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U.S. Retail Hit by Store-Closure Streak

By Daniel James – Jan 29, 2014 at 11:12AM

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A wave of store closures announced by major U.S. retailers has many commentators wondering about the feasibility of brick-and-mortar stores.

The face of retail is evolving. Consumers are changing their shopping habits and are often turning to online alternatives in order to satisfy their shopping needs. The process has been ongoing for a while, but now it has once again been underscored by a deluge of announced store closures. Among the businesses that have been affected are huge names in American retail including Sears Holdings (SHLDQ), J.C. Penney (JCPN.Q), and Macy's (M -0.54%). What does the future hold for these companies?

Closing up shop
A wave of store closures has been announced in the U.S. lately. While the number of closures reported is usually higher in the first quarter of the year, the number seems to have surprised analysts. As the scope of online retail continues to grow, shoppers should expect to see a sharp decrease in both the number of brick-and-mortar retail locations and square footage per location.

Some estimate that the amount of overall retail space could be reduced by one-third to one-half over the next 10 years. Additionally, retailers seem to be making a move out of indoor malls, favoring outdoor mall locations or stand-alone stores instead.

Affected chains
As far as J.C. Penney is concerned, the store closures were expected. The retailer has been struggling with traffic and cash flow issues for some time now, and while the savings are unlikely to make a significant impact, they are necessary. Earlier this month, the company announced it will be closing 33 retail locations across the country as well as cutting some 2,000 jobs. The savings are estimated to be around $65 million, money the company needs desperately.

Sears is another major retailer that recently announced store closures, including its flagship Chicago store. The company had a very poor holiday season, reporting a 9.2% decline in comp-store sales for the period. Management has acknowledged the shift in consumer behavior toward online shopping and has stated it will work on developing this channel. Since 2010, the company has closed around 300 locations, trying to downsize its physical presence as store traffic continues to dwindle..

Macy's is also planning several store closures, albeit fewer than the previous two companies. However, the job cuts it announced earlier this month are quite startling. Macy's now plans to lay off some 2,500 workers. The market reacted very favorably to the news, sending shares up around 6%, presumably in expectation of an improved bottom line. Macy's stated it will be attempting to save up to $100 million a year with several cost-cutting initiatives, including five new store closures.

While analysts generally seem to believe that the store closures announced by big U.S. retail chains are a step in the right direction, questions remain as to the feasibility of brick-and-mortar stores in general. As shoppers increasingly migrate to the Web, and more products are offered online, some fear that traditional shopping locations may in the future become irrelevant. As such, the sector may be forced to reinvent itself, either by offering more products online or by somehow giving consumers services that are not available through the Internet.

The bottom line
These recent store closures raise questions about the sector's health. On one hand, the closures are a bad sign for retail, as this means traffic is simply insufficient. On the other hand, they can be seen as a necessary evil for companies to bolster their bottom line. With many retailers struggling to maintain business, Macy's, Sears, and J.C. Penney are being forced to downsize in order to survive. 

Daniel James has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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