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Retail Newsline: Dawn of the Dopey

By Garrick Brown, Vice President of Retail Research, Americas


Holy cow! I go on the road for a couple of weeks and suddenly all hell breaks loose.  Business Insider runs with a headline of “Retail Apocalypse” and suddenly you would think that there is no difference from the mall world of today and the mall world of the film, “Dawn of the Dead.” In case you don’t remember that one, the 1978 original (there was a pretty decent 2004 remake as well) focused on a group of people that had escaped the zombie apocalypse and sought shelter in an abandoned mall.  Sadly, they quickly find that the newly risen dead, with not much else to do, pretty much head for the comfort of the local super regional mall.

Of course, the difference in these two scenarios would be that at least the zombies are heading to the mall, whereas today’s living millennials?  Eh, not so much. Of course, whenever we see a wave of sensationalist doom and gloom, we see the opposing wave dying mall denials.  The problem is, of course, that both stories have serious elements of truth to them… but if you don’t know the mall marketplace it seems the retail real estate equivalent of “news” vs. “fake news.”  Let’s just say the hyperbole is a bit much but let me try to break things out in a more balanced and clearer manner…

Sears set this latest maelstrom off last Tuesday when they issued a10-K report that said, ““Our historical operating results indicate substantial doubt exists related to the Company’s ability to continue as a going concern. We believe that the actions discussed …are probable of occurring and mitigating the substantial doubt raised by our historical operating results and satisfying our estimated liquidity needs 12 months from the issuance of the financial statements. However, we cannot predict, with certainty, the outcome of our actions to generate liquidity, including the availability of additional debt financing, or whether such actions would generate the expected liquidity as currently planned…”

In other words, Sears basically said, “While we think we can make it through the year… we might not.”  This shouldn’t be all that earth-shattering on its own—it’s no secret that Sears has been in trouble for years.  What is most surprising perhaps is the admission.  It is something we have not seen before and something that retailers simply do not plug into their quarterly reports unless things are pretty darn bad.  In this case, there were recent moves by creditors to hire legal advisors that may have prompted this move.

Certainly the real pressures of their financial situation play a role here, but there is a real potential negative here for Sears in that they were actively looking to sell off a lot of assets. This reportedly included the Kenmore brand, DieHard and a whole lot of great real estate.  We all know that they sold the Craftsman brand last year for $900 million—but Sears reportedly had been hoping to raise $2 billion with this offering.  My sources tell me that there were a number of private equity firms seriously looking but many of these decided not to bid at all—their mindset was that if Sears was going to go into bankruptcy any time soon that they might be able to pick some of these assets up for dimes on the dollar.  This admission certainly can’t help the pricing of those assets, which if sold even at half of their asking prices, could potentially add another couple of years to the retailer’s life as they continue to work for the miracle of turning around their slumping sales. The question now is, if potential buyers smell blood in the water will any of them throw Sears a lifeline by picking up some pretty valuable brands and/or real estate… or will they simply stand by and watch the retailer drown… hoping to get a deal in bankruptcy court.

This, of course, is huge because most of the department store closure news has been focused on Macy’s (100 closures underway) and JC Penney (140 planned for this year).  Sears only had about 50 official closures planned (but dozens of Kmart stores), though we knew more were coming.  But a bankruptcy could mean more than 620 Sears stores going dark and another 740 or so Kmart locations.  The overwhelming majority of Sears’s closures would impact super-regional malls.  The overwhelming majority of Kmart closures would impact neighborhood/community and power centers… most of them Class B or C.

It’s far too soon to draw any conclusions but the writing on the wall is there whether we are talking about this year, next or even the year after. Sears faces the monumental task of turning around a sales slide that has persisted for most of the past 40 consecutive quarters in an environment that is only becoming more challenging for department store players.  I have no doubt that there is a good chance that Sears Hometown (their smaller format, mostly appliance and tool store concept) could be a thriving standalone concept (the same goes for Sears Automotive stores), but the challenge is the department store business itself.  And so it is looking increasingly like one of the nation’s most iconic brands might not be with us much longer (well, actually you can bet someone would buy the name out of bankruptcy court and likely the assets I just mentioned plus probably at least half of the physical locations that their spinoff real estate trust, Seritage, is marketing).

But this news comes with the awareness that the current closure wave from Macy’s and JC Penney will probably only get those chains about halfway to where Wall Street wants them. 30% is the magic number…  Wall Street wants to see most of the nation’s department store players dropping about 30% of their locations (from peak levels of about four or five years ago).  They also want to see all of these guys boosting their eCommerce/NewCommerce businesses to where at least 30% of their revenues are coming from online sales.  Sadly, this is one area where Sears has been doing a pretty good job (their volumes have been climbing and they have had one of the most successful click-and-collect rollouts of any department store chain in the States).

But this all means more closures coming. Really, this period began about two years ago.  I am guessing that it will go for another four to five years.  And so, this era of 2015 to 2022 is likely most going to be remembered as a period in which as many as 1,000 actual department store locations closed and roughly 200 to 250 malls simply ceased being malls.

Did I say 1,000 department stores?! Yes… and that could get worse depending on the macro-economy and if say, the Trump plan for a Border Tax on retail goes through.  That would boost the prices of goods significantly in an era where everything is being driven by discounting.  Something to think about… if we might see Marshall’s, Ross and TJ Maxx customers balking about once $20 pairs of slacks suddenly being $26 due to a border tax… what do you think that will do to the mid-price guys who are the ones already getting squeezed between off-price and online players?

For example, Macy’s is finding it a challenging enough environment in that middle ground already… to the point where Amazon is forecast to overtake them as the US largest apparel retailer this year and TJ Maxx is forecast to pass them up for the second slot by 2021 at current rates of growth. Mid-price players in the apparel and department store world would be the most challenged by any Border Tax and it would mean lights out for many of them.

But back to that 1,000 number of mine… Green Street Advisors, who I think are among the best in hardcore deep dive mall retail work, are on the record saying they see at least another 800 closures.  But here is something to think about… Macy’s is increasingly doing more deals for store-within-a-store concepts with the likes of DKNY and other iconic brands with loyal followings.  They also have been testing some Macy’s Backstage pop-up stores… This is notable not just because this is their off-price answer to Nordstrom Rack, Burlington and all the TJX concepts… but it is notable because those pop-ups have been in Macy’s full service stores.

Here is a great big what if? And I have no inside knowledge of anything here, so all you media types on the mailing list please note that this is just a theory of mine…  But what if Macy’s goes through this round of 100 closures and then goes through another round… and they get down to about 700 stores or so… They have a new CEO. New CEOs like bold initiatives… especially if Wall Street will respond to them.  Most knowledgeable retail investors understand that Nordstrom’s growth is coming from Nordstrom Rack right now (at least in the US—they are actually growing their full line department stores in Canada).  Investors know that off-price is killing it… So what would happen if Macy’s were to announce that they were converting a large amount of their remaining stores to their off-price banner?

First, the average store size of a Macy’s is about 179,000 square feet and Macy’s Backstage, so far, has been in the 30,000 to 50,000 square foot range. But what if new CEO Jeff Gennette wanted to make a splash with a big move on the off-price front and say, convert 100 or even 200 stores to off-price?  Could they sublease the remaining space?  Could they redevelop/remodel owned real estate?  Could they fill existing space with more store-within-stores—but concepts that would work well under an off-price rooftop?  Would it just make more sense to close some of those full line department stores and simply find smaller storefronts within the same malls?  Like I said, it’s just a random thought I had… except that I am pretty convinced that such a move, combined with their continued moves to grow in their eCommerce/NewCommerce space would likely have a strong positive reaction on Wall Street. But what do I know…

In the meantime… if you are a Class A or Trophy Mall you are not going to escape this current wave of closures unscathed… but you are generally not going to have an issue backfilling those concepts with the food & beverage, entertainment and luxury brands you wanted anyway. But any tenants out there thinking that you can roll into negotiations with a trophy mall and that you are in total control… sorry, you’ve read too many headlines and haven’t factored in the big differentiating factor and that is Class.  As for Class B malls… you are going to be a mixed bag but a mixed bag full of headaches for landlords for the most part.  And all you poor Class C mall landlords?  Those dying mall stories that are true are mostly about you.  Your lifeline is to completely reinvent your center as something entirely different… can still be retail in most cases by the way, but tear the roof off that mall, plug an office building on one side where that Sears used to be and slap a boutique hotel on the other where the Macy’s went down…  You get the picture…  It’s time for serious moves.

By the way, here are some links you might find useful…

Last week our Capital Markets research group released their Great Wall of Money investment report, which tracks CRE investment, cap rates, money flows and top trends for all the commercial real estate food groups. Great report, definitely worth your time.

Cushman & Wakefield’s Q4 2016 USA National Shopping Center Report.

Our Bricks vs. Clicks Webcast Series Part I and II explores the impact of the 2016 holiday shopping season and eCommerce on supply chain and bricks-and-mortar retail. Bricks vs. Clicks reviews and further analyzes relevant data points, shopping trends and effects on the industry and its consumers in 2017.

Our Main Streets across the World Report tracks high street retail around the world and breaks out the globe’s premier shopping districts by continent and average asking rent.

2016 North American Retailer and Restaurant Expansion Guide

Cool Streets of North America Report and accompanying video series.

Plus, check out our new St. Patrick’s Day Infographic: Kiss Me, I’m Irish; Spend Me, I’m Green!

This post is commentary from the latest weekly edition of our Cushman & Wakefield Retail Newsline, which you can subscribe to for free by e-mailing garrick.brown@cushwake.com.

garrick-brown-150x150Garrick serves as Vice President of Retail Research for the Americas. He speaks frequently at industry events and has been a keynote speaker at symposiums, conferences and market forecasting events for groups like the Appraisal Institute, Urban Land Institute, CREW, ICSC and PRSM. He is also a member of Lambda Alpha International, an invitation-only land use society for those who are involved in the ownership, management, regulation and conservation of land, but also those who are involved in its development, redevelopment and preservation.

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