The Wall Street Journal - USA (2020-11-16)

THE WALL STREET JOURNAL. Monday, November 16, 2020 |B3

“When I walk by a store and

see a cute display in the win-

dow, that makes me want to go

inside,” said Ms. Hayes, who

works for a health-care non-

profit. “If the store isn’t there,

I’ll just go someplace else.”

Real-estate executives said

shoppers typically won’t travel

more than 3 to 5 miles to a

store, although that can vary

depending whether they live

LBrands

Coach

Abercrombie&Fitch

J.C.Penney

Gap†

-40% -30 -20 -10 0 10

Sales Earnings

ShrinkEffect
Somechainsthatclosedstoreshavestruggledtocurbdeclines.

Salesandearnings*forthelatestfiscalquarter,changefrom
yearearlier

Source: BMO Capital Markets

*Before interest and taxes †Excludes Old Navy

is often not that chains have

too many stores, but that they

have diluted their brand with

too many discounts. A health-

ier approach would be to sell

fewer items and charge more

for them, he said. The result

would be a smaller, but more

profitable company.

That didn’t work for Pen-

ney, which scaled back dis-

counts under previous man-

agement only to watch

shoppers flee. Other brands,

including Coach and Ralph

Lauren, are having more suc-

cess weaning customers off

promotions.

But it isn’t easy to do in a

world where retailers are re-

warded by investors for grow-

ing sales, Mr. Siegel said.

In his view, Wall

Street’s focus on sales growth

contributed to the overstoring

of America over the past half-

century. “All a retailer had to

do was open a new store,” Mr.

Siegel said. “It became more

important to be bigger, not

better.”

The rise of e-commerce put

an end to the store-opening

juggernaut. As consumers

bought more online, they vis-

ited physical stores less, mak-

ing them less productive and

more costly to operate. That

led chains to close hundreds of

locations with the hopes of

stabilizing profits. For some,

the strategy hastened their de-

cline.

“When you look at all the

retailers that are closing

stores now, it’s easy to forget

that so many have tried this in

the past and they aren’t

around anymore,” Citigroup

analyst Paul Lejuez said.

Retailers cast store closings

as a necessary fix, and some-

times their businesses are un-

der so much pressure they

don’t have a choice.

“We believe this is an im-

portant step, a good step for

the long-term health and prof-

itability of the business,” L

Brands finance chief Stuart

Burgdoerfer told analysts in

August about plans to close

250 Victoria’s Secret stores

this year.

Mr. Burgdoerfer said Victo-

ria’s Secret expects to recap-

ture roughly 30% to 40%

of sales from closed locations,

as shoppers transfer their pur-

chases to a nearby outlet or

the internet.

The lion’s share will go to

other stores in the chain, he

said, with 5% expected to be

reclaimed online.

In many cases, though, a

purchase is lost for good.

Tommia Hayes said she is

shopping less at Forever 21,

Gap andFoot Lockersince

they closed stores near her

Washington, D.C., home in re-

cent years.

The rise of e-

commerce put an

end to the store-

opening juggernaut.

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BUSINESS NEWS

in a rural or urban area and on

the type of retailer.

“I call it the 20-minute

rule,” said Jim Bieri, a princi-

pal of Stokas Bieri Real Estate,

a Detroit broker. “Once it’s

farther than 20 minutes, peo-

ple won’t come.”

William McComb, who

closed stores as CEO of Fifth &

Pacific Cos.—which at the time

owned Kate Spade, Juicy Cou-

ture and Lucky Brand Jeans—

said when a store closes shop-

pers don’t always move online.

In fact, e-commerce sales can

suffer unless retailers have

spent to build a web presence,

he said.

“Stores are a demand-gen-

eration machine,” Mr. McComb

said. “Consumers don’t auto-

matically go to your website.

It’s very expensive to get the

eyeballs.”

The risk of shrinking-to-

grow—which is how some re-

tailers describe their store-

closing strategies—is that

chains aren’t always able to

cut enough costs to offset the

lost sales and shore up profit

margins, analysts and execu-

tives said.

“The money saved from

closing stores ends up being

deployed on marketing,”

BMO’s Mr. Siegel said.

As a result, he said, market-

ing costs, which historically

averaged around 3% of sales,

have inched up to about 4.5%

of sales for the bricks-and-

mortar chains that he follows.

For online brands that have

few if any stores, marketing

can average upward of 15% of

sales, he said.

“The argument of the past

15 years has been that e-com-

merce has diminished the

need for stores,” Mr. Siegel

said. “But every company that

has embarked on massive

store closings has simply got-

ten smaller.”

Retailers’ preferred solution
for empty stores may only be
adding to their problems, ac-
cording to new research and
industry executives.
Retail chains have an-
nounced thousands of closures
this year after closing a record
number of stores last year, as
the pandemic crimps demand
for nonessential items and
shopping continues to migrate
online.
The hope is that by cutting
expenses associated with
physical locations, the chains
can become more profitable
and start growing sales again
as customer purchases shift to
their remaining locations and
websites.
But that rarely happens, ac-
cording to new research and
interviews with industry exec-
utives.
“Closing stores isn’t going
to solve a retailer’s underlying
problems,” said Stephen Sa-
dove, the former chief execu-
tiveofSaksInc.“Youhaveto
look at why the stores aren’t
performing. What is their
competitive advantage and
their reason for being?”
Even before the pandemic,
retailers were closing stores at
a record pace. U.S. chains an-
nounced the closure of 9,275
outlets last year, the most
since Coresight Research Inc.
began tracking the figures in

2012. The tally exceeds 8,000
      stores so far this year, accord-
      ing to Coresight.
      The health of the industry
      will be on display this week as
      chains fromWalmartInc. to
      Macy’sInc. report quarterly
      earnings, with the holiday
      shopping season already under
      way.
      Chains began offering
      Black-Friday-type discounts in
      October, instead of waiting
      until the traditional day after
      Thanksgiving.
      Retailers that closed stores
      in recent years often contin-
      ued to shrink, sometimes to
      the point of disappearing alto-
      gether, according to research
      from Citigroup Inc. and BMO
      Capital Markets. The firms
      looked at roughly a dozen re-
      tailers that announced major
      store closings in recent years,
      including Macy’s,J.C. Penney
      Co.,Abercrombie & FitchCo.
      andL BrandsInc.
      An Abercrombie spokes-
      woman said the company still
      believes in stores, but they
      need to be the right size and
      in the right location. As its
      digital business has grown, the
      retailer remains committed to
      reducing its square footage,
      but continues to open smaller
      stores, she said.
      Macy’s, Penney and L
      Brands declined to comment.
      “No retailer ever announces
      one round of store cuts—it’s
      always the precursor to a
      store bleed,” said Simeon Sie-
      gel, a BMO senior analyst.
      “Most companies we looked at
      had lower revenue and profit
      than before they started clos-
      ing stores.”
      Two exceptions wereNike
      Inc. andAmerican Eagle Out-
      fittersInc. Mr. Siegel said the
      two companies closed stores
      more as part of a normal
      pruning of undesirable loca-
      tions, rather than the mass
      closures of other chains.
      Nike didn’t respond to a re-
      quest for comment.
      An American Eagle spokes-
      woman said the chain’s fleet is
      largely profitable, but it con-
      tinues to evaluate and reposi-
      tion stores as part of its con-
      tinuing strategy.
      Mr. Siegel said the problem

BYSUZANNEKAPNER

Closing Stores Doesn’t Always Pay Off

Retail chains often fail

to recapture

customers online or at

remaining locations

Abercrombie & Fitch is among those retailers that announced major store closings in recent years.

EMILIE RICHARDSON/BLOOMBERG NEWS

NY