The Retail Apocalypse Is Not as Bad as It Seems

MarketsMotley Fool

It's only mid-March, and U.S. retailers have already announced close to 5,000 store closures since the beginning of the year. That compares to 5,524 during all of 2018, according to Coresight Research.

This data point may make it seem like the retail apocalypse has taken a dramatic turn for the worse in 2019. That said, store closure announcements tend to be clustered near the beginning of the year, as retailers assess their position following the busy holiday shopping season.

Continue Reading Below

Moreover, the total number of store closures is not necessarily the best metric for tracking the impact of the retail apocalypse on malls and shopping centers across the country. In fact, the pace of store closures in 2019 is very manageable compared to the demand for new space.

Not all store closures are created equal

In 2017 and 2018, the retail sector was rocked by a huge wave of department store closures. Macy's and J.C. Penney (NYSE: JCP) closed more than 200 stores combined -- accounting for more than 20 million square feet of space -- as they tried to shore up their profitability. Bon-Ton Stores, which had 262 stores totaling 24 million square feet as of early 2017, went out of business in 2018, closing all of its stores.

Most notably, Sears Holdings shrank dramatically. In early 2017, the company had more than 1,400 Kmart and full-line Sears stores in the U.S. (including Puerto Rico). The small fragment of the company that survived a late-2018 bankruptcy filing will operate about 425 stores going forward. The roughly 1,000 stores that got the axe accounted for well over 100 million square feet of space.

By contrast, the vast majority of the stores closing in 2019 are "in-line" retailers that operate much smaller stores.

In fact, more than 70% of the U.S. store closures announced in 2019 relate to the bankruptcies of Payless ShoeSource, Gymboree, and Charlotte Russe. Most Payless stores range from 2,000 square feet to 4,000 square feet. Gymboree stores average a little more than 2,000 square feet. Charlotte Russe stores are slightly larger, averaging just over 7,000 square feet. Together, the 3,500 stores these three companies are closing in 2019 likely occupy just 12 million square feet of space.

To be fair, some retailers that operate larger stores are downsizing again in 2019. J.C. Penney plans to close another 27 stores this year, although some of those are smaller locations. Shopko is closing more than 250 stores in conjunction with its bankruptcy filing. Some of those are full-line stores, which average around 80,000 square feet, but many are smaller Shopko Hometown stores that range from 15,000 to 35,000 square feet.

Ironically, the biggest source of new space on the market this year is likely to be Sears (again). In conjunction with its bankruptcy proceedings, the retail icon announced more than 250 store closures in late 2018 that are being implemented in the first three months of 2019.

There's plenty of demand for space

While some retailers are struggling, many others are thriving and looking to grow. For example, the off-price retail sector has taken over lots of space previously occupied by department stores and big-box retailers in recent years. Industry leader TJX Companies (NYSE: TJX) continues to expand rapidly, as do smaller peers Ross Stores (NASDAQ: ROST) and Burlington Stores (NYSE: BURL).

In 2019, TJX plans to open about 150 net new stores in the United States. Ross Stores and Burlington combined will open a similar number. These roughly 300 new stores will require approximately 8 million square feet of space. A store like Burlington or HomeGoods can't take over a full former JCPenney store, but it can serve as a strong lead tenant for a redevelopment that divides a former department store into smaller spaces.

The fitness category is also growing rapidly, led by Planet Fitness, which opened a record 230 new gyms last year, accounting for close to 5 million square feet of real estate. Dollar stores and grocery stores are also expanding at a breakneck pace.

Right now, there's a substantial backlog of empty space due to the massive number of stores closed by Sears, Kmart, and Bon-Ton (as well as Toys R Us and Babies R Us) in 2017 and 2018. However, a handful of fast-growing companies like these could take over much of this space in the next few years, assuming that the pace of department store closures continues to moderate.

Filling the spaces vacated by the likes of Payless, Gymboree, and Charlotte Russe in 2019 will be even easier. A slew of retailers can use spaces smaller than 10,000 square feet. They range from locally owned boutiques and restaurants to hot e-commerce brands looking for physical showrooms to the most successful national specialty stores.

In all likelihood, there will continue to be thousands of store closures annually in the U.S. as retailers react to changing shopper habits. But as long as department stores and big-box stores account for a relatively small percentage of those store closures -- as has been the case year to date -- America's malls and shopping centers won't turn into ghost towns anytime soon.

10 stocks we like better than J.C. PenneyWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and J.C. Penney wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of March 1, 2019

Adam Levine-Weinberg owns shares of J.C. Penney, M, and The TJX Companies and is short April 2019 $57.5 calls on The TJX Companies. The Motley Fool recommends PLNT and The TJX Companies. The Motley Fool has a disclosure policy.