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Specialty Chains Seen Slashing Store Counts

Mall developers may need to rethink retail strategies, in the face of specialty store contraction.

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Fifteen percent might be retail’s magic number.

Overstored and out-of-date, specialty apparel retailers that have let their concepts languish are expected to cut between 10 and 25 percent, or an average of 15 percent, of their store space in the next two years.

“It’s a trend that’s been happening since the recession. We’re overstored,” said Needham & Co. analyst Christine Chen. “With the popularity of Internet shopping, retailers are coming to the conclusion that you don’t need as many stores.”

While rightsizing and renovating may be a net positive for retail, analysts said it spells trouble for the mall.

Calling mass store closures a “death spiral,” Chen said she worries particularly about B and C malls, which will be impacted by the contraction.

“Brands have their heyday and then it changes,” the analyst said, pointing to some of the shakeout in specialty retail. “I think the mall has been changing. Instead of purely shopping, there are now multiple uses, more restaurants, entertainment and even medical services.”

Many of the store closures are taking place in the competitive teen sector and the mercurial misses’ apparel sector, which has struggled to remain current to its core consumer, and are leaving big holes in midmarket malls.

Women’s retailers Coldwater Creek Inc., Christopher & Banks Corp. and The Talbots Inc. are contracting by between 12 and 15 percent each. Coldwater Creek will shed 35 to 45 locations over the next two years, while Christopher & Banks will lose 100 by January. Talbots said it will have closed 83 doors by the end of fiscal 2011.

On the teen side, Pacific Sunwear of California Inc. is slashing upward of 200 stores, or nearly a quarter of its 819-store base in the next 14 months, while Abercrombie & Fitch Co., with its 1,092 total locations, is cutting between 55 and 60 U.S. stores this fiscal year on top of the 65 it already shuttered last year.

Specialty retail giant Gap Inc. will dump 189 Gap North America stores by 2013, roughly 20 percent of its domestic fleet — a detail that hasn’t gone unnoticed by mall operators or analysts.

“I think it’s a really big challenge to make a brand relevant that hasn’t been relevant in the better part of a decade. I’m not convinced that the consumer under 30 thinks of the Gap as a cool place to shop,” said Morgan Stanley analyst Kimberly Greenberger, who pointed out that, excluding e-commerce data, the company’s same-store sales have been negative in nine of the last 10 years.

“The idea that there’s a turnaround coming at the Gap is a bit hopeful — I don’t know how to say it anymore politely,” she added.

According to Alan Barocas, senior vice president of mall leasing at General Growth Properties Inc., the retailer’s closures were foreseeable.

“We try to be ahead of the curve,” he said. “We look at store productivity versus mall productivity and also occupancy costs, and then we start to make some value judgments.”

Like many of his competitors, Barocas views Gap’s contraction as an “opportunity” to raise rents on incoming tenants.

“There is a lot of demand right now in the mall, whether it’s in an A center or a B center,” he said, noting that there’s growth in several segments of retail, including in children’s brands, accessories chains and value-oriented spin-off concepts.

This year alone, Francesca’s Holdings Corp., a low-priced apparel, handbag and accessories retailer, has opened 76 shops, growing its fleet to 283 doors. Next year, the retailer is look to open 75 more stores.

Aéropostale Inc.’s kids’ concept, P.S., which launched in 2009, is the brand’s growth driver. Currently operating 72 doors, the retailer said it hopes to mushroom into a 500-store chain over 10 years.

And don’t forget Christopher Burch, who may be single-handedly giving mall operators and commercial real estate firms a reason to smile. Tory Burch’s former husband, who just launched C. Wonder, recently told WWD that he hopes to open 300 C. Wonder stores over the next few years. The Tory Burch co-chairman and investor is launching a string of high-profile ventures, including at least four new ideas set to hit from spring into mid-2013.

Experts also pointed to U.S. expansion from fast-fashion firms like H&M, Forever 21, Love Culture, Uniqlo and Zara.

While there is store growth in the U.S., Joel Bines, managing director at AlixPartners’ global retail practice, explained that retail is expanding at a slower pace in terms of store count than it had before the economic downturn.

“There doesn’t seem to be the same number of concepts looking to grow to a thousand stores like there were in the Eighties,” he said.

Regional malls, be it B malls, C malls or even A malls, will need to “operate more like brand marketers than real estate managers,” he said. “The best brands in the world know who their customer is and what their customers want.”

This entails adapting a localization strategy by understanding the demographics of the mall’s locale. For instance, if there’s a high concentration of elderly residents, it may be prudent to rent space to a medical facility, he said.

Bill Taubman, chief operating officer of Taubman Centers Inc., agreed, but admitted that the high-end malls are in a decidedly easier position.

“The weaker malls in the major markets will have more trouble,” he said, explaining that malls will either “close in more competitive markets” or they will become “hybrid malls with value-price centers.”

“Still, people have been talking about the demise of the mall forever,” he said. “I think we’re going to wake up in five or 10 years and, yes, there will be some closures, but it won’t be as drastic as people think.”

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