Fitch: Challenges, Opportunities Ahead for Strong Retailers

How the growth of e-commerce is affecting the nation’s malls and shopping centers.

New York—There’s no doubt retailers in the United States are facing challenges, many of them due to the growth of e-commerce and how it is affecting the nation’s malls and shopping centers and ultimately the bottom lines of top retail companies. In a new report, “What Investors Want to Know: U.S. Retail,” Fitch Ratings analysts address those concerns and find that despite some problems, there could be opportunities for the strongest players.

David Silverman
David Silverman, senior director, U.S. Corporates at Fitch Ratings

“The mall retail landscape will evolve significantly over the next few years but remain a viable shopping destination as part of a broader omnichannel strategy,” David Silverman, senior director, U.S. Corporates, and one of the study’s authors, said in a prepared statement. “Consumers still want the option of an in-store experience, but retailers will have to rethink how they’re using their square footage.”

Fitch notes that most of the questions from recent meetings with high-yield investors focused on “changing shopping habits due to the rise of online and discount models.” The sector that garnered the most questions and discussion was mall-based apparel, including department stores and specialty retailers. Many of these retailers are already losing sales and market share to fast-fashion and off-price stores. The report states mid-tier specialty apparel retailers face additional challenges than department stores, partly due to weak mall traffic as well as the rise of online apparel sellers.

The report addressed the recent large-scale closure announcements made by Macy’s and J.C. Penney and effects those losses will have on malls, but still “expects the financially and operationally stronger department stores, such as Macy’s, Nordstrom Inc. and Kohl’s Corp., to at least maintain their share of the apparel and accessories space over time.”

The stronger malls will survive the loss of large department stores as they re-tenant with big-box retailers not typically associated with indoor malls. Those tenants could include grocery stores, dining and entertainment complexes, fitness centers, offices and medical space. But the report notes that more closures expected in 2017, especially among department stores, “could result in significant changes to traffic trends and economics at the weakest of affected malls.”

Fitch also expects that despite the rise of omnichannel sales, approximately 70 percent of all retail sales (except auto, gas and food) will happen in stores by 2020, down from roughly 80 percent today “but still representing a majority of purchase occasions. Moreover, many online purchases are influenced by a store visit or brand recognition from its physical presence, which should benefit stronger brick and mortar retailers with broad geographic presence.”

As for single-category retail, the report said sectors like vitamins, sporting goods and pet retail have been facing the most competition from alternative channels, particularly discount and online channels. But it’s also a sector that has seen large participants like Dick’s Sporting Goods, PetSmart and GNC Holdings, continue to add square footage.

“Increased store counts, coupled with rising competition from alternate channels, is exacerbating the demand/supply imbalance and has begun to create challenges for sector issuers,” the report stated.

Fitch notes those sectors that are “most protected” from online competition include grocery and dollar stores, craft and party supplies, drug retailers, auto parts, home improvement and large consumer electronics and appliances. The report said service is an important component of those sectors that are able to drive traffic into their stores. Customers appreciate the experience of shopping in stores such as Sally Beauty Holdings, where shoppers can get beauty advice from stores associates “who provide help in trying out the products before making a purchase.”

The ratings firm cited retailers like Nordstrom, Wal-Mart and Neiman Marcus, that have invested extensively in technology, supply chain infrastructure and inventory systems to boost their omnichannel offerings.

The full report is available at www.fitchratings.com