The 'hay-day of the department store is long gone': Analyst

Department store sales are slowing as COVID-19 cases rise. Morningstar Analyst David Swartz joins the On the Move panel to discuss.

Video Transcript

ADAM SHAPIRO: We invite into the stream at this point David Swartz. He's Morningstar analyst. He's joining us from Chicago. And there's a lot we could talk about with retail. We've got earnings from some of the major outlets, Macy's. A lot of them will be reporting. But there's also the news that Simon Properties, in addition to perhaps, you know, taking a stake in Brooks Brothers, is looking at helping prop up other retailers. What's in it for Simon to do that?

DAVID SWARTZ: I think that there's a couple of reasons. Firstly, Simon is losing a lot of tenants, and they can only afford to lose so many before the malls become unviable. And so Simon is definitely trying to keep the malls surviving by keeping some of those key tenants in there, especially the anchors. If the anchors go, then a lot of times the mall itself will not survive. The other tenants, the smaller tenants will demand rent decreases, and they will start closing up their stores.

So partly, it's to save Simon's malls. Simon has said publicly that also they see these as investments. They can, at times, buy these retailers for less than the value of their inventories. Now, this is a little bit of a strange move because you would not expect the REIT to want to operate, necessarily, a retail store. But Simon also sees this as a legitimate investment opportunity for the company.

JULIE HYMAN: David, there was also that report yesterday from "The Wall Street Journal" about Simon Property potentially and talks with Amazon, which kind of begs the question, what's actually going to be done with a lot of these department closures, whether it's JC Penney or Sears. Who's actually going to want to fill that space when you've got such a big footprint?

DAVID SWARTZ: Well, the short answer is nobody. There is really no tenant there's no department stores that are opening stores in these kinds of malls that could fill in those huge spaces, and this has been a problem for years. We've seen large department store after department store close.

Lord & Taylor is now bankrupt. A couple of years ago, we saw Bontan go bankrupt. JC Penney is bankrupt. There's no tenants that can move into those spaces. So what's happening is a lot of them are being left empty, and a lot of them are going to be converted to non-retail space. So they'll become sometimes community colleges or for-profit colleges or even houses of religion. They can be churches. They can be all sorts of things.

But there is this report that Amazon is interested in buying some of these empty spaces as sort of micro-fulfillment centers for Amazon on e-commerce. This is a little bit conjecture because Amazon is often rumored to be doing all sorts of things. Amazon has been rumored to buy JC Penney. Amazon has been rumored to buy Kohl's, Macy's, essentially everybody at one time or another. Whether Amazon really wants to do these things or not is hard to say, but it's certainly a possibility.

JULIE HYMAN: David, I want to ask you about some of the specific retailers, and I know Macy's delayed its report. But we are going to hear from some of the others. We're going to hear from Kohl's. We're going to hear from GAP and some of the smaller specialty retailers as well. It seems as though there really has been differentiation, of course, among retail, particularly during the pandemic, and those that have strong online presence, like lululemon have done much better. What are you looking for specifically, going into this reporting season for the companies?

DAVID SWARTZ: Well, the good news, if there is any, is that it's going to be a lot better than it was on the last report because at least they've gotten past the worst of the shutdowns. So you know, the last earnings were just horrible because most of the stores were closed in April and into May and into June in places. So it's going to be an improvement. It's going to be a slow road back. There's going to be a lot of discounting in the apparel retail space. It's all over because these retailers were stuck with inventory for months that they could not sell.

And then unfortunately, because the virus to linger in the United States, retail traffic has remained much below normal. I think at first, going back to May and June, there was a certain amount of optimism that customers would return quickly, but I think that's gone away a little bit. I think July has not been so strong. And going into August, I think also it's pretty slow. I think there's a lot of people that just do not want to go into stores.

They're not going into retail outlets so much because they feel like they can just delay their purchases until later, until the virus becomes less of a threat. And so I think that we're going to hear some-- certainly we're going to hear more positive things than we did last quarter, but I think it's still going to be pretty disappointing. It's going to be very hard for any retailer, at this point, to really pinpoint when the turnaround is going to come. I think they're going to be talking mostly about Spring 2021.

ADAM SHAPIRO: David, I'm curious. I want to throw some names out to you-- Parisian, Burdines, Marshall Field's, Ayres, Lazarus, all department stores that has history has-- you know, gone.

DAVID SWARTZ: Yeah.

ADAM SHAPIRO: What does this look like after the pandemic? Will we go back to a Macy's, and who's going to be left standing at the end of the day?

DAVID SWARTZ: Well, a lot of the department stores disappeared because they were bought by other department stores. They didn't all necessarily fail. But clearly, the heyday of the department store is long gone. The real great period for department stores was back in the '60s and '70s when people started moving into the suburbs and the department stores themselves started opening stores in the suburbs, away from their traditional inner-city locations.

That has all changed now because of the internet but also because of Walmart and Target and stores like that, as well as discount stores like Ross and Marshall's and TJ Maxx. Those competitors are not going to away, and they have gone-- they have gotten onto the turf of these department stores everywhere, and they have taken sales everywhere. And so what's going to happen most likely is that there's going to be just a few department stores still standing, and they're going to be downsized from what they are today.

And they're going to be focused primarily on e-commerce. So both Kohl's and Macy's and Nordstrom and others have very large online businesses, too. And so at some point, they're going to become online businesses that also own stores, rather than stores that just own online businesses as well.

ADAM SHAPIRO: And I think in Chicago, as long as you can still get the Frango chocolates, right? They used to sell them at Marshall Field's now at Macy's, so-- we have to say thank you, David Swartz, Morningstar analyst--

DAVID SWARTZ: Thank you.

ADAM SHAPIRO: --joining us from Chicago. All the best to you.