A Special Report Sponsored by     The Nation’s Hottest Retailers 2008 From August 2008          By David P. Schulz

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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.

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.

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