4 mall staples that could be gone in 2017

The past few years have not been kind to traditional retailers, and malls have been hit especially hard. Online sales have taken a portion of their business, and how to win it back has not been an easily solved problem. Malls have been hurt likely because the incentive to leave the house, find a parking spot, and deal with crowds has diminished when nearly every item available can be purchased online and delivered to you.

The coming year does not appear to offer any respite, and a new report from Fitch Ratings suggests that a shift has occurred in how people spend money. To succeed, a physical retailer must offer an "omnichannel" model that serves customers across physical and digital stores.

"Spending focus on services and experiences appears here to stay, so the dividing line between best-in-class retailers and market share donors is increasingly going to be determined by which retailers can cater to the evolving landscape," said Fitch's David Silverman. "Those that find success have invested in the omni-channel model and have differentiated their products and customer service to draw customers in."

Fitch expects that retail sales in the United States will grow 3% to 4% in 2017, but only 1% of that will be in-store, with the rest happening online. The credit rating service also predicts that a number of mall staples will be "challenged to maintain share, liquidity and positive comps," which could make it hard for them to survive the year.

Sears Holdings is on the ropes

While some companies on this list may surprise you, Sears Holdings (NASDAQ:SHLD), which operates both Sears and Kmart stores, has been on life support for quite a while. The chain, which often serves as a mall anchor store, has already lost $1.61 billion through three quarters in 2016, after losing $7.1 billion over the four previous fiscal years. The Fitch press release puts Sears in the "challenged" category.

While the company talked about plans for a turnaround during its most recent earnings call, there have been no signs that one will actually occur. The struggling retailer posted a loss of $748 million in its fiscal Q3, up from a $454 million loss in the same period in 2015. Revenue also fell by $721 million for the quarter, largely due to the company having fewer stores, but comparable-store sales suffered a 7.4% decline, accounting for $304 million of the drop.

Sears Holdings' survival plan involves selling off its still valuable Craftsman, Diehard, and Kenmore brands, closing more stores, and driving customers to the as-yet-unproven Shop Your Way app. That's a plan where even if it survives, the chain will be much smaller, spelling bad news for the malls it used to anchor.

Abercrombie & Fitch teetering

When a company that builds its brand around its name becomes less cool, it becomes very hard to survive. Abercrombie & Fitch (NYSE:ANF) has that problem and it's also on Fitch's "challenged" list. Teens, always a fickle audience, have turned to other brands, leaving the once-daring retailer scrambling to find an audience.

The company, which also operates the nearly equally uncool Hollister brand, saw net sales drop by 6% in Q3 to $821.7 million. Comparable sales fell by the same percentage and income per diluted share plummeted to $0.02 for the third quarter, compared to $0.48 last year.

"As expected, our third quarter was challenging. While Hollister improved sequentially, it was more than offset by disappointing performance in A&F," Executive Chairman Arthur Martinez said in the earnings release. Global sales for the chain were down by 5% for the total company, which it blamed on negative headwinds from A&F flagship and tourist locations as well as problems with chain store sales.

Abercrombie & Fitch through the years
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Abercrombie & Fitch through the years
CHICAGO - DECEMBER 8: Abercrombie & Fitch clothing is displayed in one of its stores December 8, 2003 in Chicago, Illinois. A recent report claims that Abercrombie & Fitch discriminates against sales representatives based on their 'attractiveness.' They have also decided to remove its Christmas catalog, which some claim featured sexually explicit images, from its store shelves. (Photo by Tim Boyle/Getty Images)
UNITED STATES - JUNE 02: Cabs drive in front of a billboard surrounding the future home of a new Abercrombie & Fitch store, Thursday, June 2, 2005 in New York. Gasoline prices near April's record high restrained spending and the third straight month of cool weather hurt sales of items such as swimwear and outdoor grills at chains including Wal-Mart, the largest retailer. Sales at luxury chains including Nordstrom surged as upper-income workers led April wage gains that were the biggest in eight years. (Photo by Daniel Acker/Bloomberg via Getty Images)
NEW YORK, UNITED STATES: A military marching group walks past a gaint Abercrombie and Fitch billboard along 5th Avenue during the 244th New York City St. Patrick's Day Parade 17 March 2005. The parade is the largest St. Patrick's Day parade in the world. AFP PHOTO/Timothy A. CLARY (Photo credit should read TIMOTHY A. CLARY/AFP/Getty Images)
Abercrombie & Fitch models (Photo by David Pomponio/FilmMagic for Paul Wilmot Communications)
Atmosphere during Abercrombie & Fitch Store Opening on 5th Avenue in New York City at A & F 5th Avenue in New York City, New York, United States. (Photo by David Pomponio/FilmMagic for Paul Wilmot Communications)
Abercrombie & Fitch models during Abercrombie & Fitch Store Opening on 5th Avenue in New York City at A & F 5th Avenue in New York City, New York, United States. (Photo by David Pomponio/FilmMagic for Paul Wilmot Communications)
LONDON - MARCH 22: Shoppers leave the Abercrombie & Fitch UK Flagship Store on Savile Row on March 22, 2007 in London, England. The store opened its doors today and is the labels first London branch. (Photo by Gareth Cattermole/Getty Images)
NEW YORK - SEPTEMBER 10: (ITALY OUT UNTIL JANUARY 15, 2010) Model waits in the entrance of Abercrombie&Fitch shop in fifth Avenue, during Mercedes Benz Fashion Week on September 10, 2009, in New York City. (Photo by Filippo Mutani/Getty Images)
Topless male models wave to a crowd of onlookers from the soon to open Abercrombie & Fitch flagship clothing store in Hong Kong on August 5, 2012. The store is due to be opened for trading on August 11. AFP PHOTO / LAURENT FIEVET (Photo credit should read LAURENT FIEVET/AFP/GettyImages)
About 40 Abercrombie & Fitch (A&F) models line outside the A&F store to take pictures with passersby in Knightsbridge, a Singapore shopping mall on December 9, 2011. A&F's first Singapore store will open to the public on December 15. AFP PHOTO / SIMIN WANG (Photo credit should read SIMIN WANG/AFP/Getty Images)
LOS ANGELES, CA - JULY 11: A general view of atmosphere at Abercrombie & Fitch's presentation of their 2013 Stars on the Rise at Abercrombie & Fitch on July 11, 2013 in Los Angeles, California. (Photo by Michael Buckner/Getty Images for Abercrombie & Fitch)
A pedestrians is reflected in the window of the Abercrombie & Fitch Co. kids store on 5th Avenue in New York, U.S., on Tuesday, May 26, 2015. Abercrombie & Fitch Co. is scheduled to release earnings figures on May 28. Photographer: Craig Warga/Bloomberg via Getty Images
DUBLIN, IRELAND - September 5, 2016: A metal plaque is attached to the stone facade of an Abercrombie & Fitch store in Dublin, Ireland. Founded in New York City in 1892, the American retailer of upscale casual wear for young customers is headquartered in New Albany, Ohio. (Photo by Robert Alexander/Getty Images)

Malls need stores

Were it not for some of the malls where it operates stepping in to bail out the company, Aeropostale would probably already no longer exist. The chain sold its assets in September to a group led by Simon Property Group (NYSE:SPG) and General Growth Properties (NYSE:GGP), two mall operators that paid $243 million to snap up the chain in order to not have it go out of business, Bloomberg reported.

The new owners plan to keep at least 229 stores open, but going forward the company will need to generate sales in order to survive. Being bought out by its landlords gives Aeropostale a second chance, but even desperate mall owners are only going to throw so much money at the chain just to keep the location from being vacant.

Barnes & Noble needs a business model

While the first two chains on this list appeared on the Fitch list of companies facing troubles in 2017 and Aeropostale has already found itself escaping closure once, Barnes & Noble(NYSE:BKS) has been on death watch for so long that it's easy to forget it on lists like this one. Unfortunately, just because the retailer has been trying to turn itself around for a long time does not mean that it has succeeded.

The chain, which anchors some malls, while also having some stand-alone and mall-adjacent stores, has steadily seen sales decline. In Q2 of fiscal 2017, the company saw total sales drop 4% to $858 million while comparable sales dropped 3.2% "on lower store traffic," according to the earnings release. The company lost $20.4 million in the quarter, an improvement over $27.2 million for the same period last year.

Barnes & Noble has cut its loss by careful financial management and lowering expenses. That has bought it some time, but efforts such as adding toys, and diversifying away from books have not increased sales. The chain is currently testing selling more food and even alcohol in some stores, and in order to survive it needs to quickly find a business model capable of reversing these declines.

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Daniel Kline has no position in any stocks mentioned. He rarely buys more than coffee and lunch at the mall. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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