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Increasingly digital retail landscape fuels investor angst

February 6, 2016

Greg AndrewsInvestors don’t know what to think about brick-and-mortar retailing these days. So dark thoughts are filling the void—which helps explain why Simon Property Group Inc. shares went on a roller-coaster ride after the mall giant reported so-so fourth-quarter results late last month.

The shares, which opened Jan. 29 at $189.23, tumbled all the way to $177.55 before regaining their footing and closing the day at $186.28.

The panicked reaction was way overboard, said Rich Moore, an RBC Capital Markets analyst, who scaled back his forecast for the company after the earnings release but remains bullish.

“This incessant notion that e-commerce is going to overtake the mall and put them out of business, it is not even close to accurate in our view,” Moore said.

“It is not going to overly impact strong retail venues in any way. Investors are pretty concerned as a group that there is trouble ahead, and this quarter did not really help much in dispelling that notion.”

Of course, online retailing is a legitimate, fast-growing, powerful force. Just in the United States, e-commerce sales were projected to have reached $349 billion in 2015, up 14 percent from a year earlier.

Still, a little perspective is in order. Moore noted that pure e-commerce sales remain below where catalog sales were at their peak. And mall sales and occupancy continue to hold up, despite a sputtering economy—especially at high-end properties, many of which Simon owns.

But clearly, the rules of retailing are shifting, with shoppers increasingly going online for research and increasingly using mall outposts to pick up merchandise they ordered digitally. Retailers are updating software, revamping supply chains to provide seamless service to consumers, whether they’re shopping from a desktop, a mobile device, a telephone or visiting a store.

Indianapolis-based Finish Line Inc. is the poster child for what can go wrong. Last month, the company announced its new warehouse-management system failed to process orders fast enough, costing it $32 million in sales as the holiday shopping season was getting under way.

The problem touched off what sounds like a mad scramble, as described by Chief Financial Officer Ed Wilhelm on a Jan. 7 conference call.

“We were rerouting trucks that were initially intended to come to Indianapolis to our distribution center, and we were rerouting them back to our vendor partners where they were re-sorting the product for us and then shipping it back to us so that we can get it to our stores faster,” he said.

The giant department store owner Macy’s Inc., which also had disappointing holiday sales, said consumers’ penchant for checking out merchandise in-store and then buying it later online added to the difficulty of analyzing store performance.

The trend creates “a complication for us in making sure that we understand just how many stores we need [and] how far will the customer drive to try on this product once they have discovered it on their mobile deivce or their tablet device,” Macy’s CEO Terry Lundgren said on the company’s latest earnings call.

Simon Property CEO David Simon reported on the company’s Jan. 29 conference call that mall traffic was flat in the fourth quarter—but sales were higher.

“The trend with mobile technology is that the consumer today clearly is going to the physical environment more educated,” he said. “They’re doing less browsing, and they’re going to less stores.”

He added: “When the retailer opens a physical store in a market, they see their online sales increase. And likewise, if they closed the store, they see their online sales in that market decline.”

Online behemoth Amazon.com apparently is convinced of that co-dependence. The Seattle company, which rolled out its first physical bookstore last year, plans to open 300 to 400 more, Sandeep Mathrani, the CEO of mall operator General Growth Properties, said during a Q&A with analysts this month.

Retailers say superior customer service can play a big role in swaying shoppers to buy in store instead of online. For example, Tennessee-based Genesco Inc., which owns the teen-oriented Journeys chain, said Journeys customers turn to its store clerks as “trusted advisers.”

“They’re growing. They’re not sure of their sizes. They like the interaction with our salespeople,” CEO Robert Dennis said.

“And if you’re in high school, you’re very insecure about what you’re wearing to school and you want to get it right, and our people help them do that.”•

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