All of the “going out of business” signs may have shoppers thinking a retail apocalypse is upon us, but David Berliner, leader of the restructuring and turnaround services practice at business consultancy BDO, says it’s actually a good thing.
“It’s the survival of the fittest,” he said. “It doesn’t mean retail is going away. It’s a repositioning of retail.”
The report “Retail in the Red: BDO Bi-Annual Bankruptcy Update” shows that bankruptcy filings picked up steam in the first half of 2019, with Payless ShoeSource, Charlotte Russe and Gymboree accounting for 3,700 store closures alone.
For the first six months of the year, there were 7,282 store closures announced, according to BDO. In 2018, there were just below 6,000, and BDO quotes the Coresight Research forecast for 12,000 store closures through the end of the year.
Despite the closures, retail sales “remained solid” through the first half, the BDO report says.
Friday’s U.S. retail sales numbers show 0.4% growth in retail sales in August, with help from car sales and building supplies, and retail sales were up 4.1% for the year. Sales at e-commerce retailers and home and garden stores, like Home Depot Inc. HD, +0.05% and Lowe’s Cos. LOW, -0.47% were up.
“The number of outlets that retailers had in the 80s and 90s are no longer in vogue,” said Berliner.
Rather, retailers are getting more strategic about how much square footage they have and what they use it for.
For example, Gap Inc.’s GPS, +0.26% Old Navy announced during the company’s investor meeting on Thursday that it would nearly double the number of stores in its North American fleet, focusing on smaller markets where it has lacked a presence.
Shares of clothing and accessories retailer Zumiez Inc. ZUMZ, -1.40% soared this week after an earnings beat, with Chief Executive Richard Brooks saying that the company’s decision to shutter its fulfillment center in order to use its stores for e-commerce fulfillment was a “critical factor.”
“Not only does the concept of localized fulfillment mean that we now only have one cost structure to leverage, but we can now get product into customers’ hands faster by reducing the order processing time, cutting down the shipping distance to the customer and also offering in-store pickup,” he said.
And Target Corp. TGT, -0.91% has been focused on its small-format stores, which has also created opportunities for getting merchandise into customers’ hands more quickly. Moreover, John Mulligan, the company’s chief operating officer, said on the May earnings call the retailer was also selling more merchandise thanks to the model.
Berliner says many of the store closures that we’ve seen recently come after a reconsideration of how store locations can be more efficient and better serve customer needs. So even if it seems like doom and gloom, it’s not.
“It’s gloom for the weaker retailers with too much debt who are missing the boat with consumers,” he said.
Still, this explanation shouldn’t paint an overly-rosy picture. There are still issues looming over the retail sector and the consumer, including the trade war between the U.S. and China.
“Trends remain strong, but August grew somewhat slower than July, which could reflect consumers’ concerns about the unpredictability of trade policy,” said Jack Kleinhenz, chief economist for the National Retail Federation, in response to the latest retail sales numbers.
“It is too early to assess the impact of the new tariffs that took effect at the beginning of this month, but they do present downside risks to household spending.”
Those risks come at a precarious time: the beginning of the holiday shopping season.
The BDO report highlights weak December 2018 retail sales, ending last year’s holiday season on a sour note. The same could happen this year.
Moreover, consumer debt levels are high, exceeding $4 trillion for the first time, including mortgages, credit cards, auto debt and student loans.
So there’s a risk, but the setup going forward, with low unemployment and climbing wages, is positive. And any resulting challenges, including further bankruptcies and store closures, will more likely pick off weaker retailers rather than those that have taken steps to attract tech-savvy modern consumers.
“We continue to believe that despite the challenging and highly competitive retail environment, total retail sales will grow around 4% in 2019, driven by strong topline growth for larger, well-capitalized retailers with strong e-commerce capabilities and for retailers that offer a compelling value and convenience proposition to consumers,” said Mickey Chadha, Moody’s vice president, after the retail numbers were announced.
In a quarterly report on the U.S. retail and apparel sector published in July, Chadha said “highly-leveraged smaller retailers remain prone to more downgrades in months to come, while larger, healthier retailers will continue to grab incremental market share and improve credit profiles.”
Location technology could also help retailers as they determine where to put new stores going forward.
“As sophistication and adoption grow with the rise of location analytics, the decision making process is only going to improve further,” said Ethan Chernofsky, marketing vice president at Placer.ai, a company that tracks industry trends and provides retail intelligence. “The result will be a more selective and strategic growth process that helps mitigate large scale closures.”
Mall operators, particularly those in spaces experiencing traffic declines, are also vulnerable.
“Store closures are a function of the amount of competition and the amount of retail in the marketplace,” said Drew Myers, senior consultant at CoStar Group, which provides real estate research among other services. “There’s a lot of retail and a lot of good retail that gets glossed over.”
Operators have gotten creative about who to lease space to, turning companies like those in the entertainment or health and wellness space to bring consumers back. But even that can go too far.
“[I]t’s worth paying closer attention to the growth and performance of this segment, as the rate of square feet being added for this type of space is outpacing consumer spending in the entertainment segment,” according to a CoStar report.
The ProShares Decline of the Retail Store ETF EMTY, -0.06% has fallen 2.2% for 2019 so far. The Amplify Online Retail ETF IBUY, +0.02% is up nearly 29% for the period. The SPDR S&P Retail ETF XRT, +0.21% has gained 16.6%. And the S&P 500 index SPX, -0.07% is up almost 20% for the year to date.
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