Weak Mall Traffic Spells Pain for Abercrombie, American Eagle & L Brands

 | Apr 20, 2016 | 3:00 PM EDT
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There's no question that consumers have become increasingly comfortable shopping online. At best, a changing retail landscape has turned shopping malls into showrooms. At worst, online shopping is turning shopping malls into graveyards: As foot traffic in malls decreases, it's not just the malls that are in trouble, it's the stores within them -- particularly the ones that rely on impulse purchases.

In its annual report, Simon Property Group (SPG) said that only three of its top 10 tenants in 1993 exist in their same form today. The others have either merged with competitors or have gone out of business. Simon Property Group is a leader in the retail real estate industry and it owns or has an interest in 231 higher-end malls, outlets and shopping centers mainly in the U.S.

Among the risks to the mall business model, Simon cited the growth of online retail and changing millennial habits. Specifically the report called out "the common view that [millennials] only shop online, only live in the urban environment and will never marry and have children" as a risk to its business. (Also worth mentioning is Simon's $22.5 billion debt load, which it said it uses a "substantial portion" of its cash flows to service.)

It's not just a matter of decreasing foot traffic; even if people are coming to malls, they are increasingly diverting their money to so-called "noncore retail sectors," such as motor vehicles and food service, according to a report by management consulting firm Bain & Co. released in January.

Consumers are also using malls as showrooms, which means they try products in the stores but ultimately purchase them online from the retailer that offers the best price. Malls can combat the effect of showrooming by using their floor space to sell food or experiences, but apparel companies and other core retail sectors are committed to selling products.

While malls may have remedies to combat foot traffic issues, what happens to the stores within the malls?

Earlier this month, Pacific Sunwear (PSUN) filed for Chapter 11 bankruptcy protection, and Aeropostale (ARO) has delayed filing its 2015 10-K as it explores strategic alternatives to address its financial woes. Last year, American Apparel (APP) also filed for Chapter 11 protection. While each brand had their own unique challenges, several common threads for their collective demise have been reported: declining mall foot traffic, challenges from "fast-fashion" labels such as H&M and Zara and changing consumer behavior following the financial crisis of 2008.

Meanwhile, so-called anchor stores such as Macy's (M) and Nordstrom (JWN) have announced a mix of layoffs and store closures amid weaker foot traffic and changing consumer patterns. That's not to mention the declines of former mall stalwarts such as J.C. Penney (JCP) and Sears (SHLD). J.C. Penney is in the midst of a turnaround and its stock is up 15% over the last year, but the department store is no longer the reliable staple it once was. Meanwhile Sears is has been negotiating with lenders to secure loans to pay off other loans.

"When foot traffic goes down, the teen market is dramatically affected," Marshal Cohen, chief industry analyst of New York-based market research firm NPD Group, said in an interview with Real Money Tuesday.

As a result of decline in foot traffic and teen interest, several mall staples such as Abercrombie & Fitch (ANF), American Eagle Outfitters (AEO), Urban Outfitters (URBN), Gap (GPS) and, to some extent, L Brands (LB) could be negatively affected.

L Brands, for example, already announced changes to its Victoria's Secret stores, including exiting swimwear and ending the famed Victoria's Secret catalog. Analysts at Citi said in a note Tuesday that the changes could produce headline risks for the brand for the next year. Citi has a Neutral rating on the stock and lowered its price target to $82 from $90. 

While all of these stores have an online presence, by losing foot traffic, they also are more likely to miss out on impulse traffic.

"45% of the purchases in store, happen on impulse. Only 23% of the purchases happens on impulse online," Cohen said, later adding that scouring online offerings is just not the same as walking through stores. Online shoppers tend to shop based on price and impulse purchases are more commonly tied to promotions such as the promise of free-shipping by spending more.

Getting young people in the stores benefits retailers in many ways. Small children will nag parents to buy the toys they see on the shelf, and teens historically have been prone to mimic trends they see being worn in the mall by other teens.

To be sure, some of the teen retailers have recently taken strides to win back their customers. Abercrombie has been running an anti-bullying campaign for the last few years. The company has also done a turnaround on its lower-priced Hollister stores by offering fashion-forward merchandise at lower price points in slightly remodeled stores. The new product acceptance is improving and the company has been helped by reducing "unproductive real estate," according to a note published by an analyst team at Jefferies last month. If mall stores want to thrive, streamlining may be the answer. Abercrombie did not immediately respond to requests for comment.

Meanwhile, Abercrombie competitor American Eagle has launched an "Aerie Real" photoshop-free ad campaign to promote a healthy body image. During a call with analysts last quarter, management acknowledged the challenges posed by "choppy" mall traffic and its efforts to consolidate its store fleet and prioritize its website and mobile capabilities. American Eagle declined to comment for this story.

Both Abercrombie and American Eagle have also reduced the amount of branded clothes they sell, which is following along with teen and millennial tastes. Over the last year, the strategy appears to be working better for Abercrombie, whose stock is up 30% over the last year, compared to American Eagle whose stock is down 6% over the same period.

Ultimately what matters though, given the importance of impulse buys, is the retailer's ability to translate goodwill into store visits.

"Not only do they want them in the store, they need them in the store," Cohen said.

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