Retailers Hunting Locations That Can Overcome Shifts in Spending, Buying Habits

Posted on October 6, 2016

As a result of ongoing challenges in the malls and shopping center sector, retailers are altering their selection decisions for future locations, according to new analysis from CoStar Group.

And while a number of retailers are expanding, the ongoing challenges also are placing some traditional retailers at higher risk of bankruptcy, according to new analysis from Fitch Ratings.

Demographics of New Store Openings

CoStar Portfolio Strategy tracks announced store openings, which typically lead leasing activity in the retail market and can be an indicator of future demand.

In addition to the anticipated leasing activity that these announcements may account for, CoStar has also examined the existing store portfolio of the retailer as well as recently signed leases to determine the type of trade area demographics that a particular retailer targets.

Recent retail leasing activity has been dominated by discount retailers targeting relatively dense locations and average to below-average income levels. Exceptions to this trend are cosmetics retailer ULTA and young adult apparel purveyor Forever 21, which have targeted above-average incomes.

In addition to industry standard metrics, such as household counts and median household income within three miles, CoStar Portfolio Strategy has also assigned an average Location Quality Score to the retailers’ fleet of properties. This proprietary score based on a scale of 0 to 100 is a function of local trade-area demographics, including daytime employment and tourism, complementary retail space and competitive retail space.

For more information on the Location Quality Score system being released this week, see New Rating Systems Enhances Forecasting Performance of Retail Properties

Challenges Spur US Retail Bankruptcies

As part of its analysis of 30 recent retail bankruptcies, Fitch Ratings screened the high-yield bond and leveraged loan universe as of Aug. 31, 2016 to identify seven U.S. retailers with significant default risk within the next 12 to 24 months. The list of at-risk retailers include some that are not surprises, such as the beleagured Sears Holdings Corp., as well as others, such as Claire’s Stores Inc. (which recently completed a debt exchange), True Religion Apparel Inc., 99 Cents Only Stores LLC, Nebraska Book Company Inc., Nine West Holdings Inc. and Rue21 Inc.

Most of the retailers at high risk of default are being challenged by the nusual suspects, including declining mall traffic, competition from online and other types of retailers, and/or a lack of a compelling product line. Highly leveraged capital structures may make it even harder to face of these challenges, Fitch noted.

Sometimes, Fitch analysts suggested, retail brands have simply run their course.

“Brand degradation and competitive pressures to either price or experience can be real threats to the survival of struggling retailers,” said Sharon Bonelli, senior director, leveraged finance at Fitch. “As a result, many retailers move into the bankruptcy process without a real reason to exist and ultimately end up in liquidation more often than bankrupt companies in other sectors.”

While bankruptcy has resulted from a variety of operating concerns, several themes have emerged as key sources of pressure for companies, according to Fitch.

Discount formats, including supercenters, off-price, dollar stores and hard discounters, have taken significant share over the past two decades. While discounter inventory spans many categories, the rise of the discounter industry has most significantly impacted general merchandise and grocery retailers. As a result, the grocery industry is one of the most represented subsectors in Fitch’s 30-company bankruptcy analysis.

In addition, according to CoStar Portfolio Strategy, the relentless rise of big-box retail was the defining sector risk of the last cycle as such retailers as Walmart, The Home Depot, Costco, and others leased and built their way to saturation. As a consequence of this oversupply, performance plummeted and returns suffered across the board.

E-commerce penetration of retail sales (excluding auto and gas) has risen rapidly in recent years, increasing to 10% in 2015 from approximately 5% of sales in 2010. Fitch expects online penetration to expand further, potentially to the 15%-17% range by 2020. This suggests that half of retail sales growth is expected to come online, as opposed to physical retail locations.

Consumers are spending less discretionary time shopping at enclosed malls. This factor has exacerbated brand declines at a number of mall-based retailers and is expected to lead to further defaults.