America’s dying malls weigh on retailers

June 5, 2017

Last year was a terrible year for brick-and-mortar retailers as layoffs and bankruptcies climbed. But 2017 is shaping up to be even worse, particularly for those located in a mall.

Since the start of this year, an alarming number of companies have been making references in their filings to “mall traffic.” And both the number, and the tone, add fuel to the notion that the country’s malls are in accelerated decline.

Consider this letter to shareholders written by Buffalo Wild Wings President and Chief Executive Officer Sally Smith that was disclosed in the company’s recent proxy filing:

“Casual dining restaurants face a uniquely challenging market today. Millennial consumers are more attracted than their elders to cooking at home, ordering delivery from restaurants and eating quickly, in fast casual or quick-serve restaurants. Mall traffic has slowed. And, surprisingly, television viewership of sporting events (important for us, especially) is down.”

Smith wrote the letter in part because the company is facing a shareholder revolt that seeks to remove all of the company’s independent directors. The CEO argued that while the company is trying to squeeze out costs, and try new gimmicks like delivery and smaller restaurants in urban areas, she wanted some continuity to help get the company through this painful transition.

We’ll see.

Buffalo Wild Wings can take some solace in not being alone. Since the beginning of this year, we’ve tracked 97 filings that have used the phrase “mall traffic” as of June 1. That’s an imperfect measure, but it still serves as a useful barometer to measure the growing nervousnesses of retailers.

Last year, there were 168 filings that mentioned “mall traffic.” And in 2015, it was 163. So at this pace, 2017 will likely exceed that. By a lot.

If its seems like the drumbeat of retail store closings and layoffs are growing louder every day, well, it’s not your imagination. In March, a Credit Suisse analyst said that store closings announced in Q1 of 2017 were 2,880, up from 1,153 from the same period one year ago.

On May 31 alone, Payless ShoeSource said it was going to close possibly another 408 stores beyond the 400 closings it announced two months; while Michael Kors said it was closing 125 stores.

As you might imagine, the REITs that own many of these malls are getting whacked. Take the Pennsylvania Real Estate Investment Trust, which has seen its stock fall almost 60 percent since last August. The company owns 22 malls, and its pain is considerable, as it noted in its most recent 10-Q:

“Further, traditional mall tenants, including department store anchors and smaller format retail tenants face significant challenges resulting from changing consumer expectations, the convenience of e-commerce shopping, competition from fast fashion retailers, the expansion of outlet centers, and declining mall traffic, among other factors. In recent years, there has been an increased level of tenant bankruptcies and store closings by tenants who have been significantly impacted by these factors.”

But these reboots don’t yet seem to be having enough impact, fast enough, to shield those secondary mall retailers.

Back in March, Abercrombie & Fitch announced it was closing another 60 stories, leaving it with just 670 stores compared to 839 five years ago. In a transcript of its earnings called filed on May 30 in its 8-K, the company was asked to describe the impact such closings of large department stores is having on smaller and medium size players.

In other words, is the whole industry getting pulled into a black hole?

Abercrombie CFO Joanne Crevoiserat deflected the question: 

“In terms of the department store closures in malls, I don’t have any specific metrics to point to. I would say that we have seen mall traffic declining for some time. And I believe that where some of those stores are dosing, there are — they are in places where mall traffic has been declining.”

This decline is rippling out beyond those just involved in retail. Janus Funds, in a filing on May 30, crowed about the overall performance of its portfolios. But it would have been much better if not for the disappointing L Brands, owner of Victoria Secrets:

“Investors have also been skittish as L Brands restructures its Victoria’s Secret business, which has included leadership changes, the exit from swimwear/non-core apparel, and promotional strategy repositioning. Management has also seen margin pressure as a result of investing in sport apparel. The general weakness in mall traffic weighed on the stock, especially given the weakness in the fourth quarter holiday season.”

Retailers haven’t totally given up. They’re experimenting with smaller store spaces, and trying to craft special experiences. They’re trying to create a mesh of mobile, virtual and in-store shopping.

As New York & Company offered in its 10-K filed on April 12, it is now “omni-channel,” but it still is trying to do what it can to salvage its stores:

“As mall traffic continues to trend negatively, the Company has heightened its focus and resources towards its strategic marketing efforts to drive customer traffic into its stores. As part of the company-wide focus to increase traffic both online and at its brick-and-mortar stores, the Company plans to heavily promote its celebrity collaborations, further develop its brand ambassador program, host exciting events and experiences that resonate with its customers, along with maintaining new and fresh in-store marketing initiatives.”

It may not be totally impossible to stop the bleeding. But for shareholders, it’s most likely going to be a brutal year ahead as they try to decide whether to abandon this sector or not.

At the current rate of decline, though, it seems like malls are more likely headed toward the status of relics that old people will recall fondly to grandkids who will be dumbstruck by the notion that people use to leave their homes to buy stuff.