Consumer

Ahead of the Curve

Retail’s Disruption Yields Opportunities – Store Wars!

Apr 6 2017

Report by Oliver Chen, CFA, John Kernan, CFA & John Blackledge

 

Our analysis indicates mass & middle market mall retailers should be 400-800 stores. Meanwhile, we expect online penetration of apparel to increase to 35-40% from 20%; yielding closures of 20% at oversized chains. Traffic is likely most pressured at C & D malls, and we expect continued negative trends. Most significant closures at: Macy’s, JCP, GPS, ASNA; growth potential at ROST, TJX, ULTA, WMT.


Our Approach to Understanding Optimal Store Chain Sizes Over the Next Five Years

Cowen’s proprietary top-down metropolitan statistical area analysis combined with a bottom-up point of view reveals closures of 20% or greater required at JCP & Macy’s, while off-mall department stores such as KSS may need less trimming. In the mall, ANF & GPS (Gap & Banana Republic), and ASNA (Justice, Lane Bryant, Ann Taylor, LOFT) will likely need to significantly reduce their store counts. Overall, our analysis indicates ~1,800-2,000 stores may need to close within our coverage universe. We expect growth and share gains, on the other hand, at “deep-value” retailers such as TJX & ROST (50%-60% unit growth), BURL (70%+ unit growth); sporting goods consolidator DKS (40% to 50% unit growth) and beauty retailer ULTA (60% unit growth). In this report, we classify retailers into mass, middle-market, premium, and super premium in order to determine how many stores each metropolitan area can support.

The Retail Problem Is Really More Specifically a C & D Mall Problem

Key catalysts for poor mall traffic trends: (1) an over-stored domestic market (2) faster than expected share gains at e-commerce and Amazon, (3) evolving millennial spending habits, (4) the rise of the off-price & outlet channels, and (4) lack of game changing fashion and low-cost fast fashion alternatives have caused deflationary pricing. We do acknowledge that C and D Class malls—which are about 30% of malls —are likely at most risk, and we expect A malls to thrive given intensified investment policies. There are ~1,200 malls in the US, and malls represent only about 15% of retail square footage trailing behind neighborhood (31%), and community (25%) shopping centers.

Stores Still Matter & Cowen’s Proprietary Research Supports This Thesis

(1) Cowen’s consumer tracker and studies reveal customers still prefer to shop in physical stores 75% of the time. (2) Our national surveys indicate more people are shopping at malls (+30bps on avg last 6 months Y/Y). (3) Focus groups reveal consumers like brands, experience, current styles, and immediate gratification of physical stores. (4) Meanwhile, research indicates that browsing challenges, return hassles, and inconsistent merchandise are pain-points for online shopping.

Our Advice on What Should Retailers Do?

Retail needs reinvention plus a refocus on customers. We see customers as agnostic to channels with a preference for shopping done their way. Management needs to be fixated on speed of delivery, speed of supply chain, and be able to test read and react to new and emerging trends. As digital disruption proceeds, we expect retail to offer seamless, on-demand service and interactivity across mobile, desktop, store, and parking lots through critical functionality such as buy online pick up in store, return in store, and predictive customer relationship management.

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