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Spending remains low as suppliers adapt

Bringing in more of the goods they sell, and shutting down more of their own plants, American home fashions suppliers are keeping their capital spending near historic low levels this year, often doing little more than routine maintenance on the plants they still have, or putting money into the information systems that that drive the efficient supply chain their customers demand.

For years, suppliers expected to pay out at least 7 or 8 percent of their total sales each year in capital outlays just to run in place, even more to add capacity. Now, importing more of the products they sell, and competing with customers who are doing the same, even the strongest player out there, Mohawk Industries, is spending little more than 3 percent of last year's sales to update its plants and equipment.

Even their customers, the nation's big retailers, are pulling in their horns somewhat. Perhaps finally catching on that the nation is over-stored, merchants are opening stores at a substantially slower pace. In fact four of the nine retail chains canvassed, almost half, say they're planning to open fewer stores this year than they did in 2003.

Even Wal-Mart, the world's largest retailer, notes that sometimes growth comes with a price. CEO Lee Scott observes in the retailer's report that there's still plenty of room to grow its U.S. store base. But later, in the fine print, the retailer notes, "As we continue to add new stores domestically, we do so with an understanding that additional stores may take sales away from existing units. We estimate that comparable store sales in fiscal 2004, 2003 and 2002 were negatively impacted by the opening of new stores by approximately one percent. We expect that this effect of opening new stores on comparable store sales will continue during fiscal 2005 at a similar rate."

Even if Wal-Mart is opening more stores this year than it did a year ago, some other big retailers aren't. Bed Bath & Beyond indicates it's scaling back its openings to 57 this year from 85 a year ago, and some of those are likely to be Christmas Tree stores. TJX is opening 17 percent fewer stores, 182 versus 219 last year. Federated only seven, down from 12 in 2003, a drop of more than 40 percent. After opening 49 net new stores last year, Linens 'n Things says it's planning to open 45 to 50 this year, and that total could be offset by further store closings.

Capital Spending retailers

Federated Department Stores

Cincinnati

'04 stores planned: 7

'03 stores opened: 12

-41.7%

After opening a dozen stores a year ago — six department stores, four furniture galleries and two home stores — Federated is slowing its growth sharply this year and plans to add just seven stores, four department stores and three furniture galleries. Overall capital spending is forecast at about $600 million, up about 6 percent from $568 million a year ago. This year's pickup in spending reverses a recent string of reductions in annual capital outlays, and represents an increase of almost 6 percent over last year's level. But even so, 2004 spending will be down about 24 percent from a recent high-water mark of $786 million in 2000.

Kohl's

Menominee Falls, Wis.

'04 stores planned: 95

'03 stores opened: 85

+11.8%

Still rolling new units across the map of the United States, Kohl's will add about 85 stores this year, increasing its square footage by about 18.5 percent. Work will also begin on a new distribution center scheduled to open next year in Macon, Ga. In 2005, a further 95 new store openings are planned. Last year Kohls' moved into the Greater Los Angeles area with 28 new stores, and began to develop a presence in the Southwest. This year, the retailer said in its annual report, "We will expand our presence in the Southwest, leveraging the infrastructure built to service this new region in 2003. We will also continue to expand our presence in established markets."

Linens 'n Things

Clifton, N.J.

'04 stores planned: 45 to 50

'03 stores opened: 49

-8.2 % to + 2.0%

Still building stores at a robust pace, the home furnishings specialty retailer plans to add 45 to 50 new stores this year. Last year, the retailer opened 58, for a net gain of 49 after store closings. The retailer increased its total square footage by 11 percent, to 15.1 million square feet. At this year's shareholder meeting, Bill Giles, executive vice president, said the retailer plans to increase square footage by about 10 percent a year for the foreseeable future. This year's capital outlays are expected to total about $80 million, roughly flat with last year, when spending totaled $81.5 million, including some costs tied to opening a third distribution center.

May Department Stores Co.

St. Louis

'04 stores planned: 60

'03 stores opened: 50

+20%

Ramping up its building plans, May plans to open 60 new doors this year, up from 50 last year, including eight new department stores, vs. 10 last year. Another 12 department stores will be remodeled or expanded. Also planned are 30 new David's Bridal stores; 20 After Hours stores; and two Priscilla's of Boston units. Spending will total about $600 million, flat with last year, but down sharply, by about 25 percent, from outlays of $798 million in 2002 and $797 million in 2001. And the 2004 number doesn't include the $3.2 billion May will spend to acquire the Marshall Field's group of department stores from Target Corp. in a move that will make May slightly larger than rival Federated.

ShopKo

Green Bay, Wis.

'04 stores planned: 6

'03 stores opened: 2

+200%

Firmly in a turnaround mode, the chain's small — store Pamida format is the focus of this year's spending, as it was a year ago. Three new Pamida stores will be opened, and three new freestanding drug stores, part of the retailer's push to expand its pharmacy offerings. Additionally, up to 11 pharmacies will be added to existing Pamida stores, building on the addition of 16 pharmacies added to small-town Pamida units in 2003. Another 50 Pamida stores get a remodel. In the core ShopKo discount stores, 10 stores get a makeover this year, following three remodels last year. The ShopKo distribution center in Omaha, Neb., is being expanded and consolidated with a nearby Pamida D.C.

Target Corp.

Minneapolis

'04 stores planned: 80 to 85 net new stores

'03 stores opened: 78

+8.0%

Still building its core Target Stores franchise, even as it plans to exit its department store and Mervyn's businesses, Target will open 95 to 100 new stores, for a net total of 80 to 85 after closings or relocations, spending about $3.2 to $3.4 billion, up about seven percent from $3 billion last year. At the same time, Target plans to remodel about 70 other units, and is unveiling a new Target prototype, refining and modifying new store design to create a fresher shopping experience. The chain is upgrading distribution infrastructure and systems to support the roughly 8 percent growth in its store base.

The TJX Companies

Framingham, Mass.

'04 openings planned: 182

'03 stores opened: 219

-16.9%

The big off-pricer is scaling back its growth this year to a net 182 store openings, after some closings, off the rapid pace of 219 net new units last year. Square footage, the retailer said, is expected to grow by about 8.9 percent. Total capital spending is expected to edge up by 3.1 percent, to about $509 million from $396.7 million last year. About $164.7 million will go for new stores, up about 20.7 percent from $136.5 million last year. Store renovations will cost about $147.3 million, up about 18.5 percent from $124.3 million. Spending on office and distribution centers is scaled back by about 28.6 percent, to $97.0 million from $135.9 million.

Wal-Mart Stores

Bentonville, Ark.

'04 stores planned: 270 to 295

'03 stores opened: 235

+ 14.9% to 25.5%

Still building at a furious pace, the world's largest retailer said it plans to open 40 to 45 new U.S. discount stores this year, as well as 80 to 90 new supercenters, in addition to remodeling about 150 others. About 10 to 15 new Sam's Clubs will be opened, in addition to 20 makeovers. The Neighborhood Market concept adds about 20 to 25 new stores. Five new distribution centers will be added to support the growth. The international market gets 100 to 110 new stores, plus 30 conversions or relocations. The company acknowledges the cannibalizing effect of U.S. store growth, saying it trims same-store sales growth by about one percentage point.

Bed Bath & Beyond

Union, N.J.

'04 stores planned: 57

'04 stores opened: 85

-32.9%

A notoriously tight-lipped company, Bed Bath & Beyond hasn't yet said exactly how many stores it will open this year — but it did say, in its 10K annual report, that as of Feb. 28 it had "leased sites for 57 new stores planned for opening in fiscal 2004 or 2005," presumably including Bed Bath & Beyond, Harmon's and The Christmas Tree outlets. The retailer said "approximate aggregate costs" for the 57 stores are about $79.9 million in merchandise inventories; another $43.1 million for furniture and fixtures and leasehold improvements; and $11.8 million for store opening expenses. In the 12 years from 1992 to the end 2003, the chain added 541 doors, growing from 34 to 575 units.

Capital Spending suppliers

Croscill Home

New York

'04 capital spending: $3.5 million

'03 capital spending: $10 million

-65%

After spending heavily to build a new distribution center last year, largely to accommodate its expanding mix of imported products, Croscill is taking spending down roughly 65 percent in 2004, said Doug Kahn co-CEO, with the lion's share of the cash going for information technology. "A year ago, we built a new distribution center as our business and our imports were growing. And we needed every bit of it," said Kahn. "But this year, other than systems, hardware and software, our investment will be minimal. We'll spend about $3 million on information technology systems, and another $500,000 elsewhere."

Dan River

Danville, Va.

'04 Capital spending: $11 million

'03 Capital spending: $11.5 million

-4.3%

Rethinking its priorities and scaling back its outlays as it works its way through Chapter 11 after a year of mounting losses and falling sales, the diversified textiles producer is whittling down its capital spending to about $11 million this year. The money, the company said in its 10-K annual report, "will be used primarily for maintenance." It marks the fifth straight year of lower spending levels, following outlays of $11.5 million last year, $12.4 million in 2002 and $18.2 million during 2001. After the shutdown of some of its plants, this year's spending is less than a third of the $33.7 million spent in 2000, or the $36.7 million during 1999.

Hollander Home Fashions

Boca Raton, Fla.

'04 capital spending: $3 million

'02 capital spending: $2 million

+50%

Hollander is boosting its outlays 50 percent, to $3 million, as it expands operations in China and the United States, said Jeff Hollander, president. "It's a mix of expansion in Chicago and China, as well as getting some jacquard weaving equipment into our Chinese facility. It makes sense for us to have our own jacquard weaving. It will make us more price-competitive." Domestically, Hollander wants to expand its Chicago filling and shipping operation from 80,000 sq. ft. into a new 150,000 sq. ft. plant located nearby. "We want to stay close to the older facility so we don't disrupt the lives of our workers. We want to keep the workforce intact."

Mohawk Industries

Calhoun, Ga.

'04 Capital spending: $140 to $160 million

'03 Capital spending: $114.6 million

+22.2% to 39.6%

Steadily building its manufacturing base through a long string of acquisitions, and correspondingly its capital outlays, Mohawk plans to boost spending by as much as 40 percent this year, to between $140 million and $160 million, up from $114.6 million last year — making it one of the few companies in the American textiles industry to raise its spending levels, or increase its domestic capacity. This year the cash goes to buy new equipment to increase production capacity and productivity. Capital spending levels last year don't include the $350 million Mohawk spent to acquire the Lees Carpets business from Burlington Industries.

Brentwood Originals

Carson, Calif.

'04 capital spending: $1 million

'03 capital spending: $1.8 million

-44.4 percent

Spending at Brentwood, as at other U.S. producers, is whittled down this year as suppliers de-emphasize bricks and mortar, favoring instead technology and distribution. "We're not doing any big projects," said Loren Sweet, CEO. "The primary focus is all internal logistical stuff. It's mostly scanning and conveyor equipment, expanding it in all three of our plants. We're also adding some dock doors. The funny thing is, you see a big cost savings from the logistical stuff, because once you can demonstrate to the retailers that you've got scanners, you're in a better position to negotiate on charge-backs. That's a big savings."

WestPoint Stevens

West Point, Ga.

'04 capital spending: $35 million

'03 capital spending: $18.7 million

Stepping up its outlays after taking a breather last year, WestPoint is virtually doubling its spending, to about $35 million from $18.7 million. Still, spending is at a far lower level than in recent years, when the company was still adding capacity, notably in terry. Indeed, this year's spending is less than a fourth of the $148.6 million the company spent in 1999. About $15 million to $20 million this year will go for routine maintenance. More will pay for the conversion of the Lanier plant from bedding to bath production. Still more goes for investment in supply chain management, including information technology for logistics at distribution centers.

Supplier capital spending

Supplier '04 $Mils. % of '03 sales
Mohawk Industries $140-160 2.8 to 3.2%
Dan River 11.0 2.3
WestPoint Stevens 35.0 2.1
Hollander Home Fashions 3.0 1.3
Croscill Home 3.5 1.2
Brentwood Originals 1.0 0.6


Retail capital spending

Retailer '04 openings '03 openings % chg
*49 net new stores, after store closings.
Bed Bath & Beyond 57 85 -33%
Linens 'n Things 45-50 49* -8 to +2
Wal-Mart 70 to 295 235 15 to 26
Target 80 to 85 78 +8
ShopKo 6 2 +200
Kohl's 95 85 +12
TJX 182 219 -17
Federated 7 12 -42
May 60 50 +20


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