Date February 2020
- Average mall vacancy rates reached an eight-year high in 2019 according to real estate research firm Reis
- Department stores finished the 2019 holiday season with a 0.8 percent decline over last year driven by sales decreases for Macy’s, Kohl’s, and JCPenney
- Stage Stores recently announced a long-term strategy to convert its full chain of department stores to Gordmans off-price stores, with a goal of reaching approximately 700 total off-price stores by mid-2020
Approximate net recovery on cost
The move toward value: The decline of traditional shopping malls and the move to more accessible outlet stores and online shopping continues to impact foot traffic for traditional department stores. According to Reis and Retail Dive, average mall vacancy rates recently hit their highest level in eight years and store closings totaled over 9,300 for 2019, an increase of more than 60 percent over 2018. Pressure on traditional department stores to compete on price with mass merchants like Walmart and Target, off-price retailers like T.J. Maxx and Marshalls, and mid-tier chains like Kohl’s has resulted in gross margin compression, exacerbated by an increase in year-round discounting. Based on reporting from Retail Dive, widespread discounting could make 2019 the most promotional holiday season since the recession.
The best performing category for December 2019 was clothing, which increased 1.6 percent over November and likely benefited from targeted promotional activity based on reporting from Creditntell. Several specialty retailers, including Anthropologie (+5.0 percent) and Free People (+8.0 percent) posted positive holiday season sales. However, some traditional department stores did not perform as well, including Macy’s, which was down 0.6 percent over last year. JCPenney struggled through the season with comparable store sales decreasing 7.5 percent, on top of a 3.5 percent decline for holiday 2018.
For November and December, Creditntell noted “much of the top-line growth across discretionary sectors, including home furnishings, apparel, and department stores is expected to pressure fourth quarter margins, given the rampant promotions through the holiday season, as well as the impact of tariffs and freight costs.”
Value-focused retailers performed better, with Target and Stage Stores both coming in at +1.4 percent for the holiday period. Going head to head with department stores, Target generated positive holiday comps in two key categories: apparel (+5.0 percent) and beauty (+7.0 percent).
Building on a strategy that began in 2018, Stage Stores recently announced a long-term strategy to convert its full chain of department stores to Gordmans off-price stores with a goal of reaching approximately 700 total off-price stores by mid-2020. With lingering economic uncertainty going into 2020 and Chinese tariffs still in effect for hundreds of consumer goods, customers will likely continue to let value and convenience drive their spending decisions.
Store contraction continues: Following a difficult holiday selling period, Macy’s announced on January 4, 2020, that it would move ahead with a plan to close 125 stores and cut 2,000 corporate jobs over the next three years as part of an initiative to go forward as a smaller, more robust company. This continues a trend for the iconic retailer, having closed over 100 stores across the country since 2015 as part of rightsizing efforts. Macy’s noted that it plans to close stores in its weaker shopping malls in order to focus on opening smaller-format stores in strip centers.
As department stores continue to face heavy competition from superstores, discounters, Internet, and specialty retailers, several chains closed under-performing stores in 2019. Sears topped the list with 175 store closures, JCPenney with 27, and Kohl’s with four. After a disappointing holiday season, Kohl’s announced on February 12, 2020 that it would lay off 250 staff members as part of a restructuring effort. As part of the job cuts, Kohl’s plans to let go of a segment of its regional store leadership team and will be restructuring its merchant organization.
Some upscale department stores also faced struggles in 2019, including Henri Bendel, Barneys New York, and Nordstrom. Henri Bendel closed all of its 23 locations in 2019 including its Fifth Avenue flagship in New York City because of declining sales. Barneys, which filed for bankruptcy in August 2019 has closed the majority of its stores after Authentic Brands Group won court approval to purchase the company. Authentic Brands announced plans to open Barneys shops in about 40 Saks Fifth Avenue locations in 2020. Saks also offers merchandise under its “Barneys at Saks” banner on its website. Nordstrom also closed three under-performing stores in Rhode Island, Florida, and Virginia in 2019.
The department stores industry is expected to continue contracting through 2024 (-1.8 percent), albeit at a slower rate than it did for the prior five-year period ending 2019 (-4.0 percent). According to research firm IBISWorld, growing competition from online retailers is expected to increase pricing and gross margin pressure on traditional department stores. To compete these retailers will need to offer services that will set them apart, such as excellent customer service, extended warranties, expert product knowledge, or innovative shopping opportunities. Retailers can also target luxury consumers or expand their outlet or off-price concepts.
As the sector continues to contract, lenders with department stores in their portfolios, particularly those that are mall-based, should continue to conduct regular appraisals in order to understand changes to net recovery values as they occur.
Note: This publication is provided for informational marketing purposes only. The material contained herein should not be regarded as advice, nor relied upon to make financial, operational or other decisions; nor should it be used as a substitute for an asset appraisal. Actual recovery values may vary from transaction to transaction and the recovery values referenced herein are for representative transactions without regard to specific key factors. This material may be redistributed only in its entirety, including notice of copyright. All rights reserved. ©2020 Gordon Brothers, LLC.
Reference sources: retail dive, U.S. Census Bureau, stage.com, corporate insider, money.cnn.com, isg-one.com, creditntell, ibisworld