Outside-the-Mall Retailers Defy Industry Gloom in the Amazon Era

(Bloomberg) -- The U.S. retail sector is looking just fine for 2019 -- as long as it’s not inside a shopping mall.

Shares of Target Corp. and Kohl’s Corp. jumped on Tuesday after both retailers gave optimistic profit projections for the current year. The companies, which traditionally occupy big-box locations in strip malls, are showing how to defend market share in the age of Amazon.com Inc., which continues to disrupt the industry.

Outside-the-Mall Retailers Defy Industry Gloom in the Amazon Era

Target has introduced private brands and expanded its online capabilities with offers like expedited shipping and in-store pick ups. Kohl’s, meanwhile, has embraced Amazon like no other retailer: Some of its stores serve as drop-off locations for returned goods purchased via the e-commerce company, while it also sells Amazon products like the Echo speaker. Best Buy Co. and Walmart Inc., two other big-box giants without a big mall presence, also impressed investors with results last month.

The outlook is darker for mall-based department stores and apparel chains.

Retail consultant Lee Peterson, executive vice president of WD partners, said that’s because the functional part of shopping is now your phone. As a result, stores need to work harder to draw in consumers. Location is key, and space in a mall is just not cutting it for most retailers.

“Row after row of apparel specialty stores is over,” he said.

Consumers also prefer the faster shopping in the relatively smaller format of a Kohl’s to the more sprawling mall department stores, said Poonam Goyal, a senior U.S. retail analyst for Bloomberg Intelligence.

“Off-mall retailers have been outperforming on-mall retailers if you look back over the past five years, and that probably will continue to be the case,” Goyal said. “Off-mall is a better place to be in retail, unless you’re in malls that already reinvented themselves.”

Falling Traffic

Falling foot traffic at U.S. malls has taken a toll on shopping center stalwarts as many consumers shift to online purchases and away from brick-and-mortar stores. J.C. Penney Co. is closing 18 stores as sales contract, and Macy’s recently announced a round of cost-cutting measures.

Smaller retailers, including Gap Inc., Victoria’s Secret and Chico’s FAS Inc. are struggling as well. Last week, Gap said it would shutter 230 Gap brand locations over the next two years, while Victoria’s Secret parent L Brands Inc. said it would close 53 of the chain’s stores in North America this year. In January, Chico’s, which also owns the White House Black Market chain, announced it will close at least 250 U.S. stores over three years as leases expire and as it beefs up its digital operations.

Some smaller-format apparel chains have found success by looking for shoppers outside of the mall. WD’s Peterson says Urban Outfitters Inc. is a good example of this, citing their locations in trendy urban areas such as Chicago’s Wicker Park and across New York City.

Urban Outfitters reports fourth-quarter results Tuesday after the close of trading.

‘Product Differentiation’

Target and Kohl’s both rose the most in more than two months Tuesday, with Target shares up as much as 5.3 percent and Kohl’s as much as 7.9 percent. The results may have sparked broader retail optimism as well -- shares of Walmart, J.C. Penney and Macy’s rose as well, while the S&P 500 Index was flat.

The two companies stand out because of their “product differentiation, customer service and innovation,” according to Bob Phibbs, head of the Retail Doctor, a New York-based consulting firm.

“This is in stark contrast to the mall-based department stores rearranging their deck furniture displays and calling it a remodel,” he said. “Struggling and failing to innovate, these stores are dragging down the malls with them. It comes down to the fact that Target and Kohl’s are figuring it out. If they can do it, why can’t other retailers?”

©2019 Bloomberg L.P.