UBS predicted that at least 75,000 retail doors might close by 2026 if e-commerce sales continue to grow, but a new report indicates the recent 25 percent tariff hike could accelerate widespread store closures.
Last month UBS equity analyst Michael Lasser pointed out the impact on brick-and-mortar retail should e-commerce sales grow to 25 percent from 16 percent, noting that apparel retailers would head the list of doors to be closed. He projected that 21,000 stores, or 17 percent of the overall store base, could be on the chopping block.
On Tuesday, Lasser’s colleague Jay Sole said that the rate of softline industry store closures is already accelerating. “The implication is softline stores are increasingly succumbing to the pressure of falling store traffic and profit margins due to the rise of e-commerce,” Sole said.
But now he’s cautioning that because so much of brick-and-mortar retail is “incrementally struggling,” those store closures could occur sooner rather than later. Sole explained that he and his team track 73 publicly traded softline firms, with 15 having EBIT (earnings before interest and taxes) margins that are less than 3 percent. They represent $42 billion of sales and more than 12,000 stores.
According to a chart provided by UBS on adjusted EBIT margins, the retailers most pressured are shoe retailer DSW; women’s specialty chains Chico’s FAS, Express, New York & Co., Ascena Retail Group and Destination Maternity; department stores such as Stein Mart, J.C. Penney Co. Inc., Hudson’s Bay Co., Stage Stores and Christopher & Banks; athletic retailer Big 5 Sporting Goods and home retailer Tuesday Morning.
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“We think potential 25 percent tariffs on Chinese imports could accelerate pressure on these company’s profit margins to the point where major store closures become a real possibility…. Tariffs could cause over half of this change in one year, rather than four,” Sole said. Compounding the impact on apparel and footwear retailers is the belief that the “apparel and footwear consumer’s willingness to spend remains tepid at best,” the analyst said.
While the overall impact in the longer term from store closures could be good as the industry moves closer to stable traffic patterns, Sole said the near-term impact would like be “highly negative.” He noted that large-scale store closures, with 12,000 representing more than 10 percent of the overall retail store fleet, would “create intense inventory dislocations and discounting which would hurt almost all softlines companies.”
Sole pointed to how disruptive the closures were when The Sports Authority and Gymboree closed their doors. Another effect could be how the closures “could also make some C malls unviable, which would have a knock-on effect on healthy retailers, not to mention an impact on jobs and the larger economy,” he said.