Brick-and-Mortar Stores Are Shuttering at a Record Pace
Brick-and-Mortar Stores Are Shuttering at a Record Pace
Years of overbuilding and the rise of online shopping
have come to a head; malls as ‘energy suckers’
By Suzanne Kapner April 21, 2017 7:53 p.m. ET
American retailers are closing stores at a record pace
this year as they feel the fallout from decades of overbuilding and the rise of
online shopping.
Just this past week, women’s apparel chain Bebe Stores
Inc. said it would close its remaining 170 shops and sell only online, while
teen retailer Rue21 Inc. announced plans to close about 400 of its 1,100
locations.
“There is no reason to believe that this will abate at
any point in the foreseeable future,” said Mark Cohen, the director of retail
studies for Columbia Business School and a former executive at Sears Canada
Inc. and other department stores.
Through April 6, closings have been announced for 2,880
retail locations this year, including hundreds of locations being shut by
national chains such as Payless ShoeSource Inc. and RadioShack Corp. That is
more than twice as many closings as announced during the same period last year,
according to Credit Suisse.
Based on the pace so far, the brokerage estimates
retailers will close more than 8,600 locations this year, which would eclipse
the number of closings during the 2008 recession.
At least 10 retailers, including apparel seller Limited
Stores Co., electronics chain Hhgregg Inc. and sporting-goods chain Gander
Mountain Co., have filed for bankruptcy protection so far this year. That
compares with nine retailers that declared bankruptcy, with at least $50
million liabilities, for all of 2016.
The seeds of the industry’s current turmoil date back
nearly three decades, when retailers, in the throes of a consumer-buying spree
and flush with easy money, rushed to open new stores. The land grab wasn’t
unlike the housing boom that was also under way at that time.
“Thousands of new doors opened and rents soared,” Richard
Hayne, chief executive of Urban Outfitters Inc., told analysts last month.
“This created a bubble, and like housing, that bubble has now burst.”
The over-storing, including the influx of fast-fashion
and off-price chains, resulted in a brutally competitive landscape that made it
difficult for retailers to raise prices. “A pair of men’s dress pants costs
less today than they did a decade ago,” Manny Chirico, chief executive of
Calvin Klein and Tommy Hilfiger parent PVH Inc., said in a recent interview.
As retailers rushed to expand their physical footprint,
the internet was gearing up to do to apparel companies what it had already done
to booksellers: sap profits and eliminate what little pricing power these
chains commanded.
Despite the view that shoppers prefer to try on clothing
in physical stores, apparel and accessories are expected this year to overtake
computers and consumer electronics as the largest e-commerce category as a
percentage of total online sales, according to research firm eMarketer.
Helena Cawley, 37 years old, said she used to be a
“die-hard” department-store shopper. But with two small children, the Manhattan
entrepreneur doesn’t have time to visit physical stores the way she once did.
“I buy much more online now,” she said. “With free returns and free shipping,
it’s so easy.”
But that shift has come at a high cost to retailers. It
is less profitable to do business online than in a brick-and-mortar store,
largely due to the higher shipping, customer-acquisition and technology costs
of the digital world. Retail margins on average fell to 9% last year from 10.5%
in 2012, according to consulting firm AlixPartners LP. Over that period,
e-commerce sales increased to 15.5% of total sales from 10.5%.
The internet has also made it easier for consumers to
comparison shop, thereby erasing any pricing leverage retailers may have had.
“The internet has acted as the great price equalizer,” said Joel Bines, the
co-head of Alix’s retail practice.
To be sure, retailing has gone through shakeouts before,
whether it was the superstores such as Wal-Mart Stores Inc., Target Corp. and
Kmart that killed mom-and-pop shops, or category killers like Barnes &
Noble Inc. and Toys “R” Us Inc. that did the same to smaller booksellers and
toy chains.
And even today, there are chains that continue to grow,
such as off-price retailer TJX Co s., which is opening hundreds of stores under
its Marshalls, T.J. Maxx and HomeGoods banners, as it steals market share from
Macy’s Inc. and other traditional department stores.
“This is not the end of retailing as we know it,” Mr.
Bines said. “People are not going to stop going to stores.”
Compounding the problem is the debt that retailers have
added to their balance sheets in recent years, either through leveraged buyouts
or to fund share buybacks. That leverage has become a problem as profits dry
up. According to Moody’s Investors Service, the amount of debt coming due for
19 distressed retailers is set to more than double over the next two years.
Many retailers were slow to seize on the significance of
these changes. When business was bad during the 2015 holiday season, many
chains blamed unusually warm weather. But when the most recent holiday season
once again failed to produce robust sales growth, “retailers realized this was
a structural change,” Credit Suisse analyst Christian Buss said.
Mall traffic is down, not just because people don’t want
to buy winter coats when it is 60 degrees outside, but because consumers no
longer view most malls as entertainment destinations.
Susan Smith, 63, used to visit the Neiman Marcus store at
her local Tampa, Fla., mall once a month. In the past year, she went twice. “I
don’t like going to malls anymore,” she said. “They’re energy suckers.”
Investors, too, have fled the sector. The S&P Retail
Select Industry index is down 2.8% so far this year even as the benchmark
S&P 500 has climbed 4.9%. Some mall owners have been hit particularly hard
in 2017, even as landlords are using department-store closings to add
restaurants, grocers and other traffic drivers. Pennsylvania Real Estate
Investment Trust is down 20% on the year, while CBL & Associates Properties
Inc. has lost 13% and Washington Prime Group Inc. has fallen 11%.
Chains such as Wal-Mart have stepped up their game. In a
bid to better compete with Amazon.com , the giant retailer has been scooping up
e-commerce startups, including Jet.com and ModCloth. And just this past week,
PetSmart Inc. bought Chewy.com, a fast-growing online rival.
Others have given up waiting for a recovery that seems
always out of reach and are settling into what appears to be the new normal.
“We’re planning as if the environment is not going to improve,” Jerry Storch,
chief executive of Saks Fifth Avenue and Lord & Taylor parent Hudson’s Bay
Co., told analysts earlier this month.
—Theo Francis and Ben Eisen contributed to this article
Write to Suzanne Kapner at Suzanne.Kapner@wsj.com
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