The past few years have not been kind to traditional retailers, and malls have been hit especially hard. Online sales have taken a portion of their business, and how to win it back has not been an easily solved problem. Malls have been hurt likely because the incentive to leave the house, find a parking spot, and deal with crowds has diminished when nearly every item available can be purchased online and delivered to you.
The coming year does not appear to offer any respite, and a new report from Fitch Ratings suggests that a shift has occurred in how people spend money. To succeed, a physical retailer must offer an "omnichannel" model that serves customers across physical and digital stores.
"Spending focus on services and experiences appears here to stay, so the dividing line between best-in-class retailers and market share donors is increasingly going to be determined by which retailers can cater to the evolving landscape," said Fitch's David Silverman. "Those that find success have invested in the omni-channel model and have differentiated their products and customer service to draw customers in."
Fitch expects that retail sales in the United States will grow 3% to 4% in 2017, but only 1% of that will be in-store, with the rest happening online. The credit rating service also predicts that a number of mall staples will be "challenged to maintain share, liquidity and positive comps," which could make it hard for them to survive the year.
Sears Holdings is on the ropes
While some companies on this list may surprise you, Sears Holdings (NASDAQOTH:SHLDQ), which operates both Sears and Kmart stores, has been on life support for quite a while. The chain, which often serves as a mall anchor store, has already lost $1.61 billion through three quarters in 2016, after losing $7.1 billion over the four previous fiscal years. The Fitch press release puts Sears in the "challenged" category.
While the company talked about plans for a turnaround during its most recent earnings call, there have been no signs that one will actually occur. The struggling retailer posted a loss of $748 million in its fiscal Q3, up from a $454 million loss in the same period in 2015. Revenue also fell by $721 million for the quarter, largely due to the company having fewer stores, but comparable-store sales suffered a 7.4% decline, accounting for $304 million of the drop.
Sears Holdings' survival plan involves selling off its still valuable Craftsman, Diehard, and Kenmore brands, closing more stores, and driving customers to the as-yet-unproven Shop Your Way app. That's a plan where even if it survives, the chain will be much smaller, spelling bad news for the malls it used to anchor.
Abercrombie & Fitch teetering
When a company that builds its brand around its name becomes less cool, it becomes very hard to survive. Abercrombie & Fitch (NYSE:ANF) has that problem and it's also on Fitch's "challenged" list. Teens, always a fickle audience, have turned to other brands, leaving the once-daring retailer scrambling to find an audience.
The company, which also operates the nearly equally uncool Hollister brand, saw net sales drop by 6% in Q3 to $821.7 million. Comparable sales fell by the same percentage and income per diluted share plummeted to $0.02 for the third quarter, compared to $0.48 last year.
"As expected, our third quarter was challenging. While Hollister improved sequentially, it was more than offset by disappointing performance in A&F," Executive Chairman Arthur Martinez said in the earnings release. Global sales for the chain were down by 5% for the total company, which it blamed on negative headwinds from A&F flagship and tourist locations as well as problems with chain store sales.
Malls need stores
Were it not for some of the malls where it operates stepping in to bail out the company, Aeropostale would probably already no longer exist. The chain sold its assets in September to a group led by Simon Property Group (NYSE:SPG) and General Growth Properties (NYSE:GGP), two mall operators that paid $243 million to snap up the chain in order to not have it go out of business, Bloomberg reported.
The new owners plan to keep at least 229 stores open, but going forward the company will need to generate sales in order to survive. Being bought out by its landlords gives Aeropostale a second chance, but even desperate mall owners are only going to throw so much money at the chain just to keep the location from being vacant.
Barnes & Noble needs a business model
While the first two chains on this list appeared on the Fitch list of companies facing troubles in 2017 and Aeropostale has already found itself escaping closure once, Barnes & Noble (NYSE:BKS) has been on death watch for so long that it's easy to forget it on lists like this one. Unfortunately, just because the retailer has been trying to turn itself around for a long time does not mean that it has succeeded.
The chain, which anchors some malls, while also having some stand-alone and mall-adjacent stores, has steadily seen sales decline. In Q2 of fiscal 2017, the company saw total sales drop 4% to $858 million while comparable sales dropped 3.2% "on lower store traffic," according to the earnings release. The company lost $20.4 million in the quarter, an improvement over $27.2 million for the same period last year.
Barnes & Noble has cut its loss by careful financial management and lowering expenses. That has bought it some time, but efforts such as adding toys, and diversifying away from books have not increased sales. The chain is currently testing selling more food and even alcohol in some stores, and in order to survive it needs to quickly find a business model capable of reversing these declines.
Daniel Kline has no position in any stocks mentioned. He rarely buys more than coffee and lunch at the mall. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.