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U.S. retailers are fighting battles on multiple fronts, experts say, and in the years ahead we should expect store closings to continue.
Many retailers are seeing online sales grow at a greater rate than at physical stores while they are simultaneously hit by significant overhead costs at brick-and-mortar locations, according to Howard Davidowitz, chairman of Davidowitz & Associates Inc., a New York City-based retail consulting and investment banking firm.
“Of the 10 largest online retailers, eight are companies with a brick-and-mortar heritage, substantial investments and huge overhead," Davidowitz says. "They have a thriving online business in which they continue to invest, but are not doing so well overall because of the brick and mortar shortfall. One can only conclude that there will continue to be an ongoing urgent need to reduce brick-and-mortar with massive store and mall closures."
The bottom line is that retailers, and teen apparel sellers in particular, cannot afford to rest idly. The Deal collected data reporting that the number of large-liability retail Chapter 11 filings (at least $250 million in liabilities) nearly doubled in 2016.
Retailers’ coping strategies so far have included closing stores; focusing on smaller-format stores; and using physical stores to drive online sales through allowing customers to examine the merchandise in real life, pick-up online orders and make returns.
Among the major headwinds brick-and-mortar chains are now facing is a relatively deflationary environment for retail goods, consumers spending less money on apparel and the growth of apparel sales online, notes Neil Stern, senior partner at Chicago-based retail consulting firm McMillan Doolittle.
“Of course I am predicting more closures, more consolidations of stores, rationalization of store sizes,” Stern says. “At some point, through rationalization of supply, the retailers who survive should be healthier. I am reasonably bearish on apparel retail sector and department stores in 2017.”
Here is a look at the chains expected to be closing multiple stores this year. (The list excludes Sears Holdings stores, as at this point it seems taken for granted that it’s only a matter of time before it implodes.)
The apparel retailer is quietly closing stores, according to Racked. In October 2016, The New York Post reported additional store closures were on the table as an answer to the chain’s financial troubles (J.Crew is nearly $2 billion in debt).
Already in 2017 J. Crew has closed its location at CrossGates Mall in Albany, N.Y.; its Riverridge Mall in Lynchburg, Va.; and Northlake Mall in Charlotte, N.C. More store closures may be on the table, according to The Business of Fashion.
J. Crew is one of a number of retailers owned by private equity firms that face the additional problem of coping with a substantial debt load, according to Davidowitz. Others include Gymboree, Eastern Mountain Sports and Bob’s Stores.
In its fiscal year 2017 third quarter SEC filing, Guess? Inc. acknowledged that one of its focuses going forward will be “closing unprofitable stores upon lease kick-out or expiration unless new rent terms make them profitable.” The retailer is expected to close 50 more this year.
Sources say Gymboree will most likely close some of its stores this year as it deals with net revenues and same-store sales that are dropping year-over-year. In its most recent report to investors, the chain’s executives said Gymboree will close 10 stores in the second quarter of its 2017 fiscal year.
At the end of January, Gymboree announced that company CEO Mark Brietbard would step down to become chairman of the its board of directors. The retailer’s lenders have hired Rothschild Inc. to handle a $1 billion debt restructuring, Bloomberg reports.
Still, the retail industry’s need to rationalize store counts may open the playing field, according to Stern. “For instance, a troubled Gymboree…if it closed, that should help Carter’s and Children’s Place,” he says.
Claire’s is reportedly saddled with $1.7 billion in debt and may default this year, according to Retail Dive, which cites Fitch Ratings data. The company has an interest payment due on March 15, according to Fitch.
Between January and October 2016 the chain closed 53 stores, according to its third quarter earnings report. In the same report, Claires’ reported that it has $10.6 million in “unfavorable lease obligations and other long-term liabilities.” The company’s long-term debt totals approximately $2.07 billion. Retail industry sources say more closures are expected.
“The majority of rental income in many malls is generated by the sacrificial lambs—specialty apparel stores,” says Davidowitz. “The department store anchors contribute little.” BCBG Maz Azaria is one example of such sacrificial lamb, marked by limited cash flows, high debt and poor store traffic.
The chain announced the launch of a new strategy last month to reduce its 570 stores worldwide, Bloomberg reports. Details of the closures are emerging, with 400 stores slated to close. Of the 170 stores in the U.S., just 50 will remain open. Just this month Women’s Wear Daily reported that a financial source connected to the matter said BCBG Maz Azaria is “now shopping for bankruptcy attorneys.”
In its heyday, American Eagle was a staple teen retailer, known for its denim and collared shirts tagged with flying eagle logos. Now American Eagle is expected to close 150 stores over the next three years.
Aéropostale is another teen retailer known for its logo apparel to be in a shaky position. It was saved from bankruptcy in late August 2016 through a consortium deal comprising mall operators GGP and Simon Properties Group, but its store count will be shaved down to just 230 locations, from over 800 stores. Our sources say new store closures could still come this year. “I’m not sure a consortium works as a long-term solution. They still have to address fundamental branding issues,” Stern says of Aéropostale.
According to Davidowitz, “Malls are much weaker than they used to be. The consortium bought Aéropostale out of desperation. It did well when logos were hot, but I think it will lose a fortune. It needs to come up with something new and compelling to compete for its young customers’ business—customers who place priorities on tech and sneakers.”
Abercrombie is one of the brands facing the issue of staying relevant as retailing changes. “One part is strategy of brand positioning—are you as fashionable as you once were? Other part is shifting shopping patterns. For instance, nowadays consumers don’t necessarily go to a teen-specific retailer,” says Stern. “Abercrombie and American Eagle will still have closures.”
Suffering from 15 consecutive quarters of comparable sales declines, Abercrombie & Fitch is planning further store closures in 2017, Fortune reports. The company has been closing 50 stores a year as leases expire, according to Columbus Business First, and recently let go of 150 workers at its New Albany corporate headquarters.
Wet Seal is another retailer held by private equity investor Versa (which owns Eastern Outfitters). Wet Seal announced January 20 that it would be closing it stores, numbered at 171 and has secured early approval for a fast-track Chapter 11 liquidation. “The company was unable to obtain the necessary capital or identify a strategic partner,” MarketWatch reports.
After luxury retailing took a hit during the financial crisis, Neiman Marcus has been quietly languishing for years. In June 2016, it had reportedly sought a buyer, but garnered no interest, being weighed down by $4.5 billion in debt, according to Dallas Business Journal. Last year it had shelved its planned IPO. Stern says that although the move was “not critical,” the company is “not healthy enough.”
This month S&P downgraded Neiman Marcus bonds to CCC+ from B-, according to the New York Post, and stated that the retailer’s “capital structure is unsustainable over the long term.” Something’s got to give. Source say Neiman Marcus may see store closures this year.
The retailer currently operates 42 U.S. stores spanning 6.7 million sq. ft. of space. In its latest SEC 10Q form filed December 13, 2016, one of the limiting factors on growth listed by the company was that a “significance portion of our revenues [comes] from our stores in four states, which exposes us to economic circumstances unique to or catastrophic occurrences in those states.”
Macy’s has about $20 billion in real estate holdings, as does Kohl’s, according to Davidowitz, and many department stores own or control their space, so ultimately time will tell what happens with Macy’s real estate.
In early January, Macy’s announced 68 locations would close this year, saying the move should “generate annual expense savings of approximately $550 million, beginning in 2017,” which the company plans to reinvest into “digital business, store-related growth strategies, Bluemercury, Macy’s Backstage and China.”
Real estate is a valuable holding because it can be monetized to buy time to restructure a business, Davidowitz notes. “The road ahead is full of pain and retailers are going to need money to withstand it.”
In the past few years, department store chains tried to shore up their ailing finances by engaging in real estate plays, such as J.C. Penney and Macy’s completing sale-leasebacks and Sears coming up with a REIT spin-off. But those deals do not provide a long-term solution to retailer health, sources say.
“The real estate plays that Sears, J.C. Penney and Macys have done are not a sustainable strategy, but short-term they help to generate cash and reposition the chain,” Stern says.
As it rationalizes its portfolio, sources say J.C. Penney could be looking at store closures this year. In fact, it may have to close 30 percent of its fleet, amounting to about 700 stores, Cowen and Company analyst Oliver Chen recently told CNBC.
Chico’s will complete its 120 planned store closures by the end of 2017.
In January, The Limited closed its 250 stores nationwide, citing shoppers’ tastes trending toward fast fashion and e-commerce, and filed for Chapter 11 bankruptcy protection. The brand name itself, however, may yet continue to live online thanks to an injection of funds from private equity, according to Racked.
Eastern Outfitters, the second (and fairly new) owner of Bob’s Stores and Eastern Mountain Sports stores, filed for bankruptcy earlier this month, listing up to $500 million in assets and liabilities, according to Reuters. There are 35 Bob’s Stores, based mostly in the Northeast, as well 61 Eastern Mountain Sports stores. U.K.-based sports retailer Sports Direct is reportedly in a stalking horse bid arrangement with the company and would keep some stores open, according to a reported from Morningstar.
Gander Mountain is preparing to file for bankruptcy, and could do so as early as this month, according to Reuters. The sporting goods store had faced competition from Bass Pro Shops and Cabela’s while undergoing an aggressive expansion plan that saw it add 60 stores since 2012.
The retailer’s total store count is 160. But already in 2017, the company has closed four Pennsylvania locations and one Ohio store. Aggressive expansion could just be more salt on the wounds for certain retailers. “Bricks-and-mortar [locations] don’t go away or transform easily. Brands are going to have to explore this more thoroughly as they try to rightsize their business,” Stern says.
A mountain of debt has Payless in restructuring talks that would result in closing at least 1,000 stores of its 4,400-store portfolio, Bloomberg reports. Payless is one of many private equity-owned retailers to be suffocating under a high debt load.
