Foot Locker speeds up departure from the mall

Walk-in locker (NYSE: FL) may be a mall now, but even before the coronavirus pandemic disrupted business as usual in the retail world, the shoe retailer was already jogging for the door. The crisis only accelerated this exit.

This creates more problems for mall operators like Simon Real Estate Group (NYSE: SPG). Some have chosen to acquire struggling retailers out of bankruptcy to prevent more empty storefronts from appearing in their malls, but retailers like Foot Locker are creating their own void by seeking out-of-center space. commercial to settle.

Image source: Foot Locker.

Redefining sneaker culture

Foot Locker operates over 3,200 stores worldwide under various banners such as its namesake stores, Lady Foot Locker, Kids Foot Locker, Champs Sports and others. The vast majority of stores are located in the United States and about 80% are located in shopping malls.

Yet he has developed what he calls his ‘Power’ store format, which he describes as a community concept offering “cutting edge retail experiences that deliver connected customer interactions through service, experience. , the product and a sense of community ”.

These concept stores, which are not intended to be located in malls, feature more than 8,500 square feet of retail space, roughly three times the size of the average US-based chain store. at 2,800 square feet. (Internationally, the average is only 1,700 square feet.)

It opened six of those new stores in 2019 and had planned to open 20 more this year before the pandemic struck.

Support the mall

It was clear to Foot Locker that the mall was dying. Foot traffic was already on a long decline even before COVID-19 hit, and when fast-fashion retail icon Forever 21 filed for bankruptcy last year, Simon Property Group, another mall operator Brookfield Properties Partners (NASDAQ: BPY), and brand management company Authentic Brands Group bought its retail business for $ 81 million.

Previously, the trio had acquired the bankrupt Aeropostale for $ 243 million plus debt to prevent it from liquidating its stores, and now they are said to be in talks to buy JC Penney, which declared bankruptcy.

The rationale for this buying frenzy from damaged retailers resembles law enforcement’s much-criticized “broken window theory,” which posits that leaving small signs of crime and civil disorder unrepaired – windows proverbial breaks – creates an environment that encourages more crime in a vicious cycle. In this case, mall operators are clearly concerned that allowing too many signs of decline – vacancies – will lead to fewer consumers visiting the malls, leading to the bankruptcy of more retailers. centered on shopping malls, which will exacerbate the vacancy problem and eventually snowball. in shopping center closures.

Buying faulty chains, however, is a risky proposition, even if they can be bought at rock-bottom prices. Mall operators will always face the same vacancy issues, as successful retailers will voluntarily close their stores to seek spaces closer to the consumer.

Another kind of risk

However, non-mall locations are not a panacea and come with their own risks. New Jersey, for example, has more malls than any other state per capita and is now home to North America’s third largest mall, the recently completed American Dream complex in the Meadowlands. Retail stores were due to open in this mall on March 19 – until the pandemic is declared.

Such a density of shopping centers, including the thousands of linear shopping centers that line the state’s freeways, also makes New Jersey one of the most congested states in the country in terms of retail. Non-mall locations will not necessarily be better places to shop.

Of course, not all places are like New Jersey, and having a reduced presence in malls helped Kohl’s to avoid the fate of JC Penney, even though he was hampered by the general decline of the brick and mortar retail business.

Fortunately, Foot Locker is also investing heavily in its digital channel with the goal of making it a significantly larger component of overall sales.

Dealing directly with customers

Over the past few years, Foot Locker has invested heavily in its digital and logistics capabilities, which has enabled it to expand its direct-to-customer and social media channels to drive sales. In the last quarter, nearly 200,000 orders were processed in a single day.

“This digital-only focus has accelerated our evolution as an omnichannel retailer, improved our customer relationships and will continue to benefit us in the future,” President and CEO Dick Johnson told analysts on the conference call. on the company’s first quarter results.

Nonetheless, Foot Locker’s direct-to-customer business is low-margin and was partly responsible for the lower gross margins and merchandise margins it reported. It was also deemed necessary to be more promotional in the chain than it would otherwise be.

Ready to run

Although Foot Locker’s stock is now trading 60% above the low it hit in March, it remains down around 25% year-to-date and almost 40% below of the peak reached last November.

Accelerating its exit from the declining shopping center scene will allow Foot Locker to focus on “nomadic retail” to drive sales. Trading below 9 times earnings estimates and only a fraction of its sales, this retailer’s transformation makes it an interesting stock that investors should take a closer look at.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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Peggy P. Gilmore