Commentary: To survive, retailers must team up and make strategic partnership
Scale seems to be integral to retail survival nowadays and we are seeing alliances between some of Europe’s largest retailer. Finally, after month of rumours, Germany’s two major department store chains Kaufhof and Karstadt have agreed to merge. The deal will unite retail operations with annual sales of around 4.6 billion euros and combined shares of almost 85% of the department store market according to Euromonitor’s 2017 data.
Following years of declining sales, Kaufhof was sold to Hudson’s Bay in 2015, which then unsuccessfully tried to revive the retailer modernising outlets and the product portfolio, as well as through a better multi-channel approach hoping this would increase sales. In contracts, Karstadt has last year achieved to grow again through a better multi-channel approach particularly e-commerce. This merger now is a consequence of overall struggling department store sales over the last years. However, both Karstadt and Kaufhof still possess outlets in prime locations and have the potential to become a modern multi-channel retailer.
The combination will be 49.99% owned by Canadian retail giant Hudson’s Bay, while Austrian Karstadt owner Signa will hold the remainder. This merger has the potential to stimulate growth again as this partnership is a strategical opportunity to equip both companies with the capabilities to strengthen operations and overcome the challenges in the German retail market.
To survive, retailers must team up and make strategic partnership. This mega-merger scale trend is a strategy to drive down cost but also a way to face the Amazon and other internet giant’s threats like Zalando over the retailing world. Amazon alone generates several billion Euros in Germany. Buying alliances are en vogue in Europe mainly within food retailers but not only. After the merger between Sainsbury’s and ASDA in the UK, the buying alliance called “Horizon” between Auchan, Schiever and German distributor in continental Europe, the recent partnership in-between Tesco and Carrefour, JD Sports recent purchase of House of Fraser was the latest ground-breaking news this summer 2018. The telecom sector is no outlier as well with the confirmed plans to merge in Australia Vodaphone Hutchinson and TPG Telecom in August 2018.
Hudson’s Bay in joint venture with German department store giant
Hudson’s Bay Company has entered into a deal that will result in the merger of Germany’s two biggest department store chains — Galerie Kaufhof and Karstadt — and help the Canadian retail giant pay down its debt.
HBC said it has formed a joint venture with Signa Retail Holdings, a leading European retail and real estate operator whose holdings include, to form a strategic partnership for its European retail and real estate assets. Signa is paying $616 million (Canadian dollars, or $468 million) to acquire a 50.01% stake in HBC’s European retail operations, and a 50% stake in HBC’s real estate in Germany
HBC Europe’s retail operations will merge with Signa’s Karstadt Warenhaus GmbH retail chain, with HBC taking a 49.99% interest in the combined businesses. This includes two iconic banners, Galeria Kaufhof and Karstadt, as well as other HBC and Signa banners to create a well-capitalized retailer positioned for improved profitability.
The new retail company, which will be comprised of about 243 stores, will be led by Dr. Stephan Fanderl, CEO of Karstadt. HBC and Signa will share six board seats and have joint oversight of all major decisions.
HBC’s European banners include Galeria Kaufhof, the largest department store group in Germany; Belgium’s only department store group Galeria INNO; Saks Off 5th in Germany; and the Netherlands and Hudson’s Bay in the Netherlands. (Its North American banners include, Hudson’s Bay, Lord & Taylor, Saks Fifth Avenue, and Saks Off 5th, and Home Outfitters.)
“We are excited to bring together these iconic banners to create Germany’s leading retail business,” said Helena Foulkes, CEO of HBC. “We are creating a stronger retail entity that is better positioned to capitalize on market opportunities. This transaction builds on our recent efforts to streamline HBC and provides a clear path forward to improve our European operations.”
In a separate transaction, affiliate Signa Prime Selection AG is acquiring a 50% stake in Hudson’s Bay’s European real estate holdings, along with Kaufhof stores in Cologne and Dusseldorf, Germany. The deal will generate proceeds of $616 million (Canadian dollars) or $469 million, for HBC.
HBC will use the proceeds to help reduce its hefty debt, which is about $4.2 billion (Canadian dollars). It is one of the biggest moves so far by Foulkes, who took the reins of HBC in and has been working to improve the company’s sagging fortunes.
“This transaction creates significant value for our shareholders, enhances our balance sheet and provides a better operating platform for our European business,” she stated. “The creation of a stronger operator in Europe allows us to focus our attention on our North American banners, helping to ensure we are making the right strategic decisions to drive performance and profitability within those businesses.”
Richard Baker, HBC’s governor and executive chairman, said that the transaction highlights the significant value of the company’s German real estate assets, which are worth approximately $1.1 billion more than what it paid for Galeria Kaufhof in 2015.
“Our partnership with Signa will serve our business extremely well as it establishes a platform to further strengthen our European retail and real estate operations,” Baker stated. “This transaction reinforces our long-term focus of unlocking real estate value through strategic partnerships, redevelopment and enhancing the credit profile of retailer tenants along with managing a portfolio of retail banners.”
Francesca’s Holdings Q2 misses; store renovation program continues
Francesca’s Holdings Corp. reported second-quarter earnings and sales that missed expectations and provided a disappointing outlook amid “weak traffic trends.”
The jewelry and accessories retailer reported net income of $454,000, or 1 cent a share, for the quarter ended Aug. 4, down from $7.3 million, or 20 cents a share, in the year-ago period. Analysts were expecting 5 cents a share.
Sales declined 6% to $113.0 million, missing estimates of $120.8 million, Same-store sales fell 13%, greater than expected.
“Second quarter sales results were disappointing mostly due to weak traffic trends,” said Steve Lawrence, president and CEO, Francesca’s. “While we have made significant progress in our merchandising strategy, inventory discipline and store renovations, we know there is additional work to be done to win back our core customer. We did see some positives in the business, including improving conversion, very strong ecommerce sales growth, and a significant reduction in clearance inventory.”
Francesca’s ended the quarter with 742 locations. It expects to update 80 to 85 stores this year, along with opening 34 locations and closing 24 boutiques, and refreshing 80 to 85 boutiques in fiscal year 2018.
“I strongly believe that the steps we are taking in resetting our merchandising strategy, investing in our omnichannel and reformatting our stores to better showcase our product, were the right decisions for the business,” said Lawrence. “In addition, we are taking action to drive improved traffic trends through a number of marketing initiatives. That said, as we see the progress in our business coming at a more measured pace, we are reducing our annual guidance.”
For the third quarter, the company expects net sales of $105 million to $110 million, below analysts’ forecasts of $116.5 million, and same-store sales to decline 3% to 8%, compared with expectations of a 4.3% rise.