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The "Retail Apocalypse" May Last 2 More Years

The Motley Fool logo The Motley Fool 10/3/2019 Rich Duprey

The bankruptcy of fast-fashion retailer Forever 21 was the 35th major bankruptcy this year, with over two-thirds of them in retail. And it likely won't be the last.

Coresight Research says over 8,500 stores have closed this year, 47% more than last year and ahead of the record 8,000 or so that shut down in 2017. It estimates as many as 12,000 stores will close in 2019, offset by only 3,500 openings year to date.

a house that has a sign on the side of a building: The pain symbolized by this abandoned shopping mall isn't over yet.© Getty Images The pain symbolized by this abandoned shopping mall isn't over yet.

Brick-and-mortar stores will not vanish because of e-commerce, but there's a real possibility it may grind down the retail industry for several more years as it falls into a more sustainable equilibrium. It's a change that could fundamentally alter the retail landscape.

Still open for business

There's the temptation to minimize the carnage being inflicted on retailers by noting that just a handful of companies make up a large percentage of the store closures. Payless Shoes, for example, accounted for 2,300 of the total after it filed for bankruptcy earlier this year, and Gymboree, Charlotte Russe, and discount chain Fred's each contributed hundreds more. But there are a number of retailers in expansion mode.

Target(NYSE: TGT) has opened 100 mini stores in the past two years with an ongoing commitment to open 30 more each year. Dollar General(NYSE: DG) opened over 900 stores last year and is more than halfway to achieving its goal of opening 1,000 stores this year.

So where a relatively small number of retailers represent most store closures, an even smaller number of retailers are responsible for the bulk of store openings this year as well.

No end in site

An analyst at B. Riley FBR says that the retail industry remains oversupplied with stores and that the shakeout underway could continue for another 18 to 24 months. According to the industry site Retail Dive, analyst Scott Carpenter suggests as much as 30% of existing retail space "would cease to exist in its current form, as consumer buying trends shift increasingly online."

The wreckage is being felt at the shopping mall. With customer traffic in decline, mall operators are considering drastic measures to forestall the inevitable. Simon Property Group(NYSE: SPG) is considering bailing out troubled retailers, using some of its $6.8 billion in liquidity to keep its tenants afloat.

Simon successfully invested in Aeropostale after it declared bankruptcy, by partnering with General Growth Properties and Authentic Brands Group to keep several hundred stores open. A mass closure like that could have further discouraged consumers from visiting their local malls, which would have had a domino effect for other retailers.

Vacating the premises

Vacancy rates are still creeping higher at shopping malls. Simon Property Group says the occupancy rates in its U.S. malls fell to 94.6% in the second quarter from 94.8% a year ago. Similarly, Macerich(NYSE: MAC) saw its occupancy rate decrease from 94.3% in last year's second quarter to 94.1% this time around, while Brookfield Property Partners(NASDAQ: BPY), which now owns General Growth Properties, saw the number of stores in its portfolio that are leased fall to 95% from 95.7% in 2018.

These are seemingly minor movements, but they involve class A mall operators owning some of the best properties. Among class B and C mall operators, the impact could be much more devastating.

While there are more than a few retailers who still seem well positioned to expand, many others are financially distressed and on the verge of bankruptcy themselves. As the "retail apocalypse" stretches out over the next year or two, we're likely to witness more closures from across the industry.

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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