Slow times at Ridgemont Mall

ridgemont-mall Now that the US government is back in the business of being in business, can we all get back to business?

There is little doubt that small businesses and the retail consumer are two of the most important drivers of the North American economy. That said, the retail landscape has changed over the years with the 1980s mall culture now gone and replaced by social media. Hanging out with your friends at the mall is no longer the cool thing to do and many would say malls themselves are in decline. Of course, if you told an Apple store employee that, they might look at you like you were an alien. But, the reality is that Tier 2 and Tier 3 malls are no longer in vogue. If you don’t have all the mainstream brands in your mall, you are in trouble. For teens, the mall has been replaced by social media as the cool place to be, as they prefer to “hang out” in location agnostic Facebook, Twitter or text messaging.

The website www.deadmalls.com captures over 400 malls in North America that have been shut down since 2001! In fact, since 2007 there were no new mall openings until 2012 (this doesn’t include outlet malls as they have their own dynamic). Believe it or not, in 2012 the stats show that Vancouver was home to two of the top 5 malls in North America (in terms of sales-per-square-foot). Both of these malls are skewed by their Apple store and its crazy sales-per-square-foot metrics, but more importantly, these malls only have the hottest brand retailers.

Retailing has changed and newcomers must have a strong social media presence, engaging consumers both online and in store. Consumer habits have also changed. To them, the physical store is becoming less about sales and more about a showroom (or change room) for the website. The advent of same-day or one-day delivery is only accelerating this change. Gone are the days when a successful foreign retailer like Forever New (Australia) can open a location overseas (for example in Pacific Centre Mall) and expect consumers to flock. Instead, Forever New is floundering. With no integrated social marketing in North America to introduce its brand, it’s not engaging the consumer. Engaging the consumer has always been necessary but the traditional avenues of malls, magazines and TV have been replaced by social media sites like Google, Facebook, Pinterest and Twitter through desktop and mobile devices. Today’s successful retailer is scaling back physical location size in favour of a larger online investment. Smaller format stores and stores-within-a-store at larger department stores is the new American mall.

Another downside to the decline of the mall is the lack of affordable labour to retailers. Cheap labour from teens was at high supply when a mall was the place to be. Now, even that is challenging. Finding and retaining staff is harder and more expensive for today’s retailer.

Amazon has led a quiet revolution in changing consumers buying habits through discounted pricing and fast, guaranteed delivery. Over the years, consumers have conformed to expect special deals and big sales. JC Penney has learned the hard way that consumers love a good sale after shifting their pricing strategy to “always low prices” which has significantly hurt their bottom line. JC Penney customers no longer felt like they were getting good prices without seeing a discounted price tag. Of course, JC Penney could have avoided that pain if management had looked north to where the Bay went through a related problem, not more than a few years ago.

So how does this flow through to your investments? Well, it’s becoming easier to separate the winners from the losers. Companies like Deckers Outdoor Corp (equity held in the Vertex Fund and Vertex Growth Fund) and Burlington Coat Factory (bonds held in the Vertex Enhanced Income Fund and Vertex Fund) are winning the game while a JC Penney (recently covered equity short in the Vertex Fund) or Bon-Ton Stores (Vertex Fund equity short) struggle. With JC Penney we were short its common shares for a while but recently we purchased their short-dated bonds in the Vertex Fund and the Vertex Enhanced Income Fund. True to our style of scrutinizing the full capital structure of a company when considering investments, we were bearish JC Penney’s equity but felt there was also value higher in the capital structure. These are only a few choice examples to illustrate a larger investment theme that we explore.

Further collateral damage from the fall of malls has been REITs (Real Estate Investment Trusts). For years, malls were a boon for REITs as rent was charged based on average-sales-per-square-foot. The higher sales a mall had meant the higher retail-space demand and consequently, the higher rent it could charge. These dynamics have also changed with retailers scaling back on their physical location size. Diminished traffic will ultimately mean less revenue for REITs and rising interests rates may be the other edge to its falling knife. This conclusion may take time to materialize but looking longer-term we are wary of mall REITs.

spicoli-in-class “Did someone order pizza?”

#until_next_time

For information on this update or the funds we offer, please contact a regional VP of sales:

Noel Dattrino
(Western Canada)
604.408.5660

James Wilson
(GTA & Western Ontario, Maritime Canada)
519.902.7780

Michael Lindblad
(GTA & Eastern Ontario)
416.200.4457

Janine Breck
(Nationwide Inside Sales)
866.681.5787 x122 or 604.408.5663