Department stores take the brunt of it
The situation is especially dire for department stores, where UBS analysts anticipate growth “well below average” and weak profits.
It is believed that Department Stores face many challenges ahead. We model very weak earnings outlooks for Nordstrom, Kohl’s and Macy’s and believe these challenges are not fully appreciated by the market.
Furthermore, many specialty and department stores will likely shutter more locations after a year of relatively few closures, UBS said in another research note. In 2020, store closures were rampant. Each quarter between Jan. 1 that year and March 31, 2021, saw some 1,800 stores close on average, according to UBS.
The remaining stores gained share, but the quiet around closures this year has had the opposite effect, they said. The current store count is on pace to be down 1.2% year over year in the fourth quarter, and just 0.3% in the first half of next year.
This is an underappreciated headwind further adding to the [2023] challenges the industry faces from inflation and a potential recession.
Once again, department stores are most at risk, per UBS. From Q4 of 2019 to Q1 of 2021, that segment’s store count fell 33%, but has been flat since, which UBS analysts say “has made sales growth harder to come by” for the likes of Nordstrom and Kohl’s.
The retail segments where footprint expansions are favorable include off-price and luxury — both segments competing for head to head with department stores.
It is expected that Department Stores to close locations as challenges persist.
But brick-and-mortar retailers, in general, will likely be forced to abandon more locations, not because of a challenge from e-commerce, as many may believe, but as a correction to their late-pandemic reluctance to do so.
It is also believed that challenging traffic, sales, and margin trends in 2023 will be a catalyst for a store closure rate increase.