A few months ago, J.C. Penney (JCPN.Q) announced plans to shutter 138 stores this year as it tries to adapt to the changing retail environment.
Last week, the company confirmed that it will add a 139th store to the list. J.C. Penney has sold its store at Southdale Center in Edina, Minnesota, for a reported $4 million and will close that location in August.
J.C. Penney recently decided to close one more store. Image source: J.C. Penney.
In the popular media, department store closures like this one are almost always presented as examples of the "death of the department store." However, the reality is not so simple. In fact, the upcoming closure of J.C. Penney's store at Southdale Center shows how the department store sector can become healthier by shrinking.
Store closures have become extremely common
Retail experts have known for years that the United States has too many malls, too many department stores, and too much retail space in general. The rapid growth of e-commerce has made the problem even more acute.
In recent years, big mall-based department store chains like Macy's (M 1.52%), Sears, and J.C. Penney have closed hundreds of stores in an effort to get ahead of this problem. Despite these efforts, Sears is spiraling toward bankruptcy, Macy's faces persistent declines in comparable-store sales, and J.C. Penney is struggling just to remain profitable.
To some extent, the issue has simply been that department stores have been too slow to close stores. Additionally, many department stores have found that if they close their only store in a particular market, e-commerce sales in the surrounding area will decline as well. In other cases, the problem has been that when a rival department store closed, it was replaced by popular fast-fashion and off-price retailers, driving additional market-share losses.
A win-win situation
The upcoming JCPenney store closure at Southdale Center shows how department stores can all benefit when the industry downsizes.
From J.C. Penney's perspective, closing the store clearly made sense when there was a buyer willing to pay about $4 million for the property. Morningstar Credit Ratings had previously flagged this store as likely to close due to its having below-average sales per square foot. Furthermore, J.C. Penney still has eight other stores in the Twin Cities area, which should allow it to retain a significant proportion of the sales from its Southdale Center store.
J.C. Penney's closure at Southdale Center will help Macy's. Image source: Macy's.
Meanwhile, the JCPenney store closure should help the mall's remaining department stores -- Macy's and Bon-Ton subsidiary Herberger's -- in the long run. The J.C. Penney building will be torn down and replaced by a Life Time Fitness, an upscale health club.
This means that Macy's and Herberger's won't be getting new competition at the mall. As a result, they will have an opportunity to capture some of the sales that J.C. Penney can't retain in its other stores or online.
Even more importantly, when the new Life Time Fitness facility opens in 2019, it will be a significant traffic driver for the mall. Obviously, many people will just go to the gym and go home without ever stepping foot in the mall proper. But some people will stay to shop once they are already at the mall, benefiting the remaining retailers there.
The key lessons
There's no question that more department stores need to close to make up for declining mall traffic. Many malls still have three, four, or even five department stores as anchors. With the rise of e-commerce and off-price retail, that's clearly not necessary.
However, if mall owners can replace some of their current department store anchors with other kinds of traffic-driving tenants -- fitness clubs, food halls, entertainment centers, or even walk-in medical clinics -- a smaller group of remaining department stores could still thrive.
It will almost certainly take years to fix the current department store glut. However, shares of companies like J.C. Penney and Macy's are already beaten down. If the department store industry can slim itself down to a healthier size, both stocks could regain a lot of ground in the next few years.
