Shifting Styles, Fashions and Shopping Behaviors Forcing Retailers and Mall Owners to Rethink What Works and What Doesn’t
Many retailers and regional shopping mall owners are discovering what many parents have lamented for years: How do we get through to our teenagers?
Declining teen retail sales has become a red flag for many fashion-dependent stores. And while retailers are on the front line of that trend, mall owners are not far behind, and they are also trying to get through to their parents as well, who appear to be abandoning many of their old standby department stores. Finding answers is critical for their futures.
"There are macro issues that are facing the teen growth today, whether it's teen unemployment or other things that are out there,” said John D. Goodman, CEO of teen retailer Wet Seal. “We've got to put aside the macro for a second and ask, what can we do to get business for ourselves and what are the strategies we need to put in place to really turn the tide? The macro issues are out there, but how do we get our share of the business in a very difficult environment?”
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Declining teen retail sales have affected all classes and types of malls.
Overall, U.S. retail sales (excluding-auto and food sales) remain challenged in February of this year, with sales up 1.1% year over year, but down from this past summer’s 3.9% trend.
No doubt, the extreme winter weather across most of the U.S. definitely hurt sales and mall traffic. Nevertheless, Ki Bin Kim, director of U.S. REIT equity research at SunTrust Robinson Humphrey, said he continues to see a clear trend among weak retailers continuing to suffer declining sales. These include teen retailers such as Abercrombie & Fitch, Aeropostale, American Eagle, and Guess, and also those retailers most at-risk to ecommerce competition, such as Office Depot, Best Buy and Staples.
“In our view, teens didn’t suddenly stop shopping, they are simply spending a significant portion online at very well run online fashion retailers, such as: Shopbop.com, Revolve.com and Brandymelvilleusa.com,” Kim noted. “The initial e-commerce assault on brick and mortar retail started with commodity type items (the low hanging fruit), but it is continuing to evolve to higher brow consumer items.”
The trend is having an impact on smaller, in-line boutiques as well as on major department stores. Total department store industry sales declined by 4% to about $175 billion in 2013, according to Fitch Ratings. This was the worst rate of decline since the 2008-2009 recession, according to the bond ratings agency, and lower than Fitch Ratings’ medium-term projection of a 1% to 2% annual decline rate.
Fitch said the results reflect the continued competitive pressure and 'channel leakage' to specialty apparel, discounters and, more recently, the online channel.
The notable department store chains feeling the pinch continue to be Sears/Kmart, Bon-Ton Stores, Kohl’s and JCPenney, although JCPenney finally turned a positive 2% comp in the fourth quarter, Fitch noted.
Meanwhile, Fitch noted that store closures by anchor tenants continued to weigh heavily on the mall REITs. In particular, the downsizing of both Sears and JCPenney were likely causing some of lower sales per square foot. Other big named retail closings announced this year include Radio Shack (1,100), Staples (225), JCPenney (33), Aeropostale (175), and Children’s Place (125).
On the Bright Side
Even with all of the negative news around announced store closings in the retail industry and declining retail foot traffic at malls, the retail property sector performed well this past year across a number of measures, Nomura Securities noted.
The U.S. shopping center industry posted a 7% rise in net operating incomes last year to post the strongest annual performance since 2008, according to the International Council of Shopping Centers (ICSC) and National Council of Real Estate Investment Fiduciaries (NCREIF).
Also, the CMBS 30-plus day delinquency rate for retail properties declined 25 basis points to 5.82% in February 2014, which was the lowest delinquency rate of all CMBS property types, excluding self-storage.
Also, despite the retail sales trend, SunTrust’s Kim noted that mall-based retailer stocks have outperformed those of strip center-based retailer stocks so far this year, sort of. Actually, mall-based retailer stocks have not lost value while strip center retailer stocks have dropped 6.6% year-to-date.
Retail sales trends further differentiate "good" malls and bad, Nomura Securities noted. Better-performing malls with high retail sales per square foot are expected to continue performing well and have no trouble backfilling vacated space. The concern among analysts lies mostly with outdated malls or those located in overcrowded markets that need only two of three existing malls, according to Nomura analysts Lea Overby and Steven Romasko.
The majority of retail REITs continued to emphasize the importance of “capital recycling” in their most recent quarterly investor calls, that is selling underperforming properties and investing in higher quality centers with growth potential.
Reflecting this trend, most REITs have a set of 'non-core' assets that they plan to sell or dispose of over the next year. Several spokespeople noted the strengthening investor interest in lower-performing malls, providing a possible opportunity for the REITs to shed underperforming assets.
According to CoStar sales comps data, more malls are being sold, moving from less than half a million dollars in total mall property sales in 2009 to more than $6 billion last year.
Of the sales in the last five quarters, 195 of them were rated by CoStar as 3-star properties, with sales prices averaging $162 per square foot in 2013 and $140 per square foot this year. Four- and five-star rated properties accounted for 93 of the sales in the last five quarters at an average price of $202 per square foot with prices this quarter approaching $400 per square foot.
Cooking Up the Right Tenant Mix
In a bid to enhance their appeal and draw increased foot traffic, many of the REITs that owned malls were increasing the mix of entertainment and dining options in their properties. For example, since 2008 Taubman Centers has renovated, expanded, or built from scratch over half of its centers. Specific examples include:
At the Mall at Green Hills in Nashville, Taubman is relocating a Dillard’s store and adding 170,000 square feet of mall tenant area.
At Cherry Creek in Denver, it is adding a 53,000 square foot three level Restoration Hardware stores at mini-anchor as well as about 38,000 square feet of additional in-line mall space. This expansion will occupy the former Saks Fifth Avenue site.
At Dolphin Mall in Miami, Taubman is planning to add 32,000 square feet at the new restaurant space.
At the Beverly Center in Los Angeles, it is creating a new contemporary dining court. Uniqlo will open by late 2014 and the new dining court is expected to open in 2015.
At Sunvalley near San Francisco, it is converting some existing low level space into a food court.
“Consistent with teen retailers struggling through the year, both junior and unisex apparel impacted this quarter negatively," Robert Taubman, chairman, president and CEO of Taubman Centers, said of his firm's fourth quarter 2013 performance. “And not withstanding many reports of our mall traffic slowing, our fast food category was up nearly 7% suggesting our traffic was okay. It was a busy January for us.”
Stephen Lebovitz, president and CEO of CBL & Associates, said that mall owners are turning to restaurants because that is something the Internet can’t do.
Malls, he said, are more than just a shopping experience.
“It’s a social experience, entertainment experience; they are town centers in our communities,” Lebovitz said. “And their role has evolved in terms of adding restaurants, adding experiential uses, adding more events and programs. So those are the types of things that we are focused on in terms of “competing” with the internet, is to make the mall experience as compelling as possible to our shoppers.
“I know a lot of retailers have jumped on that bandwagon in their comments over the last month or [about decreased mall foot traffic], but our food courts were for the most part higher in sales. Our restaurants were busy,” Lebovitz said. “The types of impulse uses that we see in the malls, their business was up. So the sales decreases we didn’t see coming from traffic.”
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