Are retailers ready to store up? Decisions on whether to open new locations could be swayed by how much cheer consumers deliver during holiday 2012.
As Americans start their holiday shopping they'll have yet more online choices, more outlet stores filled with designer goods and the return of seasonal pop-up stores, at a time when retailers and mall owners are trying to squeeze more out of their space than in years past.
Predictions call for a solid showing, but not a stellar one. How high or low this year's holiday sales and profit numbers actually come in could steer store planning toward or away from expansion in 2013.
"Most prognosticators expect this holiday's retail sales to be better than last year and the trailing 10-year historical average — despite the economy," said Ryan Severino, senior economist at real estate research firm Reis (REIS).
"With little construction coming online in the fourth quarter, there's some hope that this could translate into at least slightly increased demand for retail space and buttress retail fundamentals," he said.
November-December brick-and-mortar retailer holiday sales should rise roughly 3% over last year, forecasts Michael Niemira, chief economist at the International Council of Shopping Centers. While that would be less than last year's 3.7% gain, it would still amount to a "relatively healthy" holiday season, Niemira says, and above the 2.1% 10-year average rise in holiday sales. The data exclude most brick-and-mortar retailers' online sales.
Profit Picture Perks Up Analysts see U.S. retailer fourth-quarter profits rising 13.9% from a year ago, says Ken Perkins, president of Retail Metrics. They were up only 2.5% year over year in 2011's fourth quarter as stores came under big margin pressures from major discounting, rising cotton prices and free shipping, Perkins says.
This time, retailers are heading into the holiday with well-managed and controlled inventories, he adds. With inventories in good shape and solid demand, Perkins does not expect to see any "fire sales.
Most retailers have kept expansion plans modest lately, Niemira notes. Some, though, are selectively growing their footprint. Department store chain Nordstrom (JWN), for example, is boosting its Nordstrom Rack discount locations as that business thrives. It sees opening 24 Racks in 2013 vs. 15 this year. Dollar stores have also expanded fast, but aren't so sensitive to holiday sales as others.
"The slow recovery of the last several years has put a damper on expansion in the industry," Niemira said of retail generally.
Store openings have also been limited because developers aren't building many shopping centers.
"Very few retailers are expanding right now outside of the restaurants," Severino said. "Most are holding off, and the ones who are expanding are keeping things quite modest.
Severino expects only about 11 million square feet of space to be absorbed in 2012, but about 21 million in 2013.
Through the third quarter of 2012, total U.S. retail space has inched up only 0.2% from a year earlier, following a rise of 0.3% for all of 2011 and 0.4% in 2010, Niemira says, citing data from CoStar Realty Information. It's far down from as recently as 2006-08, when yearly growth ranged from 1.8% to 2.2%.
"Clearly, the pace of expansion has virtually ground to a halt," Niemira said. "But existing holders of retail property find this a plus since less new supply will help to absorb the vacant space more effectively today and generate more rent.
Opinions vary on how much weight this holiday season's numbers will carry, in determining whether stores expand assertively or not much at all. But given forecasts for a healthy Christmas season, many analysts expect the numbers to favor expansion, though they don't see a boom in the cards.
Retailers won't make long-term moves based on a single holiday, Severino says. But if they see 2012 holiday sales are up from, say, 2011 and 2010, they may decide the time is right to capitalize on still-low rents and lease more space.
Money In The Stocking If forecasts for a 3% to 3.3% rise in 2012 holiday sales are on target, and if retailers are able to hit or exceed expected profit margins on their sales gains, it should give them additional funds to invest in expansion, notes John Bemis, executive vice president at the retail arm of commercial real estate firm Jones Lang LaSalle (JLL).
"If sales and margins line up the way they are projected for the 2012 holiday, retailers should have a good profit picture at the end of the holiday and that in turn should drive additional store expansion in 2013," Bemis said.
If a retailer was planning to add perhaps 20 stores in 2013, and it does particularly well over the holiday, that may give it the added funds needed to open 25, he says.
Typically, a successful holiday season plays a large role in determining a retailer's growth plans for the following year, says Garrick Brown, director of research for retail real estate brokerage ChainLinks Retail Advisors.
Expanding Tradition Take what happened in 2011, after holiday sales came in well above what was forecast. The surprising success of the season helped spur retailer expansion. By the spring, overall unit growth plans for 2012 were up 20% from before the holiday, Brown says.
This year, he predicts, the holiday won't be as much of a factor in expansion, though it should be a successful season. He says a lot of people are waiting to see what happens with the fiscal cliff. Brown expects holiday 2012 to lift unit growth plans for 2013 by 10% at most by the spring, vs. before the holiday season.
"When I speak to site selection guys they're all trying to figure out where the tax policy will be next year," Brown said. "Because of that they're postponing doing deals. A lot of people have deals near the finish line, but they're holding off to see what will happen.
Also, in the past, the big sales boost resulting from a successful holiday season had been strongest among midpriced mall apparel retailers. But they're not in growth mode because the typical middle-income consumer is still being frugal, Brown says.
But Bemis says the midpriced store segment is beginning to perform better and should see sales gains for the holidays.
He says midmarket retailers such as department store Macy's (NYSE:M), Victoria's Secret's parent Limited Brands (LTD) and teen apparel chain American Eagle Outfitters (AEO) are at a price point that accounts for the majority of stores in shopping centers across the U.S.
Bright At Both Ends The luxury goods segment is also performing extremely well, Bemis says. It includes store operators such as Saks (SKS), Nordstrom and Michael Kors Holdings (KORS). That booming handbag and fashion brand, No. 2 on the IBD 50 list of top companies, has stores on New York's Madison Avenue and in Beverly Hills, Calif., and in malls. It also runs popular discount outlets.
Overall, retail chains — mostly conservative on expansion — are starting to loosen the reins, he says.
"I expect this slow, steady increase to continue through 2013 and most likely 2014," Bemis said. "But I don't think we will see a huge spike like we saw in 2001."