I’ve been thinking quite a bit lately about an article I read earlier this summer, a piece by Krystina Gustafson that appeared on cnbc.com entitled, “For retailers, closing stores isn’t as easy as it once was.”
The article points out that, despite the fact that “investors are demanding it” and “industry analysts are pushing for it,” and the wave of media attention over high-profile closures from iconic brands like Sears and Gap would seem to indicate otherwise, companies are moving extremely slowly when it comes to actually closing down underperforming stores. Gustafson cites ICSC numbers that indicate that there were only 1,422 announced store closures in the first quarter of 2016 – a figure that is down substantially from an average of 2,160 closures during the same period over the last six years. In addition, as the article highlights, shopping center occupancy rates were up 93.2% at the end of 2015 – the highest year-end figure in eight years. That number ticked up even higher during the first part of 2016, reaching 93.5%.
The article discusses some theories as to why this discrepancy exists, including a recovering economy muddying the waters and obscuring the comparatively poor performance by some assets, accompanied by the perspective espoused by some industry professionals that there is no particular urgency to close a profitable store.
I disagree. My thinking is more in line with Citi’s Paul Lejuez, who is quoted in the article with a statement taken from a research note he sent to investors: “Too many companies are focused on each store’s individual cash flow when making the determination of whether to keep it open or to close it.”
Lejuez argues that “the amount of working capital and inventory costs that go into a particular store should also be considered,” suggesting that they can be thought of as “ongoing capital required that could get put to other uses.” He goes on to talk about how trimming poorer performers from a portfolio could free up inventory, reduce corporate costs, and, in the case of struggling retailers, yield a smaller portfolio that would potentially be easier to manage and control costs.
Despite the numbers quoted in the article, I think this perspective is gaining traction in the industry. For so many years, investors seemed to be looking almost exclusively at store/unit growth. Expansion was the sign of success. Today I’m seeing a growing focus on profitability – which probably should have been the priority all along. I think industry decision-makers and investors alike are starting to recognize that closing poorer performing stores is an important part of a healthy strategy. For struggling retailers, it can even herald a return to profitability. While online sales considerations can certainly make these decisions a little bit more complex, the fundamentals are fairly straightforward.
For evidence of the fact that investors don’t view closing stores as a liability anymore, we don’t have to look any further than the recent announcement from Macy’s that the department store giant will be closing 100 stores in 2017. Macy’s shares were up over 17% in the wake of the announcement. Now, Macy’s has many more structural and competitive challenges on its plate, and it’s clear that the venerable retailer has more work to do going forward, but I think this is a positive step–and it’s encouraging to see investors and analysts respond accordingly.
More needs to be done in the reporting the whys and wherefores of these store closures, something that was off-target in most of the Macy’s coverage. In an article on CNN Money, for example, the closures were directly tied to online competition (“The Macy’s move is the latest in a wave of store closures amid the rise and success of Amazon and other online shopping options”). The Macy’s closings were lumped in with other store closures announced in recent months by names like Sports Authority, Target, J.C. Penney, Kmart and Sears.
There is considerable debate about the impact of online and mobile shopping, but when you think about the fact that digital sales represent only about 8% of total retail sales, the notion that Amazon and its digital brethren are what’s prompting the closure of 100 Macy’s stores just doesn’t stand up to scrutiny. Macy’s and other department stores have taken a far bigger hit from discount brick-and-mortar retailers, and the story of their decline over the last two decades is complex and cannot easily be boiled down to any one factor.
The decision to lump all of those brands together doesn’t make sense, as the closures were all prompted by very different circumstances. Sports Authority has essentially died of old age, while Kmart and Sears have genuinely struggled with declining market share, poor strategic decisions, and the results of a strategy that has prioritized real estate over retail viability. Target and Macy’s are very different. In those cases, the closures seem to be the result of brands trying to understand ongoing shifts in demographics, consumer preferences, shopping patterns, and a desire to trim the fat from their portfolios.
Not all store closings are created equal. My hope is that if and when another major retailer announces a store closing, there is a more thoughtful discussion behind the real estate strategy and long-term success of the store.