More Warnings Surface About Department Stores

More dire warnings for the department store and mall sector showed up this week as the pandemic rages in the majority of U.S. states and an immediate comeback of consumer spending has not been happening.

The new warnings were spurred by an analyst note from UBS, which resonated across the media and investment community. It dropped Macy’s Inc. and Kohl’s Corp. to sell from neutral, and UBS analysts recommended investing in brands that are able “to capture sales on their own rather than relying on third-party sellers like department stores.”

“We now think Macy’s real estate will ultimately be leveraged for cash, which would likely be used to try to fix the business. Over time, we expect an increasingly larger percentage of Macy’s enterprise value to shift to debt, which would cause the equity value to shrink,” said UBS analyst Jay Sole. “A recession, bad weather, fashion misses, or some other one-off event could make a challenging situation much more problematic … To deliver steady long-term growth, we believe brands can no longer rely on malls or department stores to drive traffic. Brands have to generate their own audiences and become destinations.”

A new research project from Forbes released this week put contraction in the sector at 22 percent over the past four years. That number was reached by taking the 3,600 department stores in business in 2018 and subtracting with the documented list of 798 closings since then. And more will come.

The problem with department stores is not limited to the U.S. In the U.K., problems at Debenhams, Marks & Spencer and John Lewis & Partners have led to dramatic store closings.

“The department store is dying in front of our eyes, with even blue-chip operators like John Lewis closing locations opened as recently as five years ago,” says commercial real estate publication Bisnow. “Of course, not every department store in the UK will close — but huge swathes of them are shut already, leaving landlords with the quandary of what to do with big empty boxes often totalling hundreds of thousands of square feet.”

In the U.K., department stores have been treated in the same way malls have in the U.S. Alternative use cases abound including converting department stores into offices, coworking, residential, hotels, cinemas and food halls. The Bisnow research team has identified three key questions to ask: What does the location need, what can you do with the physical structure you’re left with and will the change make money?

One key to that is data. “Data is at the heart of everything we do,” Ellandi Development Director Julie Pears said. “That is how we get information about what is relevant for the demographic profile of a particular place. What is the demographic movement of people in a location? Are they going elsewhere to get culture, leisure or to work, and if they are, can we plug that gap?”