Apocalypse Now or Right-Sizing? Retailing Perseveres Through Mass Closings
Some industry reports indicate more store openings than store closings last year.
Each year retailers routinely prune the store base. A store here, a store there, amid some openings.
But this year the industry has been rocked by an avalanche of store closures impacting operators across the spectrum of prices and product categories and recalling a level of downsizing not seen since the 2008 Great Recession. Optimization and productivity became a mantra for chief executive officers in 2017 as they sought to focus on their best locations. They found support from investors and analysts, who largely applauded the industry’s efforts to become leaner and meaner.
The numbers were big: Macy’s set more than 100 store closings for 2017 and a few years out. Sears and Kmart set 476 through 2017 into January 2018, and J.C. Penney revealed 138 closings.
Payless ShoeSource dropped to roughly 3,500 stores from 4,400 worldwide. Bon-Ton said it would shutter at least 40 units through 2018, and Rue21, Guess, Charming Charlie, BCBG Max Azria Global Holdings and J. Crew each disclosed scores of closings.
Most retailers shuttering stores were part of the lean and mean movement; others were going completely dark. Sears Canada liquidated all of its 82 stores. Bebe Stores Inc. shuttered its 170 doors. American Apparel’s 104 stores were all closed, while The Limited exited its 250 locations and, just last week, boho retailer Calypso revealed plans to liquidate.
Teen retailer American Eagle Outfitters Inc. said in May that it would be more aggressive on store closures, shuttering 25 to 40 doors, though going about it carefully. “We want to do it in a smart way so when we do close a store, we pick up those sales and we pick up those profits,” said Jay Schottenstein, chairman and ceo. “We just don’t want to close stores to close stores. We want to figure out how to optimize and maximize those sales so when we do close, we’re able to keep the majority of [the sales].”
Abercrombie & Fitch Co. in March said it was closing 60 of its U.S. stores “through natural lease expirations” and noted that half of its U.S. leases would expire by the end of fiscal 2018, giving the company plenty of room to operate.
Likewise, Victor Herraro, ceo of Guess Inc., said, “As more than half of our leases will expire, or have kick-out clauses, in the next three years, we have a lot of flexibility to continue with a closure past this year to further improve profitability.”
Guess already shuttered 62 stores over the past two years and laid out plans to close another 60 this year.
When the lease expiration is nowhere in sight, brands bite the bullet. Ralph Lauren Corp. closed its Fifth Avenue Polo store in New York in April as part of its “continued commitment to optimizing its store footprint.” The flagship, which opened in September 2014, is still vacant.
According to the Fung Global Retail & Technology weekly tracker as of Dec. 8, the store closing announcements from major retailers add up to 6,885 units, representing a 224 percent year-over-year decline. Fung’s tracker also calculated 3,433 store openings by major retailers.
“The U.S. retail industry is facing structural headwinds that some observers have referred to as ‘the retail apocalypse,'” Deborah L. Weinswig, managing director of Fung Global Retail & Technology, wrote in a report. “In 2017, many prominent U.S. retailers have struggled to compete with Amazon and e-commerce pure plays. Some companies have filed for bankruptcy and, as of the end of November, U.S. retailers had announced more than 6,400 store closures this year.”
But Weinswig added that “despite the well-publicized struggles in the retail sector in the U.S. and Europe, multiple retailers have held IPOs in 2017, including fashion, furniture and food companies. Their share price performance has been diverse.” Among the IPOs were Canada Goose and J. Jill, and plus-size clothing chain Torrid registered to go public in the near future.
This year’s brick-and-mortar purge is widely regarded as a healthy, albeit painful, cleansing of excess space. The U.S. has 23.5 square feet of retail space per capita, while Canada has just over 16 square feet per person; Japan and France, 1.7 square feet per capita, and the U.K., 1.3 square feet.
Why so many store closings, so suddenly? Simply put, new web sites and the shift to shopping online have siphoned traffic from stores and malls, shareholders have been pressuring retailers for change and greater profits, and retailers are examining the profitability of stores more closely while devoting greater resources to technology, enhancing websites and implementing omnichannel services.
Retailers also realize they must step up merchandise differentiation and personalize the marketing, as America’s middle class shrinks and shopping habits and spending shifts to the home, travel, health and recreational activities and other types of experiences. They must make those stores left more productive by investing in them, rather than building new ones. For decades, retailers grew revenues and profits through aggressive store rollouts to satisfy shareholders, though that strategy bore fruit for only so long.
Ultimately, retailers, consumers and landlords should benefit by the store-count reduction. The merchandise redundancy consumers see across the retail landscape, turning shopping into drudgery, will diminish. Ideally, innovative retail formats will replace outdated ones, and landlords and shopping center operators will develop ways to better utilize the space that comes available. Retailers should become more profitable and nimble, as they shutter stores and monetize properties. Lord & Taylor, for example, is downsizing its Fifth Avenue flagship in Manhattan and selling the entire property to WeWork for $850 million. WeWork will use most of the flagship as its New York headquarters and L&T owner the Hudson’s Bay Co. will improve its balance sheet. And Macy’s is considering changes at its Herald Square flagship, also to monetize some space with other uses.
While the extent of the store closures has been dramatic, it’s also distorting the state of retailing. Much of the industry is performing better this holiday season compared to last year, and the outlook for the fourth quarter is for average revenue gains of 3 to 4 percent or more.
According to a Cowen & Co. report, “Many apparel retailers will continue to close doors over the medium term. But the retail landscape is fairly healthy with growth forecast of up to 4,000 net openings in 2017. Our take is that retail remains vibrant at A-A+ malls, which have productivity levels at $550 per square foot and higher. There remains high occupancy and demand in this segment.
“On the other hand, B malls are seeing tenants move to a gross lease structure or a variable percent-only deal for a few years. Other key trends: concessions increasing, free rent and higher build out allowances, and the utilization of kick-out clauses given concerns on tenants leaving.
“In our view, the current dislocation in retail is primarily driven by underperforming malls and non-differentiated apparel concepts, while many other segments within retail have performed well,” Cowen wrote.
Fung reported 3,422 store openings, year-to-date, with Dollar General claiming the most followed by Dollar Tree, Aldi and TJX. Dollar General planned to open 900 stores in 2017. It currently has more than 14,000 stores in 44 states. Last August, TJX said over the “long term” there’s an opportunity to open as many as 5,600 stores, up from the 4,000 plus locations the retailer currently operates globally.
The bulk of the retail growth will come from off-pricers and dollar stores. Formerly online pure plays such as Warby Parker and Amazon, as well as pop-ups, holiday markets, food halls, and beauty chains Blue Mercury, Sephora and Ulta will further the expansion.
According to the IHL Group, retail is growing, not declining, with 4,080 net store openings this year based on 14,248 store openings, versus 10,168 closures, as reported by major companies. The figures include 2,026 fast food openings and 728 restaurant and bar openings, as well as 1,905 openings by mass merchants and 1,700 openings by convenience stores. Supermarkets are seen opening 674 units; drug stores, 345. On the other hand, department stores are dropping 400 locations and specialty soft goods are closing 3,133 units.
“This sector has been going through transformation,” said Jack Kleinhenz, chief economist for the National Retail Federation. He cited technology, demographic and population shifts rendering some department stores less relevant, and retailers being over-leveraged in some cases.
“In northern Ohio the population is flat-lining,” Kleinhenz said. “At one time it made sense to have three malls nine miles apart, but the population has been shifting from the Northeast and Midwest to the Southeast and Southwest. That’s where the demand is.”
While overall, “we are seeing stability to some degree,” in the retail industry, “it would be stupid to think we won’t see further evolution and transformation,” he added.
Terry J. Lundgren, who’s stepping down as executive chairman of Macy’s this month, laid out his thinking on the topic of closures last February, near the tail end of his long run as ceo. “More and more, we’re convinced that the consumer is entering the store with their mobile device and making their decision where they’re going to shop before they leave their home or their car,” he said. “We have to make sure that we understand that the transparency that is clear to the consumer today, that we are responding to that and in fact anticipating that that’s the way the consumer will shop and getting in front of it. So, I think we’re on that track. I think that we’re doing all of those things that I would do. If the department store did not exist today, there’d be a group of smart people sitting in Silicon Valley inventing the department store today, because it will serve a purpose.”