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Moody’s on Credit Card Interchange Fee Settlement

BY Marianne Wilson

The July 13 settlement of a lawsuit over allegedly fixed credit card interchange fees is a credit positive for the two largest industry players Visa and Mastercard, but will have a smaller impact on merchant acquirers, retailers and banks, said Moody’s Investors Service in a new special comment "Credit Card Interchange Fee Settlement is Credit Positive For Visa, MasterCard."

The $6.6 billion settlement concludes a protracted legal proceeding that saw retailers sue credit card network operators and the largest banks that issue Visa and MasterCard payment cards, alleging a conspiracy to fix interchange fees.

As part of the settlement Visa will pay its $4.4 billion share from its litigation escrow account, which is funded by the shareholdings of U.S. member banks. But the longer-term impact of this settlement will continue to factor into ratings, said Moody’s.

"This settlement removes a major uncertainty for Visa and MasterCard with an interchange fee reduction much smaller than expected," said Stephen Sohn, a Moody’s VP – senior credit officer. "Without this litigation overhang, Visa and MasterCard could pursue more aggressive financial policies that will be key to any possible rating changes."

One effect of the settlement might be a reduction in credit card volumes, says the rating agency. That’s because retailers are now free to impose surcharges on credit card purchases, although "no-surcharge" laws in 10 states—including California, Texas and New York—will remain valid.

Banks like JP Morgan Chase, Bank of America and Citigroup too will only be modestly affected by the settlement, standing to lose only about 1%-3% of pre-provision income, says Moody’s.

Given the relatively small reduction of credit card interchange fees (10 basis points for an eight-month period), we expect that merchant acquirers will only modestly benefit from keeping a portion of the savings in 2013.

But neither the monetary damages from the settlement or the temporary reduction in the interchange fees will have a material impact on the earnings of retailers. Moody’s expects any savings to offset rising operating costs.

The last area of the settlement that is of potential benefit to retailers is the ability to assess a surcharge on purchases made with a MasterCard or Visa credit card. However, because Moody’s believes consumers would not view surcharges favorably, it expects large national retailers not to add surcharges to credit-card purchases. However, Moody’s said it is possible that small mom-and-pop retailers who operate in states that allow surcharges may decide to add them.


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Safeway not swayed by negative forces

BY CSA STAFF

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Undeterred by an abundance of headwinds facing conventional supermarket retailers, Safeway chairman and CEO Steve Burd expressed optimism about his company’s performance and prospects during the second half of the year.

Following a modestly better than expected second quarter profit performance, Safeway confirmed a full year profit forecast that calls for earnings per share in the range of $1.90 to $2.10. Safeway is assuming it will achieve full year identical stores sales increases of 1% to 2% and product inflation will range from 2% to 3%. The affirmation of guidance that was provided earlier this year followed the July 19 release of financial results for the second quarter ended June 16 that analysts and investors found concerning.

During the period, Safeway generated income from continuing operations of $121.7 million, or 50 cents a share, compared to profits of $146 million or 41 cents a share the prior year. Total sales increased by $190 million or 1.9% to nearly $10.4 billion and identical store sales advanced 0.8% after a flat first quarter.

The reason the company was able to grow earnings per share nearly 22% on a decline in net income is because a massive stock buyback program reduced the number of outstanding shares. By the end of the second quarter Safeway’s outstanding shares had fallen to 240 million compared to 352 million at the end of the second quarter the prior year.

The share repurchase activity clearly helped the company’s profit performance, but Burd made the case that sales weren’t too bad either and are poised to accelerate during the back half of the year thanks to some new initiatives that are expected to gain traction.

“We are encouraged to see that our volume trends are improving as inflation has eased, and we are pleased to see market share gains in the grocery channel and a slight gain in market share in all food-related channels,” Burd said. “We expect continued momentum as participation grows in our Just for U loyalty program that is now available in all U.S. divisions and as we enhance our fuel rewards programs and expand our health and wellness initiatives.”

While Burd expressed optimism about the future, analysts fixated on the 73 basis point erosion in gross margins that saw the company’s rate of profitability decline to 26.3% of sales. One of the reasons for the decline was increased costs related to the roll out of the company’s Just 4 U loyalty program which is being relied upon to deliver longer term sales growth. Safeway was eager to get the initiative rolled out to the market to promote registration and usage because early indications are the program helped the company grow sales and gain share. After identical store sales were flat in the first quarter and up only 0.8% in the second, Safeway is counting on considerable improvement in third quarter and fourth quarter sales if it hopes to achieve the upper end of its full year identical-store sales target.

As for expenses, Safeway managed to offset the decline in its overall rate of profitability by controlling them. Operating and administrative expense decreased 39 basis points to 23.99% of sales in the second quarter.

Safeway invested $219.2 million in capital expenditures in the second quarter of 2012, while opening one new store in the company’s Lifestyle format and completing one Lifestyle remodel. However, the company also closed 10 stores, including three Genuardi’s stores that were sold during the quarter. For the year, Safeway expects to invest approximately $900 million in capital expenditures to open approximately 10 new Lifestyle stores, complete approximately 10 Lifestyle remodels, refurbish in-store pharmacies and develop properties through the company’s wholly owned subsidiary, Property Development Centers LLC.

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A Welcome Development: Landlords Tout New Projects

BY CSA STAFF

By Eileen F. Mitchell, [email protected]

When Taubman’s City Creek Center opened in Salt Lake City, Utah, back in March, the shopping center and retail industries were on the edge of their proverbial seats. The project was ambitious in and of itself—with a retractable glass roof, a creek running through the property, a pedestrian sky bridge and a tenant lineup that included the likes of Nordstrom, Macy’s, Tiffany & Co., Michael Kors and Coach, to name a few. But of course, City Creek Center also happened to be the first enclosed, regional mall to open in the United States in six years. Everyone was waiting to see if its retailers would report robust numbers, or if the opening would just be “ho-hum.”

Whatever the case, it would certainly have big implications, not just for Taubman, but also for the rest of the industry, particularly malls. Fortunately, City Creek Center opened to wide praise. This project has been on fire, with many of its retailers doubling their original sales plans. The numbers have been so good, in fact, that Apple recently bought out of its lease at the mall down the street and plans to open a large store at City Creek Center. You can bet other tenants around the country have taken notice.

And indeed, the success of City Creek Center has clearly contributed to the rising confidence of major landlords like Simon, General Growth and Westfield, as witnessed in the number of developments introduced at RECon (Not to overstate its importance, but just imagine the difference in the industry’s mood at RECon if City Creek Center had flopped). While it was nice to see the strong attendance at RECon, it was far more heartening to hear landlords from across the United States and Canada share their plans to spend serious money on a host of new brick-and-mortar projects. Over the past 18 months or so, discussions of new projects, if they occurred at all, have tended to focus mostly on outlets. But at this year’s show, many of the top landlords were talking openly about building or reinvesting in regional malls.

Companies like GGP have done a good job of spinning off underperforming assets and getting their financial houses in order. They are now laser-focused on either building or redeveloping in the best MSAs, where space is tight and retailers are clamoring to get into good real estate.

Buoyed by the warm reception in Salt Lake, Taubman, for starters, is moving forward with two new malls—the Mall of San Juan (Puerto Rico) and the Mall at University Town Center in Sarasota, Fla. (They’ve partnered with Benderson Development on the latter.). The 664,000-sq.-ft. Mall of San Juan will boast Saks Fifth Avenue, Nordstrom and what the company describes as “a critical mass of luxury, bridge and better merchandise stores that does not exist on the island today.” The project is ideally located to capture tourist traffic (there are 60,000 luxury vacation homes on Puerto Rico) and woo affluent locals, Taubman says. Plaza Las Americas is within 10 miles but targets a more mainstream demographic, so the prospects for the Mall of San Juan are good. Construction is underway with a likely 2015 grand opening. The 880,000-sq.-ft. Sarasota project, which is set to open in 2014, will offer Saks, Macy’s, Dillards, a yet-to-be-announced fourth anchor and approximately 115 other stores, many of them new to the market. Given its experience with Florida properties like International Plaza, Waterside Shops and the Mall at Millenia, Taubman understands the state’s local markets quite well. This project was put on hold after the downturn in 2008, but the company feels the time is right to start up the bulldozers once again.

On the reinvestment front, Westfield used RECon to highlight its bullish plans for the San Diego market, where it owns malls such as Horton Plaza, University Town Center (UTC) and North County. The REIT is known for its redevelopment formula, which typically includes the addition of streetscapes, updated food courts and various refits and remodels geared toward making older malls feel relevant again. With the economy in Southern California starting to pick up, Westfield is running a full-court press in San Diego. The goal is to make older centers like UTC more palatable to higher-end and better-known national brands. The $180 million UTC revitalization, for example, will include a new dining terrace, more shops and restaurants, as well as San Diego’s first ArcLight Cinemas. According to Westfield, the makeover will be complete by December. While anchor demand is limited, Westfield has done a good job of using renovations to convert the likes of vacant Mervyn’s spaces into in-line locations for Forever 21, H&M and other tenants that can take 15,000 ft. to 20,000 ft.

For its part, Simon is on a tear with the expansion of its highly successful outlet business. In recent months, the REIT has invested in, opened or announced projects, not only in domestic markets like St. Louis or Merrimack, N.H., but also in Toronto, Brazil, China and Japan. Simon’s clout gives it the ability to do bulk leasing deals with the likes of Saks Off Fifth, which announced plans earlier this year to open seven stores in Simon’s Premium Outlet centers.

It is also perhaps telling that even the old Meadowlands Xanadu mall out on Route 3 in New Jersey has attracted a developer’s attention once again. Triple Five Worldwide (owner of West Edmonton Mall in Edmonton, Canada, and Mall of America in Bloomington, Minn.) aims to transform this albatross of a property, which has been bought and sold numerous times over the years, into “one of the largest and most unique shopping, entertainment and tourism centers in the world.” It will be called American Dream | Meadowlands, and the mega-scale plans include an amusement park, ice rink and water park, along with retail, restaurants and nightlife in a thoroughly updated setting. The demographics around this site are questionable, to say the least, but if anyone can pull off a plan of this size, it is Triple Five. The company, which was showing off plans for the property at RECon, says it has entered into an agreement with DreamWorks for the theme park. American Dream is a project to be watched, for sure, but the $3.8 billion entertainment complex is already being criticized for its slow timetable. It reportedly may not be open in time for the 2014 Super Bowl at MetLife stadium.

All of the aforementioned projects amount to welcome news from the development community. Does this mean the economy has come roaring back? Not quite. After all, the activity is focused only on the best markets—those that offer density, healthy household incomes, job growth and the like. That means many communities in America—the secondary and tertiary markets—actually are losing retail. In these areas, the housing markets are still in the doldrums and retail prospects tend to be dim. Still, the success of City Creek Center illustrates how domino effect doesn’t just apply to the downward slope: Good economic news, when strong enough, can beget more of the same, and this can, in turn, trigger improvements in the prospects of construction workers, architects, fixture manufacturers and on down the line.

Let’s hope we can toast even more bullish headlines in the quarters to come.

Eileen F. Mitchell is executive VP and head of the Growth & Development and Outsourced Real Estate Management practice of New York-based retail real estate advisory firm RCS Real Estate Advisors. She can be reached at [email protected].


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