To say that 2020 has been a tough year for retailers would be an understatement. In the wake of the coronavirus pandemic, dozens of well-known names have filed for bankruptcy. While some may recover, others could be looking at widespread store closures in an effort to reorganize and trim costs. That’s bad news for malls and shopping centers, who can’t afford to lose more tenants.
Apparel companies have been particularly hard-hit. The remote work trend has made new clothing purchases less of a necessity, and economic uncertainty has caused many consumers to rethink their spending on nonessentials. In fact, Moody’s Investors Service (NYSE: MCO) says that apparel retailers will be looking at a 50% to 60% plunge in profit in 2020. But it has very different things to say about 2021.
A positive outlook
Despite a brutal 2020, Moody’s anticipates that apparel retailers’ profits will surge 70% to 90% in 2021. Notably, it thinks operating profits at department stores like Macy’s (NYSE: M), Nordstrom (NYSE: JWN), and Kohl’s (NYSE: KSS) will rise over 500%, while regular apparel retailers like Gap (NYSE: GPS) will see their operating profits climb over 100%.
Much of this change won’t happen until the second half of the year. The U.S. economy still needs time to recover from the damage the pandemic has caused, and shoppers likely won’t feel comfortable returning to stores at full force until a COVID-19 vaccine becomes widely available. But once that happens and stores no longer have to worry about capacity limits, consumers may flock to malls and shopping centers after having stayed away for so long.
That said, a big reason apparel retailers are positioned to thrive in the coming year is that many have done a great job ramping up their digital presence and offering consumers more ways to access purchases. Options like BOPIS (buy online, pick up in store) and curbside pickup have already worked wonders for some retailers. With that framework in place, even in a post-pandemic world, it opens the door to added revenue as consumers take advantage of more flexibility. It also gives physical retailers an advantage over online giants like Amazon (NASDAQ: AMZN), which limits consumers to shipping.
But while a positive outlook for apparel retailers is a good thing for real estate investors in theory, there’s a flip side to consider. Operating stores is expensive, and many apparel retailers have seen digital sales explode in the wake of the pandemic. That could, in the coming year, drive many retailers to rethink their current models and look at unloading less profitable stores in an effort to shift resources toward improving their online presence.
As such, even if apparel retailers start clocking in higher profits, that may not be enough to prevent store closures. Though cash flow may not be an issue, some retailers could shutter locations as a strategic long-term move.
The Millionacres bottom line
Of course, whether apparel retailers really see such a strong surge in profits in 2021 will depend on how quickly a COVID-19 vaccine is rolled out as well as how the economy recovers as a whole. The fact that Moody’s sees strong potential is a positive thing, but real estate investors should brace for store closures in the coming years nonetheless.
