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Hot 100 Retailers (2008)

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Hot retailers had to be exceptionally hot in the economic environment that settled over most of the country in 2007. The hottest of the hot, the top 10, performed comparably to chart-toppers from prior years; more challenged were those at the lower end of the chart.

Two years ago, the companies tied for the 75th spot on the inaugural STORES Hot 100 Retailers chart showed a sales increase of 10.3 percent, while the same ranking last year came with a 12.4 percent year-over-year gain. This year, Neiman Marcus has sole possession of that spot with an 8.9 percent gain – still mighty respectable, since the Dallas-based company is one of only two department stores represented in the Hot 100.

The companies heading the 2008 STORES Hot 100 Retailers list took the typical route to the top — acquisitions. CVS joined forces with Caremark; Rite Aid completed its deal for the Brooks Pharmacy and Eckerd operations; IHOP took over the larger Applebee’s chain; FTD saw a revenue boost from the 2006 acquisition of U.K.-based Interflora. Amazon.com made some small transactions to enhance existing merchandise categories while extending its e-commerce expertise into new areas.

GameStop continues to reap the synergistic benefits of some strategic acquisitions two years ago, and American Apparel and Chipotle Mexican Grill both have been growing store counts for a couple of years, with the resultant sales increases up in this year’s figures.

With CVS Caremark resting at the top of the chart and Rite Aid commanding the runner-up position, it is not surprising that drug chains constitute the hottest retail segment among companies on the Hot 100 chart, sporting a gaudy 42 percent year-over-year volume increase. Last year was the first full year of operation for the combination of drug retailer CVS and prescription benefits manager Caremark Rx: Their joint revenues of more than $76 billion were 74.2 percent above the $43.8 billion CVS generated in 2006.

Rite Aid’s revenue boost came from its purchase of the Brooks Pharmacy units in New England and Eckerd drug stores along the East Coast that had once been part of Canadian Jean Coutu Group’s ill-fated experiment doing business south of the border. It is only this summer that Rite Aid is wrapping up the conversion and integration of those stores into its coast-to-coast network. Walgreen is beginning to slow its three-stores-every-two-days expansion pace, abetted by some selective acquisitions of specialty pharmacies.

Convenience store heat
Ranking behind drug stores as the second-hottest group of retailers is a quartet of fuel, food and convenience merchandise merchants in the quick-stop/c-store segment with an average revenue increase of 21 percent. The four include TravelCenters of America, the truck stop/travel center and restaurant operator spun-off by a group of private equity investors early last year; Susser Holdings, which once operated under the Circle K banner before renaming and launching the Stripes convenience store chain in 2006 and buying Town & Country Food Stores last year; Casey’s General Stores; and The Pantry, the latter two having made a practice of buying small operators to either in-fill or grow the perimeters of their operating territories.

Holding down the third position on the Hot 100 list is IHOP, one of three restaurant companies in the top 10. IHOP startled industry observers last summer when it announced its intentions to acquire Applebee’s, the nation’s largest full-service dining chain by number of locations. Though IHOP built its name and reputation running pancake restaurants, it has spent the last five years transforming itself from an operator to a franchisor of restaurants and is now nearly 99 percent franchised.

Most of Applebee’s units were company owned and operated; it began changing that shortly after consummating its takeover last November. In a deal typical of its plans for Applebee’s, the company last month announced the sale of 26 Applebee’s restaurants in Southern California to Apple American Group, a deal which generated approximately $27 million in after-tax cash proceeds.

To signal a new stage in its development — and reduce the potential for confusion among the restaurant-going public — IHOP Corp. earlier this year changed its name to DineEquity. The company boasts that, with more than 3,300 units, DineEquity is the largest full-service restaurant company in the world.

Joining IHOP among restaurant operators in the top 10 are No. 7 BJ’s Restaurants and No. 8 Chipotle Mexican Grill, both of which are growing organically rather than through acquisitions.

BJ’s, which started serving deep dish pizza in the Los Angeles suburb of Santa Ana 30 years ago, has grown into a chain numbering 73 locations.

After opening its first brewery in 1996, the company’s latest restaurant is styled as BJ’s Restaurant & Brewhouse, where pizza is still a major component of the menu. Though more than half of BJ’s locations are in California, the company has grown eastward, with units stretching into Texas and Louisiana, as well as Indiana, Ohio, Kentucky and Florida. In July, the company created the post of chief marketing officer and filled it with Matt Hood, who had been national brand restaurant consultant for Google.

Denver-based Chipotle, which split from McDonald’s in 2006, experienced explosive growth before and after the alliance, even though some quick-serve conventional wisdom has been cast aside. For one thing, the company operates its own restaurants and doesn’t franchise; for another, it eschews TV advertising.

Chipotle is the brainchild of Steve Ells, whose approach is to marry the pedestrian burrito with ingredients such as freshly chopped cilantro and beefsteak marinated for 12 hours, ideas worthy of someone trained at the Culinary Institute of America. Ells was one of the early proponents of pushing suppliers to use natural and humane methods of raising farm animals. More recently, the company has begun a program of buying at least 25 percent of its produce — romaine lettuce, green bell peppers, jalapenos, red onions — from local farms.

Chipotle has nearly 750 restaurants across the country, is opening its first Canadian units this year and is casting an eye toward Europe, where Frankfurt, London and Paris have been mentioned as possible expansion sites.

Supermarket segment
The supermarket segment has five representatives in the Hot 100, but none are in the top quartile. As a group, they posted a 17.2 percent year-to-year revenue rise, led by A&P’s 19.2 percent boost following its acquisition of Pathmark Stores. The differential was enhanced by A&P’s downsizing in the several quarters preceding the combination of the two New Jersey-based chains.

Rising food prices have helped all grocers’ top lines, and SUPERVALU benefited from this, as well as from the inclusion of its distribution business in total revenues for the first time this year. Spartan Stores has shed its drug store chain and also distributes to some independent grocers. Rounding out the hot grocery segment are Ingles, a low-profile but well-respected operation based in western North Carolina, and Whole Foods Markets, which is still opening stores.

Apparel stores are well represented among the Hot 100 Retailers, with the ’tweens and teens category enjoying an aggregate 13.3 percent sales lift. Included in this group are chains that have grown through rapid store openings rather than acquisitions, operations as disparate as Zumiez, Urban Outfitters, Aéropostale, The Buckle, and one-time Limited divisions Tween Brands (the erstwhile Limited Too) and Abercrombie & Fitch.

As a group, specialty apparel retailers didn’t fare as well as those focused on the younger set. With sales gains of 35.8 percent, only No. 5 American Apparel earned a single-digit ranking.

American Apparel has been opening stores with a vengeance, fueling its torrid sales gains, but the expansion might be coming at the expense of fiscal prudence, with securities analysts and industry watchers raising red flags over equilibrium on the company’s balance sheet.

Amazon.com hasn’t carved out a niche so much as it has defined what online retailing is and how it should be conducted. The result is a formidable seller of books, music, movies and a lot of other goods, as well as an entity that functions like an electronic shopping mall — directing shoppers to branded stores carrying other retailers’ names — and as a facilitator and consultant for retailers too small or too inexperienced to establish e-commerce businesses on their own. All the while, Amazon has remained innovative and creative while adding new merchandise categories (like groceries) and introducing the Kindle, an electronic device enabling the downloading and reading of books in digital formats.

GameStop spreads internationally
GameStop has no direct competition in this country, though retailers from Best Buy and Blockbuster to Target and Walmart all sell electronic games. GameStop continues to open stores here, aiming for about 300 this year, but its greatest opportunities are overseas, where it buys entire chains to enter a new country or market. Earlier this year, GameStop acquired the 49-unit Free Record Shop in Norway to go with the 100 units it already operated in Scandinavia. More recently, GameStop agreed to purchase The Gamesman, New Zealand’s largest independent game retailer, which will give it 308 locations in New Zealand and Australia.

No. 9 FTD sells flowers and gifts directly to consumers through ftd.com and is also a web and telephone marketer of merchandise through its network of approximately 20,000 North American flower shops. Merchandise includes flowers, plants, pots and vases as well as books, plush toys, jewelry and collectibles. This is likely FTD’s final appearance on the Hot 100 chart, since it has agreed to be acquired by United Online, a provider of consumer Internet and media services based in Woodland Hills, Calif.

A number of retailers have displayed the ability to maintain their heated growth pace over the three years of the Hot 100’s existence. In spite of the sluggish consumer spending environment, GameStop, CVS Caremark and Amazon.com sport triple-digit growth over the extended period. What might seem counterintuitive is that not all of the three-peat Hot 100 retailers are active in the mergers and acquisitions arena or are young go-go companies. Among the 40 retailers showing sustained sizzle are Walmart, Costco, Tiffany and Abercrombie & Fitch.

No food service businesses are included in this group because restaurants weren’t part of the initial Hot 100, but restaurants now constitute the largest segment among Hot 100 Retailers, though for compilation purposes they are grouped into three sub-segments (Sandwich/beverage, casual and upscale dining).

Size is not an impediment to hot sales, with fully 30 companies appearing on both the Top 100 chart and the Hot 100 list, ranging from Walmart at the top end to No. 99 Saks Fifth Avenue, which is prospering after slimming down from its foray into regional department stores. Jewelry, a retail segment not represented at all in the Top 100, is well-represented among Hot 100 Retailers, including Tiffany, Blue Nile, Finlay Enterprises (operator of leased departments and parent of the Bailey Banks & Biddle and Carlyle chains) and Birks & Mayors, which operates stores in both Canada and the United States.

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