-store results for October:

  • The Buckle outdid estimates, with a 2.6% increase.
  • Gap’s sales increased 2%.
  • Cato reported a 2% increase.
  • The Wet Seal reported a 1.3% decline in sales.
  • Aeropostale’s sales decreased 2%
  • American Eagle Outfitters reported a 2% decrease. The company noted it completed the closure of its Martin + Osa stores during second quarter 2010.
  • Destination Maternity reported a 0.6% increase.

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Growing to a T


(November 1, 2010) In 2009, news headlines suggested shake-ups at T-Mobile—but not of a negative nature. The Bellevue, Wash.-based mobile phone retailer, which has built a brand empire on innovative marketing that includes endorsements by such celebrities as actress Catherine Zeta-Jones and pro basketball icon Charles Barkley, unveiled an innovative growth plan it called the T-Mobile Premium Retailer (TPR) program.

Designed to ease entrepreneurs into their own T-Mobile retail stores, the program aimed its earliest efforts at the Latino community, labeling the growth drive “TPR Latino” and launching in Southern California with plans to expand to 10 highly Hispanic metropolitan areas including New York, Los Angeles, Houston and Miami. Not your typical franchise model, TPR doesn’t charge royalties or franchise fees, but rather provides start-up capital, training and ongoing support to qualified prospective business owners.

Owners get their own business, and T-Mobile gets a quick path to more stores—all managed by highly motivated operators.

Senior editor Katherine Field talked with John Clelland, VP channel development for T-Mobile, about the company’s unique expansion model as well as its more traditional modes of growth and a new store design. Clelland, whose responsibilities include overall distribution strategy, market planning, and company-owned real estate development, construction and facilities, says that T-Mobile has gotten aggressive with growth, with plans to expand the retail footprint by another 1,000 locations over the next few years.

Overall, how has T-Mobile fared during the downturn?

T-Mobile has continued on a growth path in 2010, opening more store locations, adding 106,000 contract customers in Q2 as well as increasing data revenue by 18%, all while expanding our HSPA+ network (“High-Speed Packet Access,” which is a wireless broadband standard), now offering 4G speeds in more than 65 major metropolitan areas, with plans to reach 100 major metropolitan areas and 200 million people by the end of 2010.

What are some specific challenges and advantages you have faced during the last 18 to 24 months?

While we fared well in Q2, the economic downturn has definitely raised challenges for us as [it has] every business during this period, but it has also played to T-Mobile’s strength in providing great customer value.

Another advantage is the unique model of our branded third-party partner program, the T-Mobile Premium Retailer program. This program is not a franchise and provides savvy retailers with unprecedented training and support, while it provides our customers a complete shopping experience—the same quality level of products and service as our company-owned locations.

As you look forward to 2011, what are your growth plans?

We are extremely aggressive on growth across all channels, particularly with our new T-Mobile Premium Retailer program. There are plans for more than 1,000 new retail locations within the next few years.

What store design changes have you made over the last 18 to 24 months?

We engaged in a major store redesign when we launched our T-Mobile “Playground” model in Q4 2008. This design has been rolled out across the country with new store builds and remodels for company-owned, branded partner and kiosk locations. T-Mobile Playground stores offer customers a unique, interactive retail experience. From interaction with staff to store fixtures and features that make customers want to visit, learn, stay and play, the design model is more engaging and interactive for our customers. In addition to a more attractive and energetic space that draws customers in, the format also features demos that allow the customer to interact with the phone they are interested in and to play with features, while comparing and contrasting to other phones. It’s a unique approach to delivering customer delight.

We also are focusing our merchandising and display to effectively show off new devices coming into the category, like netbooks and tablets.

Has your real estate strategy changed with the downturn?

We have been able to get much more intelligence on site selection over the last few years and are translating this knowledge of our customer into finding the best and most convenient locations. As one of the most growth-focused retailers in the country at present, we are enjoying the opportunity to take advantage of better locations at more attractive lease rates.

What do you feel differentiates T-Mobile from its competitors?

Great customer value, the broadest selection of Android devices, the most pervasive mobile broadband network in the country and stellar customer service. The company has continued its run of customer service accolades awarded by J.D. Power in its Wireless Retail Sales Satisfaction and Customer Service indices. On that front, we’ve been quite successful, taking top honors in nine out of 12 total studies for Retail Sales Satisfaction. Our most recent win, awarded in August, was the third victory in a row in the category.

What about you, personally? What have you brought to the T-Mobile table that you are most proud of?

I have been with T-Mobile for 10 years and remember when text messaging was a capability that we weren’t really sure people would use! I joined T-Mobile after eight years at PepsiCo and Yum!, working on restaurant brands. Many people wondered how experience in the “low-tech” restaurant business would translate into the “high-tech” wireless world. Successful restaurants serve their customers consistently great quality food in a great environment; in the wireless business, people are looking for great quality service that they can rely on every day, which is not so different. Over the years, I have tried to make sense of the technology, the hardware and the alphabet soup of acronyms with this same focus on the customer.

When I first started, we used to talk about things like “someday you will be able to listen to music on your phone,” and today we are rolling out new capabilities daily that are literally changing the way people communicate and live their mobile lives. I love this business, and I think that we are still just starting to see the capabilities we can bring to market—you should hear how we complete “someday you will…” now!


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FASB: The Biggest Threat to Retailers’ Earnings


By Bill Bosco

(November 1, 2010) Is the economy the biggest threat to earnings of U.S. retailers? I think that a bigger threat may just be a proposed lease accounting rule change.

The Financial Accounting Standards Board (FASB) has issued an Exposure Draft (ED) of proposed new rules for lease accounting that essentially will turn operating leases into capital leases for accounting purposes. (The ED is available for review on

The degree of unfamiliarity among the nation’s retailers about the proposed rule change is stunning, especially considering the potential devastation it will wreak on earnings. Currently, the accounting rule (Financial Accounting Standard 13) requires only off-balance sheet footnote disclosure of future operating lease obligations. The proposed new rule, however, does much more than merely capitalize leases as the analysts do. It capitalizes estimated renewal and estimated percentage rents, so much more is capitalized than expected.

Many believe that estimated renewals and percentage rents do not meet the definition of a “liability.” The ED requires that the estimates be reviewed and adjusted when there is a material change (this could well mean monthly). Also, the FASB decided that average rent expense is not lease expense but rather amortization of the capitalized asset, and imputed interest on the capitalized liability is the reported P&L cost of the lease. The result is a front-ended lease cost pattern, which many believe doesn’t reflect the economic cost pattern of a lease.

The front-ended pattern causes the increased lease cost to accumulate until the midpoint of the lease term, at which point it turns around so that lease costs are lower in the second half of the lease. Given Wall Street’s “what have you done for me lately” philosophy, it is not good to have better earnings in the future, while you have lower earnings now.

In the chart below, I’ve estimated the impact of the ED’s lease-cost pattern versus current GAAP rent expense for a lineup of the largest U.S. retailers. (I used footnoted future operating lease payments from the retailers’ 10K annual reports.) The results are actually understated compared with the ED’s capitalization model, as estimated renewals and percentage rents are not captured. Looking at Walgreens, for example, if the impact is three times the above, its pretax earnings will drop by 50% in the first year under the proposed rule change.

The first step that every retailer needs to take is to become educated about the proposed rule change and how it can/will impact earnings. As I urged attendees of the National Retail Tenants Association annual conference in Anaheim, Calif., during my September keynote address, start by reading the Leases Project ED, evaluate its implications, and then write a comment letter to FASB. It is not too late to change the direction of the rules, and there are alternative views that have sound basis, but if you do not comment to the FASB, the ED will become reality.

The deadline to submit comment letters is Dec. 15, 2010. For a link to comment letter guidelines, as well as more details about FASB and its potential impact on retailers’ bottom lines, visit .

Bill Bosco is president of Leasing 101, a New York City-based lease consulting company. His areas of expertise are accounting, tax, financial analysis, structuring, pricing and training. An author and frequent speaker on leasing topics, Bosco has been named to the FASB/IASB Lease Project working group.


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