Holiday sales in the United States typically make up about 20% of industry sales overall – more than Mother’s Day, Father’s Day, Valentine’s Day, Halloween, Easter, and St. Patrick’s Day combined. However this past holiday season clothing retailers reported some of the most abysmal numbers yet. Retail giants like Macy’s, JCPenney and chains like Finish Line and Aeropostale are resorting to shutting down stores. Many mid-priced clothing retailers like Gap and J.Crew are failing to sell at full price, instead enticing consumers with sales and discounts that are seemingly perennial. Changing consumer behaviors, online shopping, and a still recovering economy have taken their toll on clothing stores. Though the scenario is bleak, there may be hope yet for shopping malls. Some retailers have found their niche and are thriving, and researchers have found shoppers still prefer visiting brick and mortar shops.
Stuck in the Middle
One lesson to take away is that it is a bad time to be in the middle, or the moderate category, for clothing stores. In retail, designers categorize brands according to price point. “Luxury” refers to a very high-end class of brands. From there lies the “moderate” category, which includes lines like Levi's, and “budget”, which consists of mass market brands like Forever 21 and H&M. Lastly, you have the “off-price” category, which includes discounted pieces, off-season fashion and close-out pieces from retailers. Many shoppers are flocking to budget fashion stores and off-price retailers like Nordstrom Rack and Marshalls with dire consequences for middle brands.
Mid-range retailer Gap reported that comparable sales fell 2% in December, for a 20th consecutive month of flat or falling sales. Banana Republic reported a 9% drop and Old Navy, the most affordable and best performing chain, dipped 7%. Other mid-priced apparel companies like J. Crew, Anthropologie, and Macy’s reported similarly disappointing performances.
If the Price Isn’t Right
Gone are the days when sales were sporadic events to mark on calendars. Today’s shopper never expects to pay full price. Gap, for instance, more or less constantly runs “one day only” sales in a struggle to compete with outlets and marked down places like Marshalls and T.J.Maxx. Senior retail analyst Adrienne Yih Tennant at Wolfe Research posits that the discounts, while driving sales and traffic, are “[…] training customers to only buy at these margin-eroding price points.”
Consumers are simply finding it more difficult to justify purchasing a $65 sweater, instead opting for the same (or a similar) sweater from last season at $25. Subsequently, retailers are closing their namesake stores and investing instead in outlet locations or off-price type shops. Gap is closing 26% of North American stores and leaving 300 outlet locations untouched. Macy’s is making thousands of job cuts and closing 36 stores yet opening 50 Macy’s Backstage stores. (Macy’s Backstage is the equivalent of Nordstrom Rack and T.J. Maxx.) J. Crew is expanding its lower-priced sibling J.Crew Factory to regular malls and shopping centers under the moniker J.Crew Mercantile.
The industry is worried that this has become the new norm in spending, since the recovering economy can’t be held accountable for much longer. Analyst at Stifel, Richard Jaffe, believes the downward trend of apparel consumption is due to the spending patterns of millennials who are the largest segment of the population. Jaffe credits the change to a cultural shift in clothing consumption. “The casualization of the workplace has ostensibly shrunk their closet and their apparel spending when compared to the prior generation,” says Jaffe. Therefore millennials no longer need an elaborate wardrobe to cover a plethora of occasions. Instead, they dress idiosyncratically, making it difficult for retailers to respond to their tastes. Additionally, millennial consumers are focusing their earnings on technology, travel, and food, notes Jaffe.
Cleaning Out the Closet
As the industry scrambles to meet new needs, stores are having to close to increase efficiency and make up for poor performance. Macy’s plans to pack up another 36 stores this spring after already shutting down four last year. The closings will affect over 2,700 associates, according to the company, and another 3,000 may be affected by store staffing reductions, though half of those workers will be assigned to other positions. In total over 6,000 employees will be affected of the 163,000 employed by the retailer. The cuts are in response to a disappointing 2015 sales and earnings performance, Macy’s CEO Terry Lundgren said in a statement. The company reported a decrease in comparable sales of 5% in November and December.
A quarter of Finish Line stores will meet the same fate in the next four years. The footwear retailer announced a plan that includes shutting down 150 low performing Finish Line locations in an effort to improve efficiency. However the company is far from throwing in the towel when it comes to attracting shopping mall clientele. Finish Line executives stated that the company will “selectively open new stores in the best-of-class malls and invest in our top stores to strengthen customer experience.” The retail industry ranks malls by letter grade, from A malls which are the most high end, to D malls which are struggling to survive. Retailers are pruning their locations in lower tier malls, opting instead to allocate resources toward bigger and better malls where they can reach a more affluent customer base.
In similar fashion, Macy’s is redoing a store at Century City in Los Angeles, which real estate research firm Green Street Advisors called an A++ mall. Many chains that announced store closures in the past year have strategies that are tailored to new shopping trends, aiming to redirect customers to new locations or capture more online sales.
There have also been developments in the American Apparel saga which came to a head when the company declared bankruptcy last year. Investors Hagan Capital Group and Silver Creek Capital Partners have offered a buyout deal valued at $300 million to the company according to a recent statement.
A major part of the buyout plan is to reinstall Dov Charney, the former CEO who was removed a year and a half ago. Charney was served with a surprise termination letter that listed a slew of indiscretions including alleged misuse of corporate assets, violation of sexual harassment policies and more. Despite this, Chad Hagan, managing partner of Hagan Capital Group, is eager to welcome Charney back to the company. “Removing him from the company’s board and leadership was a shortsighted mistake and we are seeing the results of this error unfold in the declining performance of the company today.” Hagan said in a statement. The proposal from Hagan Capital and Silver Creek has a higher enterprise value than the prepackaged bankruptcy plan American Apparel would otherwise move ahead with, according to the statement. The plan includes $130 million from investors, $90 million of new equity and $40 million from a new term loan. In February 2014, American Apparel stock was trading below $1 and the retailer hadn’t posted a profit since 2009. Clearly, the company had not fared particularly well under Charney; but indeed things have worsened since his departure. Investors remain hopeful that the buyout will keep the company afloat, deliver higher returns to creditors, and save jobs.
Adding to the grim news for clothing retailers, Aeropostale announced it will be cutting 13% of corporate headcount (100 jobs) and redistributing the CEO’s stock options to existing staff to encourage them to stay. According to the report, CEO Julian Geiger, who returned to rehabilitate the company in 2014, “voluntarily relinquished” one million stock options, which will now be used by Aeropostale for “motivating and retaining other key members of the organization.” Though the plan appears generous, at Aeropostale’s current price of 24 cents a share the options are virtually worthless. The teen retailer has endured a string of bad years and has been warned more than once that its stock could be delisted from the New York Stock Exchange. Since Geiger returned, he has made optimistic plans to rebrand and appeal to the 14 to 17 year old demographic. His efforts, however, were met with sales that plummeted 20% in the quarter that ended October 31 and the subsequent closing of hundreds of stores. In Tuesday’s press release, Geiger said that “the decisions that led to today’s actions are a result of our focus on Aéropostale’s future, and our goal of returning to profitability.” “We are building upon areas of progress and continue to work to improve our business,” Geiger continued. “We look forward to discussing our plans for 2016 on our next earnings call.”
Despite reporting same-store sales were up during the holiday season, JCPenney has announced plans to close several more stores. Just a year ago, the company had immediately followed reports of high sales with the closure of 40 stores. This time, 7 underperforming stores will be shuttered by mid-April. A spokesperson for the company said locations set for closing are situated in smaller markets. Nixing stores at the beginning of the year isn’t unusual for JCPenney – past closures including 33 in 2014 came as part of the company’s annual review process. The retailer spent the last decade initiating and then undoing what was ultimately a fruitless business-model makeover under former CEO Ron Jonson. The company has since hired former Home Depot Executive Marvin Ellison who took control in August.
In a sea of stores that are perpetually offering 40% off regular merchandise, Lululemon sticks steadfastly to their price tags. The athletic clothing retailer managed to sell an impressive 90% of goods at full price between Cyber Monday and Christmas, marking an 85% sale for the current quarter. This is particularly notable given Lululemon’s steep prices relative to competitors like Athleta and Nike. Lululemon’s CEO Laurent Potdevin credits the company’s grassroots-driven market strategy with the company’s success. This could signify a niche market for specialized and luxury goods.
The Case for Window Shopping
Despite the grim news, shopping malls and shopping centers will not likely go extinct in the near future. Research shows that shoppers still prefer to visit an actual store to online shopping when making purchases. Nearly 40% of consumers make purchases inside a brick and mortar shop at least once per week, compared to 27% online according to the 2015 PricewaterhouseCoopers’ annual consumer survey. The data found that 65% of consumers said they shop in-store to avoid delivery charges, while over 60% said they prefer to have the item immediately. Furthermore, 61% reported they wanted to try on or see the item in person before purchasing it. The research further illuminated shopping trends. In store shoppers were drawn by the ease of returns and the chance to support local business. However, consumers were still using online outlets as part of the shopping process. Nearly 75% spent time browsing merchandise online before purchasing it in a physical store. Integrating technology has certainly changed the consumer experience. For instance, 36% of U.S. consumers said their interactions with brands on social media have led them to buy more from those brands. To stay current with shoppers, brick-and-mortar stores will clearly need to adapt to the digital age.