Take a walk around the typical U.S. mall, and chances are, you'll come across a Gap (NYSE: GPS) store. But perhaps not for long. Like other retailers, Gap is turning its focus to digital sales in the wake of the pandemic. And that could end up being a mixed bag for real estate investors.
A solid first quarter fueled by online sales
After a rocky 2020, Gap's first-quarter sales rebounded 89% this year to $4 billion compared to a year earlier. Meanwhile, sales rose 8% compared to the first quarter of 2019. Gap also posted a net profit of $166 million for its first quarter, compared to a loss of almost $1 billion a year prior, when the pandemic first reared its ugly head.
But while those numbers are no doubt encouraging, only about 17% of Gap's overall sales came from indoor malls. Meanwhile, online sales made up 40% of its first-quarter revenue.
In light of that, Gap is making plans to close 30% of its Gap and Banana Republic stores in North America by 2024, with a focus on shuttering locations in indoor malls. All told, malls could lose a good 350 stores within three years, 75 of which are being phased out this year.
Malls are out of the picture
Gap isn't just planning to sink resources into expanding its digital offerings. It's also seeking to open more off-mall locations in the hopes of drumming up added business. The pandemic turned a lot of consumers off of malls, so now retailers are increasingly looking to open stand-alone stores in outdoor shopping centers.
All told, the retailer expects 80% of its revenue from its Gap and Banana Republic brands to come from off-mall, outlet, and online sales by 2024.
The impact on real estate investors
Gap's plans are set to deal a heavy blow to mall REIT (real estate investment trust) investors. Malls have been steadily losing tenants for years, even before the pandemic. But the coronavirus outbreak exacerbated an already problematic trend by forcing many retailers into bankruptcy -- a process that, for some, led to store closure plans.
On the other hand, malls' loss could be shopping centers' gain. Shopping centers, too, have lost tenants in the wake of the pandemic, so filling those vacancies could make for a nice surge in revenue.
Furthermore, Gap's focus on digital sales could be a good thing for industrial REITs. Gap is already making plans to build a massive warehouse in Texas with the capacity to process 1 million packages on a daily basis. If Gap continues to seek out warehouse space, industrial REIT values could climb.
Gap's future seemed somewhat uncertain last year, when the pandemic battered retailers. The company's sales declined to $13.8 billion in 2020, and it posted a net loss of $665 million. But thankfully, at this point, things are looking up. Still, it's pretty clear that while Gap may have some pretty big plans, it's clearly pulling away from malls, and that's apt to make an existing vacancy crisis exponentially worse.