If you’re a glass-half-empty kind of investor, you’ve found plenty to fret about in the retail world lately.
Back-to-school spending was disappointing, and overall retail sales remain lackluster. Larger trends are no more comforting, as online retailing continues to gain market share, behemoth anchors Sears and JCPenney remain adrift, and the economy shows signs of slowing.
Yet amid all this, shares of mall goliath Simon Property Group Inc. continue to chug higher, reaching yet another all-time high on Nov. 5. Shares now are up 24 percent over the last 12 months, compared with 16 percent for the S&P 500.
The outperformance is nothing new. Since David Simon became CEO in 1995, Simon Property shares have posted a total return of 2,150 percent—a dazzling run extending nearly two decades.
In a conference call with analysts Oct. 22, Simon sounded as intense—and as upbeat—as ever.
“We have tremendous confidence in our business and our platform,” he said. “And the thing I would have you rely on is what we’ve done year after year.”
Analysts almost universally remain upbeat, suggesting the company can keep churning out improved results by reducing debt costs, building new outlet malls and international projects, and raising rents at existing properties as leases expire.
Rents on expiring leases are relatively cheap, Rich Moore of RBC Capital Markets wrote in a report, which “suggests that the company faces a number of years of steady rental rate increases even if tenant sales remain somewhat stagnant.”
Over the last two years, the company consistently signed new leases at $63 to $67 a square foot, Chief Financial Officer Stephen Sterrett said on the Oct. 22 call, way above the mid-$40s charged on expiring leases.
The company—the world’s biggest real estate company—also has the advantage of scale, which gives it the clout to bring aboard the most-sought-after tenants. Simon’s newest projects, Charlotte Premium Outlets and Twin Cities Premium Outlets, opened over the summer 100-percent leased.
None of those advantages completely insulate Simon from economic or competitive pressures. For example, analysts agree that the company eventually will feel the impact if retail sales fail to recover or if the economy slides back into recession.
But not all the macro trends are threatening. Retailers of all stripes are racing to become “omnichannel,” tearing down the walls between their online storefronts and brick-and-mortar locations to provide customers a seamless experience.
In practice, that means some online retailers are opening physical stores—even Amazon.com, which plans locations in New York City, San Francisco and Sacramento, California.
Meanwhile, conventional mall retailers are increasingly using their stores as distribution centers for shoppers who want to buy online but pick up the merchandise the same day.
Finish Line Inc. CEO Glenn Lyon said on a conference call last December that more than half the chain’s customers have multiple points of contact—via computers, tablets, social media, mobile phones or in-store—before making a purchase.
“Brick-and-mortar and digital are completely interconnected,” Lyon said on the call.
The trend favors Simon, David Simon said.
“It’s got to be in the equation for a retailer to have a physical presence,” he said. “I don’t think there is any question in that. And as our retailers have gotten more sophisticated in the online world, I think that is going to play to our benefit.”
Simon officials also are emboldened by research that found that, despite their tech-savvy ways, millennials flock to malls. Simon said this month that 89 percent of survey respondents age 18 to 33 said they plan to shop at a mall this holiday season, compared with 83 percent of respondents of all ages.
“We are going to experiment and do lots of things oriented around them to continue to make them an important consumer base in our properties,” Simon said. “But we’re not going to ignore the baby boomers, either, because they have a lot to spend.”
Analysts, whose past bets on the company have paid off handsomely, are keeping the faith. The stock, which retreated to around $181 after topping $184 Nov. 5, is poised to top $190, maybe even $200, according to a litany of analyst forecasts.
Simon is “still not too big to outgrow the competition,” summed up Jefferies analyst Omotayo Okusanya.•