Tuesday, March 26, 2019

How Bad is the Mall Business These Days?

It will be two years in May since Credit Suisse came out with its bold prediction that up to 25% of regional enclosed malls would close by 2022. At the time, there were roughly 1,100 malls in the U.S., which translates to approximately 275 mall closings. Many skeptics rejected the idea, saying it would never reach that level, and that the dire calculation was way overblown. 

We’re not even halfway to that 2022 end date, yet it’s starting to feel as if that forecast by Credit Suisse may not be so unreasonable. After all, the ongoing brick-and-mortar fallout experienced at regional malls is showing no sign of abatement.

The retail industry has seen more than its fair share of bankruptcies over the past two years, and no sector has been hit harder than malls. According to lists compiled by Retail Dive, there were 21 bankruptcies in 2017, 13 in 2018, and there have been 10 bankruptcies so far in 2019 – and we’re not even through the first quarter yet. Among these 44 bankruptcies, 29 have been filed by major mall-based retailers (this doesn’t necessarily reflect all mall-based stores, as some retailers opt for both mall and off-mall locations). Once-formidable chains such as The Limited, Gymboree, and Brookstone are now out of business.

And, of course, malls have been dealing with hundreds of department store closings. While Sears is the most notable among the group, Macy’s, JCPenney, Bon-Ton and others are included as well.  A recent list compiled by Moneywise indicates that in 2019 Sears will close another 72 stores, JCPenney will close 27 units, Macy’s another eight stores, and Lord & Taylor will close eight stores. On the heels of the Sears and Bon-Ton bankruptcies in 2018, Moody’s Investors Service placed JCPenney and Neiman Marcus on its short list of those most likely to go into default or possibly bankruptcy later this year - both are swimming in debt and may need to file for Chapter 11 protection.

During the same time frame, in addition to bankruptcies, plenty of still-viable mall-based retailers announced store closings in droves. These include the Ascena Retail Group (Ann Taylor, Loft, Dress Barn), Gap, Abercrombie & Fitch, J.Crew, The Children’s Place, Foot Locker, Michael Kors, American Eagle, BCBG, Charming Charlie, Best Buy Mobile, and many others.

According to Coresight, store closings actually fell in 2018 - 5,524 stores were shuttered compared to 8,139 the previous year. Through the first six weeks of this year, prior to the Payless ShoeSource liquidation, Coresight said 2,187 stores have already been closed, up 23% in the same time frame last year.

Among the 10 bankruptcies already announced in 2019, mall-based retailers include Charlotte Russe, Things Remembered, and Payless ShoeSource, the latter announcing the closing of all 2,500 stores in what could be the largest liquidation in retail history. The latest bankruptcy, filed just this week, was Diesel USA.

We’ve all heard about the classification of malls into “A, B, and C” categories. With all that has gone on in the past few years, it would be naive to say that A malls have gone unscathed. But it also wouldn’t be unreasonable to say that A malls are in the best position to recover. Better quality anchors, better quality tenant mix, and better demographics all contribute to the long-term viability of these regional shopping centers.

At the other end of the spectrum are C malls, those with high vacancy and continuous erosion of market share. If there’s a solution to the problems facing this classification of malls, it typically results in the repurposing of the property to some non-retail use. And then we have the “tweeners” in the B classification. At these properties, perhaps demographics are favorable for retail but the tenant mix is wrong, or an anchor vacancy or two has considerably impacted foot traffic. Sometimes these properties just need a face lift in the form of a new non-traditional anchor to spark some new life.

 In the Boston market, we can point to the Burlington Mall, for example, as an A-level mall that has proactively taken an empty Sears store and is currently remerchandising the space into much higher rent- paying shops and restaurants. The Silver City Galleria undeniably represents the C classification. All three department store anchors have closed as well as Best Buy. Overall this center is more than half empty. At one time there was hope of repurposing the property into a casino, but that potential opportunity ship has since sailed.

University Mall in South Burlington, Vermont (a mall we manage and lease) typifies the B classification. KeyPoint Partners’ leasing team was able to replace a vacant Bon-Ton store with the first Target store in the state pictured above). As a result of the pent-up demand for this dominant discounter and subsequent increase in customer traffic, H&M also was enticed to locate its first Vermont store at University Mall. With the ability to lease to these two additions, as well as relocations and expansions of other key tenants, there’s significant upside potential to attract more viable tenants to UMall.


While some malls are at the point of no return, there is hope for some – the question is ultimately how many. We’ll keep one eye on the count and another eye on the Credit Suisse prediction.

The bottom line is? As is so often the case in the current retail environment, things ain’t easy.

Bob Sheehan, VP of Research,
BSheehan@KeyPointPartners.com

KeyPoint Partners Company News

New Leasing Business: VP of Leasing Don Mace: 330 Reservoir Street, Needham, MA; VP of Leasing Michael Branton: 34 Leonard Street, Belmont, MA.

National Retail News

US retail sales rose 0.2% in January, the Commerce Department said. Data for December was revised to show sales dropping 1.6% instead of 1.2%, the biggest drop since September 2009. Excluding automobiles, gasoline, building materials, and food, sales rebounded 1.1% in January. The January sales report was delayed by the partial shutdown of the federal government. February’s retail sales report will be released on April 1. See sales reports below.

Accelerating Retail News

Green Growth Brands, a cannabis and CBD-infused products company, opened its first Seventh Sense CBD shop, in Lexington, KY, the first of hundreds GGB plans to open across the US. The company also announced an agreement with Simon Property Group to open shops in 108 Simon malls nationwide, with the first to open in March…Wayfair opened its first permanent location, an outlet center in Florence, KY. The 20,000 s/f store will sell items that have been returned in good condition, as well as other discounted goods…Hobby Lobby opened 54 stores and undertook 20 store relocations in 2018. It plans to open an estimated 65 new locations this year, and relocate an additional 16 stores. Hobby Lobby currently has more than 840 US stores…Activewear brand Lorna Jane is opening 8 more US stores to bring the brand’s store count to 38... DSW Inc. is expanding its pilot W Nail Bar nail salons to 5 additional stores, in Texas, DC., and Ohio. DSW has been testing the service since 2017 at 2 of its stores in Columbus, Ohio…American Dairy Queen Corporation plans to expand its DQ Grill & Chill restaurants by targeting 10 major metro markets and launching a new franchisee incentive program. Dairy Queen has more than 7,000 locations and plans to add more than 70 new restaurants this year...The Habit Burger plans to open 21 to 23 company-owned locations this year, of which a third will be on the East Coast...Kohl’s is working with Planet Fitness to open up to 10 Planet Fitness stores adjacent to select Kohl’s stores across the country in 2019 with the opportunity for additional locations in the future...Amazon.com plans to open dozens of grocery stores in several major cities. The first will open in L.A. as early as the end of 2019. The company has signed leases for at least 2 other locations with plans to open sometime early next year...Pet Supplies Plus has about 100 stores in the pipeline, and plans to open 50 stores this year. The company currently has over 450 stores...Casey’s General Stores has acquired Fantasy’s Convenience stores and Ride the Wave carwashes in Omaha, NE. Casey’s plans to remodel all 9 locations. Casey’s operates more than 2,100 convenience stores in 16 states. It is currently the 4th largest convenience store chain and 5th largest pizza chain in the US…American Eagle Outfitters is planning 60 to 75 new Aerie stores for this year. The openings will include including 35 to 40 standalone locations, as well as a number side-by-side with American Eagle stores. Aerie currently has 115 standalone shops and 147 side-by-side stores...Sephora will open 35 new US locations in 2019. Sephora has 460 stores across the Americas, as well as 660 locations inside JCPenney…Ross Stores opened 22 Ross Dress for Less and 6 dd’s Discounts stores across 6 states in February and March. The company plans to open approximately 100 stores in fiscal 2019...Macy’s will open 50 more Macy’s Backstage outlets this year inside existing Macy’s stores. There are currently 172 Backstage locations, all but 7 of which are inside Macy’s stores…Online retailer Mack Weldon has opened its 1st physical store, 850 s/f  at The Shops at Hudson Yards in NYC…Ulta Beauty plans to open about 80 new stores in fiscal 2019. In addition it will undertake some 20 remodel/relocation projects and about 270 store refreshes. As of February Ulta operates 1,174 US stores.

Decelerating Retail News

Whole Foods plans to convert all 12 of its existing 365 stores into regular Whole Foods by the end of this year. The move follows its decision to stop expanding the smaller format stores...Hudson’s Bay Company is closing up to 20 of its 133 US Saks Off 5th stores. No details on the closures were announced...Tesla is shuttering some brick-and-mortar stores in favor of e-commerce. Tesla will keep an unspecified “small number” of its approximately 130 US stores in high-traffic locations...Family Dollar will close 390 stores this year, re-brand some as Dollar Tree, and renovate others as the discount chain seeks a turnaround. Dollar Tree bought Family Dollar in 2015…Premium denim brand Diesel USA Inc. has filed for bankruptcy protection. Diesel USA doesn’t plan to close stores. Instead, its court papers describe a plan to restore the brand in the US, including opening new stores and retrofitting old ones. Diesel USA has 28 US stores...Amazon will close all of its 87 US pop-up locations in April. Amazon has pop-ups inside Whole Foods locations, Kohl’s stores, and malls around the US...Just One More Restaurant, the company that licenses the Palm name to more than 20 restaurants, entered Chapter 11 bankruptcy protection in Fort Meyers, FL...Home furnishings retailer Z Gallerie has filed for Chapter 11 bankruptcy protection and is seeking approval to close 17 of its 76 stores...Shopko plans to liquidate, citing its inability to find a buyer and will close an additional 120 stores in addition to the approximately 250 locations that were announced earlier. Gordon Brothers will oversee the liquidation process, which should conclude in 10 to 12 weeks.

New England News

Big Y Foods is looking to sell its 16,000 s/f Adams, MA location because the store is too small for its current business model…Papa Gino’s  closed 7 additional locations throughout New England, including 6 in Massachusetts and 1 in New Hampshire. The closures come after PGHC Holdings, Inc., the former parent company of Papa Gino’s and D’Angelo Grilled Sandwiches, shuttered roughly 95 locations between the two chains in November. The newly closed MA stores are Melrose, Wilbraham, Brockton Natick, and 2 in Framingham, The Seabrook, NH location also shuttered...5 former Papa Gino’s locations are up for sale or lease in Brockton, Natick, Framingham, Wilbraham, MA and Seabrook, NH. Wynnchurch, a private equity investment firm, closed on a purchase of the parent company of Papa Gino’s and D’Angelo’s in February. The previous owners filed for bankruptcy, abruptly closing nearly 100 restaurants. The sale involved 140 company-owned restaurants.

Mall News

Online furniture seller Wayfair will open its first permanent mall store later this year at the Natick Mall in Natick, MA, where it tested a pop-up shop last year...Payless ShoeSource Inc. filed for bankruptcy protection a second time, and will close about 2,500 stores in North America by the end of May... Gap Inc. plans to separate into two publicly traded companies, spinning off Old Navy into a separate firm as it closes about 230 Gap stores over the next two years. The other company, yet unnamed, will consist of the Gap, Athleta, Banana Republic, Intermix and Hill City. Gap will pay children’s clothing retailer Gymboree Group Inc.  $35 million for the high-end children’s fashion line Janie and Jack and its online business and leases to its stores, as well as other assets including customer data. The Children’s Place will pay the company $76 million for the rights to its Gymboree and Crazy 8 brands, and assume a contract with Zeavion Holding Co., which acquired Gymboree’s Play & Music business in 2016. The Children’s Place has 988 stores. Gymboree filed for Chapter 11 bankruptcy in January, saying it would close about 800 Gymboree and Crazy 8 stores. The proposed transactions must be approved by the bankruptcy court...Chico’s FAS will close 60-80 stores in 2019 following a disappointing fourth quarter, part of a previously announced plan to close approximately 250 stores across its Chico’s, White House|Black Market and Soma brands in the next three years...J.C. Penney will close 18 department stores and 9 free-standing furniture stores at which comparable sales were significantly below the rest of the company’s 840 stores… L Brands plans to close approximately 53 underperforming Victoria’s Secret locations this year. The lingerie chain currently has 957 US stores...Charlotte Russe will close all of its stores over the next two months.

RETAIL SALES REPORT




























Notes: figures gathered from individual company websites, press releases, and Federal filings.  Not all companies report all figures; results not reported will be marked “n/r”. Quarterly results will be updated when available; quarterly figures are shown in italics. Figures from companies not calculated to one decimal point automatically received an ending digit of 0. 

COMMERCE DEPARTMENT MONTHLY SALES

US retail sales rose 0.2% in January, the Commerce Department said. Excluding automobiles, gasoline, building materials, and food, sales rebounded 1.1% in January.

Source: U.S. Department of Commerce - commerce.gov

TREASURY YIELDS


















Treasury Yield Sources:  federalreserve.gov; ustreas.gov

CONSUMER CONFIDENCE INDEX

The Conference Board Consumer Confidence Index® increased in February, following a decline in January. The Index now stands at 131.4 (1985=100), up from 121.7 in January.

Source: The Conference Board - www.conference-board.org

PURCHASING MANAGERS INDEX

Manufacturing expanded in February, as the PMI® registered 54.2 percent, a decrease of 2.4 percentage points from the January reading of 56.6 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

Source: Institute for Supply Management - Manufacturing Report on Business - www.ism.ws