The past eight months have been pretty depressing for department store fans. In February, Macy's (NYSE: M) announced plans to close 125 stores nationwide. In June, bankrupt retailer J.C. Penney (OTC: JCPNQ) said it would shutter 154 locations. And in late August, Lord & Taylor declared that following its bankruptcy, it would be shutting down operations completely.
But as harsh a blow as this news may have been for shoppers, it's even more devastating to real estate investors with money in shopping centers and malls. Why? Malls have historically relied on department stores as anchors. These large tenants not only pay a lot of rent but also draw in customers and keep other stores interested in maintaining a mall presence. And the fact that they're seemingly dropping like flies is troubling.
If too many department stores close down for good, it will threaten malls' very existence. And that could be disastrous for investors in both physical malls as well as mall real estate investment trusts.
That said, while we may see more department store closures in the not-so-distant future, these retailers are pretty unlikely to disappear completely. Here are three reasons why.
1. They sell essentials
While some department stores focus on clothing and other apparel, others, like Macy's, offer everything from shoes to kitchen appliances to bath towels. Even if consumers start cutting back on luxury purchases, they won't be able to stop buying essential household items, which means they will still need department stores -- even during periods when the economy is poor and spending is widely curtailed.
2. They have a loyal customer base
There's a reason so many Lord & Taylor fans were heartbroken over the retailer's recent closing announcement: Consumers tend to be very loyal to their favorite department stores. Not only that, but many shoppers enjoy the in-person experience of visiting a department store, traveling from floor to floor stocking up on goods. These customers are less likely to be satisfied with an online-only model.
3. They're trying new things
Department stores aren't oblivious to the writing that's been on the wall for quite some time. But rather than give up, some are trying to shift their business models to ensure their own longevity. Macy's, for example, is making plans to open a series of smaller stores in non-mall locations. Doing so should help the retailer conserve cash and test the market for off-mall shopping. Moves like these can help ensure department stores -- particularly the most adaptable ones -- can thrive, even in an age where online shopping seems to be taking over.
The bottom line
Although we've lost a lot of good department stores this year, or are in the process of bidding them adieu, there's a strong chance these retailers will ultimately survive in some shape or form. That's great news not just for investors but for the dedicated shoppers who love nothing more than to spend their days at the mall running up a credit card tab.