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Retailers go into 2017 with too many stores

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Neev

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June 25, 2017

Retailers go into 2017 with too many stores

Last Updated Dec 22, 2016 8:09 AM EST

U.S. retailers have a problem they can’t easily resolve: They have too many stores. And even though they’ve already announced slews of store closings, it’s increasingly likely they’ll have to shutter even more over the next few years. That’s especially the case as consumers keep shifting their spending online, which has left the U.S. awash in unwanted retail space, or “overstored.”

According to real estate information firm CoStar, nearly 1 billion square foot of retail space will be “rationalized” in the coming years through store closures and conversions to other uses. Many retailers also are seeking rent reductions as their productivity has slumped from an industry average of $330 in sales per square foot from $350 per square foot a decade ago.

The level of “overstoring” may only get worse. Retail analyst Jan Rogers Kniffen expects about half of all retail sales to be online by 2030, a huge increase from current figure of about 10 percent.

“A lot of these retailers are still in denial,” said Brian Yarbrough, a retail analyst at Edward Jones. “I think the Kohl’s (KSS), the J.C. Penneys (JCP) of the world, they’re in denial. At some point, there’s probably not a need for 2,400 Kohl’s and J.C. Penney’s across the United States. There’s probably not a need for 5,800 Walmart (WMT) Supercenters.”

Macy’s (M) -- The country’s largest department store chain announced plans in August to shutter 100 underperforming locations in 2017, about 15 percent of its brick-and-mortar footprint. Macy’s shed 41 locations last year and axed thousands of employees. Terry Lundgren, who had led the retailer for more than a decade, will step down next year from the CEO spot and become executive chairman.

Kohl’s -- After a rocky start to 2016 when it announced 18 store closures, the Wisconsin-based no-frills retailer rebounded and reported better-than-expected results in its most recent quarter. Kohl’s, though, continues to struggle. Comparable-store sales in its latest period fell 1.7 percent, the third straight decline in this closely watched retail metric of sales at stores open a year or more, a worrisome sign for Wall Street.

J.C. Penney -- CEO Marvin Ellison made headlines in March that when he told Fortune he wouldn’t undertake “any wholesale closings of stores in its 1,020-location fleet,” though it did shutter seven locations. The Plano, Texas-based retailer operates almost as many stores as it did in 2006, but its annual sales were roughly $7 billion higher back then than they were last year. Ellison told the magazine that Penney’s future lies in e-commerce and physical stores working together.

Walmart -- With cost pressures in mind, Walmart said in January that it would close 269 stores around the world, including its small-format Express locations that were designed to compete against the dollar stores that have taken market share from the giant in recent years. Rising expenses are weighing on the world’s largest retailer, which raised the salaries of thousands of hourly employees last year and unveiled a plan to spend billions on expanding its e-commerce operations

Sears Holdings -- This year it announced the shutdown of 68 Kmart stores and 10 Sears locations and accelerated the closing of 50 locations at the beginning of the year. Sears has indicated that more stores may be shuttered.

“I am hard-pressed to imagine a scenario where Sears as constituted as anything we have known it will be around in 2018,” 

The issue for all the big retail chains, however, remains a tough one: Just how many stores will they really need as shoppers increasingly put things into their shopping carts -- digitally.

Sears Online Sales for 2016

Sears reported disappointing Q2 2016 results, as the company continues to experience declining in-store foot traffic and sales.

As e-commerce becomes a nearly ubiquitous part of the retail industry, legacy department stores are trying to adapt, but compared to competitors like Target and Kohl's, Sears has not been able to adjust to the shifting tides in retail. The company — which owns both Sears and Kmart — has launched limited digital tools, which have failed to attract shoppers. 

Total revenue continues to fall off: Sears' revenue, including both Sears and Kmart, declined nearly 9% year-over-year (YoY) totaling $5.6 billion. This is consistent with the company's Q1 2016 performance, which saw revenue decline 8% YoY.

Sears stopped reporting e-commerce growth in late 2014, but the rates were inconsistent up to that point:

Sears' digital faltered during the holidays: At its lowest, Sears' e-commerce business grew just 10% during Q4 2013, which is especially surprising considering the bump in sales most retailers experience as a result of the holiday shopping season.Sears' lack of focus on the digital front is quite evident in its quarterly performance reports. The company has reported cutting back on physical store locations in order to focus on its e-commerce presence for six consecutive quarters. 

Stores Closing

Ralph Lauren (NYSE:RL) has cut 8% of its workforce while closing more than 50 stores, according to the company. It also has trimmed its management structure from an average of nine layers down to six. 

Macy's (NYSE:M) has either already closed or plans to close 100 stores by early 2017. CEO Terry J. Lundgren said when the first 40 closing stores were announced that the moves were needed due to the company's "disappointing 2015 sales and earnings performance." The chain has opened five new Macy's locations in 2016 as well as 50 additional Macy's Backstage off-price stores.

Sears Holdings (NASDAQ:SHLD) has struggled with both its namesake brand and its low-price Kmart locations and announced in April that it plans to close unprofitable locations this summer. The company has already begun the process of closing 68 Kmart and 10 Sears stores.

Office Depot (NASDAQ:ODP) entered 2016 expecting to no longer exist by the end of the year as it had planned to merge with Staples (NASDAQ:SPLS). That deal was nixed by federal regulators and now the chain must find a way forward. Part of its ongoing strategy involves closing stores with the chain planning to close a total of 50 locations in 2016. Staples has also been steadily shrinking and it closed 73 stores in 2015 with plans to shut down another 50 this year, according to its Q4 earnings release. 

Wal-Mart (NYSE:WMT) has been stepping up its digital sales efforts while it has been making strategic decisions to close stores. The company announced in January that it plans to close all of its 102 Wal-Mart Express stores as well as 52 full-size U.S. locations.

Gap (NYSE:GPS) has faced some of the same retail headwinds that have plagued Ralph Lauren. That has led the company to a major pullback of some of its international efforts. For example, it pulled the Old Navy brand out of Japan entirely, closing over 50 stores. The company's North American operations have not been hurt as dramatically as some of its international ones, but the retailer did close 14 stores across its Gap, Old Navy, and Banana Republic brands in its fiscal Q1.The company does plan net closures of about 65 company-operated stores, Mark Cuban predicts this will make someone a trillion dollarsShark Tank's Mark Cuban recently predicted that an emerging tech trend would make someone $1 trillion. That lucky future trillionaire is just the beginning -- and the trend itself could be worth as much as $19.9 trillion.Fortunately, this hasn’t yet gone mainstream -- most people haven’t recognized the scale of opportunity here.We believe that one market expert has the right answer for investors looking to get in early -- and potentially win big.

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