We have reached the inflection point in retail, the one that so many in the business hesitate to even speak about: the number one way to increase profitability is to close stores. When the two most successful retailers of this miserable selling season, Foot Locker (FL) and Children's Place (PLCE) tell you they are going to close a lot of mall stores this year -- Foot Locker 90 and Children's Place as many as 200 -- what does it say about the losers?
We live in an unprecedented downturn in bricks-and-mortar merchandizing, a downturn that is snowballing at a pace that I can't believe, and I am the biggest proponent of the stay-at-home economy, the one that has you on the couch playing video games or watching Netflix (NFLX) while you order Domino's Pizza (DPZ) via your Apple (AAPL) cellphone apps on the watch or the phone or the desktop.
The denouement has come in fits and starts. You will have Macy's (M) shock us with the decision to close 68 stores. And then JC Penney (JCP) will tell us that 140 have to go. Then Sears (SHLD) will announce the closing of 108 Kmarts and 42 Sears. Signet (SIG) , the jewelry chain, announced yesterday it will close a minimum of 165 mall-based stores. These along with the 250 The Limiteds and 171 Wet Seals that are gone for good.
And those are only the most public of the announcements. Others are staying mum, or hoping that something will turn even as it looks like traffic was down a staggering 10% in February year over year, which is frightening for anyone who has to pay that rent regardless of sales.
Most of the store executives I know are in total denial. They simply believe that if they beef up their omnichannel, or have more experiential moments, or just somehow create some pizazz, people will come back.
But I don't think so. When Signet, the owner of Zale's and Kay's -- like them or not, they are major brands -- tells you that buyers go online first to "educate" themselves about jewelry, then you know we have reached a point of transparency where even something as personal as wedding rings has now been breached.
Yet, I have only heard one executive truly tell it as it is, and that was Richard Hayne after his godawful Urban Outfitters (URBN) quarter. It is worth it to quote this pioneer of perhaps the most exciting kind of stores -- at least at one time -- at length.
Hayne went right at it on the call, saying "our industry, not unlike the housing industry, saw too much square footage capacity added in the 1990s and 2000s. Thousands of new doors opened and rents soared. This created a bubble, and like housing that bubble has now burst."
I love that candor, but I think the analogy is misplaced. You see, we may have had a housing bubble, but ultimately we are still a growth country and more people were born and more families set out to live on their own and that housing supply glut disappeared, to the point where there is an actual shortage of homes.
But that's not the same in retail. There is no corresponding increase in shoppers. And if there are, they shop online. As Hayne says, "this would be fine if the increases in direct-to-consumer sales were wholly additive, but they aren't." The digital shopper is much smarter and just doesn't spend as much and isn't drawn to the showroom to buy anymore.
To me, this whole thing boils down to a monster existential crisis. As Hayne notes again, we have six times the retail square footage per capita as they have in Europe or Japan. I think that the imbalance will be rectified far more rapidly than we would have thought even six months ago. That's why, after years of not sinking, the market finally crushed the shopping center stocks. It's dawning on people: many of the retailers we expected to be with us forever may be gone in the next two or three years.
To me, it means if you own retailers you can't wait to find out if you are owning some of the last men standing. They are just too risky and too subject to a secular shopping change where the enemy isn't just Amazon (AMZN) . It's themselves.