We've all heard that malls are dying. In an Amazon.com (AMZN 1.80%)-dominated world, how can a boring old mall hope to eke out another day? Much less often do we hear about the malls that are adapting to meet the e-commerce challenge, and in that discrepancy lies opportunity.

In this week's episode of Industry Focus: Consumer Goods, host Shannon Jones and Motley Fool contributor Dan Kline offer a more nuanced look at the mall industry. Learn more about the mall chains and locations that are struggling -- because there certainly are plenty of them -- and the ones that are doing well. How do healthy malls keep traffic up? How much longer can J.C. Penney (JCPN.Q) survive? Is now a good time to invest in mall REITs? Tune in to find out more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

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This video was recorded on June 18, 2019.

Shannon Jones: Welcome to Industry Focus, the show that dives into a different sector of the stock market every single day. Today is Tuesday, June 18, and we're talking Consumer Goods. I'm your host, Shannon Jones. I am joined by Foolish contributor, friend, pretty much doing everything these days, Dan Kline. Dan, how are you?

Dan Kline: Hey there, Shannon! I'm good. Apparently we're going to the mall.

Jones: Apparently we are going to the mall today. I must say, I'm not a huge mall fan now that I'm no longer in my teenage years. But now that I have a child who is 9 years old, I find myself more and more at the mall. So I'm excited about today's topic.

Kline: Yeah, you're in the mall zone. My kid is 15, I have a son, and he grew out of his "every time, every day, let's go to the mall," arguing with me about buying $30 T-shirts and $200 sneakers. Thankfully, those days appear to be behind me.

Jones: Oh, thanks, I have so much to look forward to, Dan!

Kline: [laughs] Yes, you do!

Jones: Today's show is all about shopping malls. You've likely heard about the death of the American shopping mall, probably have witnessed it in your own town as well. But today we're diving into what that looks like and which mall stocks are doing well, as well as the ones that aren't.

Dan, to kick things off, I feel like I see headlines nearly every day, things like "The American Retail Apocalypse" or "Malls See Tsunami of Store Closures in 2019." Can you just give us some context? How bad is it, especially this year compared to years prior?

Kline: It's bad, but it's also being misplayed. The retail apocalypse is the idea that every store is going to die because people don't want to go to the mall, they don't want to go to big box retailers, they're just going to buy everything from Amazon on their phone. That's true for bad retailers. If you're a retailer who did nothing to address the fact that these trends are happening, then you're in real trouble. But if you're a retailer that embraced omnichannel, that gave people fun reasons to go to their stores, that made a transformation, then you're just fine. That's kind of what's happening in America's better malls. Yes, we're seeing store closures. If you go to the mall month after month, you're going to see more changes than you used to see over the years, because we've had bankruptcies like Payless that had a store in pretty much every mall. That's a big opening, and something has to go in there. We'll talk a little bit later about what's filling them.

We've had about 5,000 store closures this year, through March. That's ahead of last year, and we're on path for a record pace. We've also had about 2,500 store openings. We're not seeing too many retailers open thousands, even hundreds of stores. What we are seeing is a lot of retailers being very selective and opening in the A malls or the best places. Mind you, those 5,000 closings are not all in closed malls. Some of them are strip malls, some of them are victims of a big box in a strip going out and killing all the things that were left there. But for a big list of companies, this is bleak.

Jones: So, a bit overdone, you would say some of these headlines are?

Kline: Well, yeah. It's easy to look at, say, Sears and J.C. Penney and say, "Oh my god, Amazon is going to kill everyone." But you have to bring up Best Buy and Walmart and Target. Obviously Target is sometimes a mall store; Best Buy is sometimes a mall store. They're also sometimes standalone. But those are companies that said, "OK, this is what people want from Amazon. Can we give them that? And can we give them something that they can only get from a store?" I can right now jump on my phone, see if Best Buy has the laptop, HDMI cable, I don't know, blender, toaster, whatever it is I might want, see if they have it, buy it, and go pick it up at the Best Buy down the street. Amazon can't do that yet. Now, Amazon might be able to deliver a selection of items in some markets within two hours. But they're not going to equal anytime soon a full Best Buy, a full Target, a full Walmart. There's absolutely things you can build upon if you're a brick and mortar store. If you're a mall-based toy store -- that's not really a thing anymore, but let's pretend you are -- you can hold a Pokemon tournament or Magic: The Gathering or Warhammer painting. Yeah, you can buy all those products for the same price or cheaper online, but you can't create the sense of community; you can't do the things that give people the immediate gratification that a store can. So, yes, we have a retail apocalypse of poorly run stores going out of business because they didn't change with the times. Or, in the case of Sears, they said they were changing, but they didn't actually do anything. So, really, this is about retail management. It's not about consumer behavior.

Jones: Yeah. That's really where, as you were mentioning, the bricks-and-clicks strategy, really building out these omnichannel presences. Even more, it's about figuring out the right ratio of what's going to be sold online, versus are you going to have a retail store? Another thing that I think is really interesting, you had a retail boom for a lot of these malls in the '90s, 2000s. Then the recession hit. You still have a lot of stores that still haven't fully recovered. A lot of your luxury, high-end retail stores have taken a big hit. But it also gave rise to a lot of these fast-fashion stores. I'm talking about your H&M, your Zara. Personally, not a huge fan of fast-fashion stores. But to each his own. But it's just interesting to see how some stores have been able to adapt, fill in the gap; and then others, like you mentioned, haven't. What are some of the biggest losers right now when it comes to this retail apocalypse hitting the malls?

Kline: Well, Shannon as you know, I am all about the fashion! [laughs] 

Jones: You're the most fashionable guy I know! I learn all that I know from Dan Kline.

Kline: [laughs] So, the losers are stores that didn't look at the consumer base. Look, I'm not a fan of H&M either. I find it disposable clothing. On the other hand, I sort of like Uniqlo, a Japanese company that does similarly priced things. They're doing basics, traditionally fashionable items. It's more foundation things for your wardrobe -- a black T-shirt, a sweatshirt that you could wear multiple times, that kind of stuff. Companies that win are the ones that are looking at, what do consumers want, how do I give it to them?

Let's take a mall loser. Gap has been closing stores. The reason The Gap has been closing stores is their merchandise hasn't connected with customers. And as a company, The Gap is hamstrung by the fact that they also own Old Navy. Old Navy is, call it inexpensive, fast fashion. That takes that end of the market, so The Gap can't go into that. So with The Gap, you have untrendy $60 jeans. You don't have trendy $100 jeans; you don't have fast fashion $20 jeans. You have a product that nobody wants. The Gap has always been a cyclical company, but it's a pretty major downtime now, where that chain may not survive.

Then you have a company like Payless. Payless is either closed or closing all of its stores. And that's because you can get shoes a lot of places online. Could Payless have doubled down on the fact that you can't try on shoes on Amazon? I've been buying different-beat shoes and I think it's taken me about six pairs to get the ones I want, and returns are not all that fun on Amazon. So if I could have gone into a Payless, and they had the products I wanted, I might have bought them. But all Payless had was the promise of inexpensive, and inexpensive is something the internet can deliver over and over again.

Then you've got companies like Charlotte Russe, which closed all its stores because it was a fashion store but it didn't really have an audience. It didn't really have a brand; it didn't do anything to attract people. Gymboree, again. Clothing for little kids is a commodity. You can buy it online; you can buy it anywhere. Parents know that it's going to have a very limited lifespan, so you might buy one or two dressy, expensive outfits, but for the most part, it's a Target/Walmart pricing point, and Gymboree just didn't answer that.

Then you have companies like Jared Jewelers, which is owned by Signet, which owns all of those low-end jewelry brands. Again, it's something that, I could go to the mall and buy jewelry, but there's so many choices and they haven't given me a reason. Pandora has done well because they have the time-limited things and the Disney partnerships. You'll go to the mall and you'll see a huge line at Pandora because they've given customers a reason to be there with an exclusive or a limited-time offer or something that they only have so many of. The stores that are failing are failing, again, because they're not managed well.

Jones: So true. We've talked a lot about J.C. Penney on the show before. They're struggling. It's still amazing to me that they continue to, I guess, put along. I will say, my first job in high school was working at the J.C. Penney shoe store. Learned a lot about business. Learned a lot about stuffing Size 9 shoes into Size 8 Rockports. I'm not saying that I contributed to their decline, but I think I might be a part of that too. But J.C. Penney is one of those stories that, like a Sears, like a Kmart, I just wonder, how much longer can they survive?

Kline: Not much longer. J.C. Penney was a company, for a long time I talked about how they were making all the right moves. For example, when Toys R Us closed, J.C. Penney went into toys. When Sears started closing locations, J.C. Penney went into appliances. And the problem is, I said those things, "Oh, they're making the right move," without going into a J.C. Penney and seeing how they execute toys. Well, the toy section at J.C. Penney last Christmas was literally a bunch of toys thrown into the middle of the floor. It wasn't merchandised well. And I'm only speaking from visits to two, maybe three J.C. Penneys. Maybe there were a couple that did it well. But the ones I saw, it was very poorly done. It wasn't the mix of toys I would have bought, and I spent two years running a very successful toy store, so I can speak to that a little bit. And I'm a J.C. Penney customer. In fact, the shirt I'm wearing is from J.C. Penney.

Jones: I knew it, Dan!

Kline: It's one of three places I buy a similar shirt from. I buy it from Amazon; I buy it from Kohl's. But half the time I go to J.C. Penney, they either don't have the shirt in the size I want, or it's not where it was last time, or the merchandising is too convoluted. It's a very difficult store to shop at. My son and I will go in, and he'll need, say, a bathing suit. And the selection in his size will be poor, but they'll have three racks of novelty suits -- the ones with the dollar bills or the American flag printed on them. You can tell, a lot of their merchandise is just to fill space, because they don't have the money to have everything they need. That is an absolute red flag, when a company is stretching out its merchandise and filling its store with stuff that is either not going to sell or is not going to be high-margin or even decent margin. There are a lot of major red flags that J.C. Penney is -- and you can look at the balance sheet -- running out of money.

Jones: Dan Kline, propping up J.C. Penney, one black polo shirt at a time. Another thing that I think is really important to address is the Stitch Fix effect. I am a Stitch Fix customer. Stitch Fix, of course, came out with a subscription where I can get clothes now mailed to me. There's the convenience factor, I can ship them back. You've seen a lot of retailers starting to implement similar subscription services. The Loft is another one that I think announced recently that they were trying that out. How do you view Stitch Fix impacting a lot of these mall stores?

Kline: It's going to hurt them. Now, if I'm a mall store, there's an answer to this. In theory, I should be able to walk into Macy's, spend some time either with an AI on a tablet or preferably an actual human. That human learns what I like, or that AI learns what I like by what I'm taking pictures of or whatnot. And then they're creating a customized solution for me. There is absolutely a way that mall stores could go into this business. But for the most part, they haven't. I'll jump on another trend: having custom-made clothes like an MTaylor or other brands like that. Or, even using a tool so you get the right sizes when you're on a website. That's something that stores should be doubling down on. I buy suits at Macy's because I tend to figure out I need a suit two hours before I need the suit, and if you go to Macy's, there are actual tailors who work there. That's just not something you can equal online.

That's where the mall needs to strive to offer. If I can go to a store and have everything done for me, I'm digitally measured, everything fits, if I want to sign up for a subscription box, I can sign up for a subscription box, and I don't have to come back to the mall, and I can make my returns in the mall instead of having to mail them back -- that's how a mall competes with Stitch Fix. I haven't seen it. I'm not a customer because, well, I don't go to an office so I don't have to really think about what I'm wearing most days.

Jones: Fair enough. We've talked about some of the losers when it comes to the retail apocalypse. Let's talk about the winners because it's not all doom and gloom, and, as you mentioned, it's a bit overdone. What are the types of companies right now that are actually doing well in this mall environment?

Kline: There are types of businesses coming to malls that we never used to have. You remember when you used to go to the mall, you'd get an Orange Julius, a pretzel, maybe a Cinnabon or something? Now, you can go to the mall and get a chemical peel and some Botox. I know my mall has at least two places that sell cosmetic procedures. I'm not fully even aware of what all of those are, but it's clearly something different that brings traffic in.

The other areas where malls are -- and these are the better malls -- they're becoming locations for digital native brands. Right now, I'm taping this in a co-working space in an outdoor mall. Right next to me is a Casper mattress. Casper is a digital native brand that's opening up select stores. The point of those stores isn't necessarily to generate sales, it's to make customers comfortable with the product. Maybe I'm coming to have dinner at the Cheesecake Factory in this plaza, and I was thinking about a Casper mattress, so I go in and lie on one. And then, a few weeks later, I buy one. Brands like Warby Parker. I know there's a Warby Parker down the street from HQ. Instead of having to have them mail you glasses, you can go in and try on a bunch of glasses, see how you look, make your pick, and have a connection to the brand that's better than the digital. Now, those chains aren't opening up thousands of stores. They're not going to fill in all the empty RadioShacks. They're going to open 100 to 300 depending on the chain. So, for malls, it's a big competition, and you're going to see the better malls get those stores.

As you move down the line, mall owners have to be creative. You're starting to see more gyms enter malls. Literally below me -- again, I'm in an outdoor mall, not an enclosed mall -- right next to the Casper is an LA Fitness. That's a store you're seeing in more traditional [malls]. The idea behind that is that a gym might bring someone in, they're going to work out, they're going to take a shower, maybe they're going to go to the mall food court to have lunch. Maybe they realize, "Oh, I need a pair of slippers. I'm going to go to this store to buy slippers." I'm not sure why I thought slippers.

Then, you're getting experiential stores. An obvious one would be Dave & Buster's, which is opening a handful of stores, and malls are coming after them pretty hard. But you might also get an old Sears that becomes a trampoline park, or even an indoor skate park, or one of those skydiving places where you're not actually skydiving, it's just a big fan blowing you up. Malls are being really creative. Obviously, co-working spaces are going into malls. You're seeing hotels go more into malls. And that makes sense, because malls have restaurants, they have co-working spaces, they have all this stuff that business travelers might need all in one place. The mall owners have gotten very creative, and the stronger malls are actually doing very well.

Jones: You mentioned it's really about the creativity of a lot of these mall owners to bring in more foot traffic. They're redeveloping a lot of the spaces, especially the vacated spaces, into these mixed use opportunities. You've got multifamily, you've got apartments, hotels, and really, as you mentioned, too, the experience, as well. As a parent, oftentimes, I'm going to the mall now to go to the American Girl store, which is a store that I'm shocked every time I walk in it. But it truly is an experience. It's not just about buying these really expensive dolls that probably no child under the age of 15 should have, but that's neither here nor there. It's about the cafe, where you can come and sit with your doll. You can have birthday parties there, you can get the doll's hair done. They can eve their ears pierced, Dan. So, what drives me to the mall is making sure that our daughter has something to do, or at least be active somewhat, but it's really about creating these experiences.

Kline: Well, as a 45-year-old man, I am not allowed to go to the American Girl store without a girl. [laughs] If I just walked in with a doll, that would not be great. But yeah. And what you're also seeing is malls being very clever with nonprofits or performance space. The mall near me is undergoing some major transformation. It has a bunch of openings, a bunch of things under construction. They've taken some of the empty space and they've let community groups have it. One part of the mall, just like a Starbucks-sized space, is now a reading room. It has a library of books. So if I bring my 15-year-old and his friend to the mall, I could go grab my laptop and go work or read a book in the reading room. Is that going to be there in two years? Absolutely not. But they're trying to fill in holes in the short term rather than just putting up signs saying "Coming Soon." In many cases, they know what's coming, but it's going to take six months, a year, who knows how long, to make those transitions. In other cases, they're still working on the deals. The mall about 45 minutes from here in Boca is knocking down an entire wing and putting up more residential, so the stores that are in that wing are a little bit desolate. So, they've tried to have some events, live performances, people singing, who knows what, just to get you to look at that quarter of the mall. So, the mall companies have been very active in managing this transformation.

Jones: We can't talk about malls without really diving into the mall owners. Of course, majority of malls are REITs, basically. We've got about 1,000 malls in the U.S. 70% are owned by these REITs. I mentioned the retail boom that happened in the '90s and 2000s, and since the recession haven't really seen a similar boom. It's interesting that the U.S., though, still has more retail square footage than any other country in the world right now. When you combine that with these store closures, these bankruptcies that are happening, you've got a lot more vacated space. That's really impacted a lot of these mall REITs. Which ones, though, stand out to you as interesting, maybe even potential investments, Dan?

Kline: The mall company I'll point out is Simon. The upscale mall here in Palm Beach Gardens is a Simon mall. That mall has done well. When a store closes, something else goes in. It's one of those malls you walk around, and you think, "Who shops here?" There's a Rolex store, and, I don't know if they have a Tesla store, but it's like that level of, "OK, all I can afford in this mall is the food court and maybe the Godiva. There's nothing I can buy." But those malls, and Simon as a company, has seen their dollar per square foot go up 3.1% over last year. They've also seen their occupancy rate go up. And again, that's not because they found new ways to get a new Sears to open. We both know that's not happening. They're being creative. They're putting in things like co-working spaces, or Eataly food halls, or more restaurants.

So the companies that own the top-tier malls, those are doing well. We saw similar things with Brookfield and Taubman, two mall companies. In general, the results are good, sales are up. But that's not the sales we thought of. Yeah, there's a few chains. Ulta Beauty is expanding quickly. Ross is expanding, not necessarily a mall store. A lot of the vacancies we're seeing are more strip malls. Whereas the successful malls have appeal. They can say to people, "Look, do you want to be next to the Kmart that's dying? Or do you want to be in the mall that replaced Sears with a trampoline park and now we have an ice skating rink and we're putting in a swimming pool," or who knows what else it is? It's really about the rich getting richer. We're going to see a lot of fully vacant strip clauses consolidate and get steamrolled and turned into something else.

Jones: Yeah. Really, where you're seeing this trend go, Dan, is premium mall opportunities. REITs that are focusing on premium brands, premium stores. I think what you see happening in the entire mall REIT space is, they are trying to make concessions to keep as many of these stores there, just to keep their occupancy rates relatively high. I think most of them are trending around 94%, if not higher. But 99% is what we saw just a few short years ago. Overall, the mall REIT section is, I think, an interesting investment opportunity, one, just because a lot of the fear mongering that's going on with the death of retail, I don't think malls are going to go anywhere anytime soon. I do think it is about adapting and figuring out which strategy they can employ to drive foot traffic. But I don't see them going out. Would you say that now might actually be a really good time to buy some of these mall REITs? Especially with yields 5%-8% higher.

Kline: I think it is. The reality is, it's harder to get Americans to leave their house. If you can buy most things on Amazon, you're not going to make a quick trip to the grocery store for something you need for three days from now. If I take a good mall, and it not only has a movie theater, a giant eating hall, maybe I can get my oil changed, who knows what, they're giving me a pile of reasons to visit. That's going to be very attractive for stores. Right now, the one advantage you have if you're UNTUCKit or Warby Parker is you have leverage over a mall. You can go to the mall and say, "I'm not signing a 10-year lease. I'm signing a one-year lease with a bunch of options. I want these guarantees. I'm not going to give you this cut of my Christmas sales." There's a lot more leverage for those retailers that bring cachet to negotiate with the malls. The malls are going to figure out ways to either get rid of space, or replace that space with other things. Starbucks will pay a comparable rate to another coffee shop. A mall can arguably charge Dave & Buster's less for the attraction of Dave & Buster's and have it be a benefit and help them get in some other stores.

So, yeah, cautiously, I would look at these REITs as possible buys if you, like me, believe that people will still leave the house, they are still going to go to the mall. I don't think teenagers are as driven to the mall as they used to be, but they still want to go there. The things we liked -- my son still wants a pretzel or a gelato or whatever it might be, and those things are at the mall.

Jones: All right, Dan, always a pleasure to have you on the show! Be sure to stay out of the American Girl store. Continue propping up J.C. Penney.

Kline: [laughs] I don't think we have an American Girl store here.

Jones: [laughs] Not yet, and thank goodness! All right, thank you so much to our listeners for tuning in! That'll do it for this week's Industry Focus show! As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. This show is being mixed by Dan Boyd. For Dan Kline, I'm Shannon Jones. Thanks for listening, and Fool on!