2020 was a tough year for retailers, and Macy's (NYSE:M) was no exception. The department store's third-quarter earnings painted a pretty bleak picture, with same-store sales declining 20.2% and a net loss of $91 million.
But Macy's fourth-quarter earnings told a different story. In fact, for the quarter ended Jan. 30, the retailer turned a profit for the first time since the pandemic began. Retail sales grew 5.3% in January compared to December, and revenue came in at $6.78 billion, an increase from the $6.5 billion Wall Street analysts had initially expected.
Now at first glance, all this reads like good news for real estate investors. Shopping malls count on Macy's to serve as an anchor tenant, and a strong fourth quarter lessens the likelihood of store closures to some degree. But when we dig a little deeper, there may actually be less for mall REIT (real estate investment trust) investors to celebrate.
In-store sales remain sluggish
Though Macy's had a decent fourth quarter, same-store sales fell 17.1% from a year prior. In fact, much of the sales growth the retailer saw came from digital orders, which have boomed across the board in the course of the pandemic.
Many consumers have been skittish about entering department stores and malls since the coronavirus outbreak took hold, shifting instead to online purchases -- a trend that may very well continue beyond the pandemic due to the ease and convenience of digital ordering. Not surprisingly, online sales were up 21% for Macy's this past quarter, and among the company's nearly 7 million new customers, many shopped online and didn't actually visit a physical Macy's location.
Of course, booming online sales create a solid opportunity for Macy's. But if the retailer decides to invest more resources in digital sales and distribution centers, it could leave mall operators in a bind. Macy's takes up more mall space than any other department store. If it makes the decision to close underperforming locations to focus on online sales, malls could be left with lots of empty square footage to try and fill.
While replacing any retail tenant is a challenge for malls right now given the number of stores that have closed over the past year (or are making plans to close), replacing department stores is a whole different story. Furthermore, names like Macy's have long worked to draw in mall customers as well as new tenants, and if Macy's starts to decrease its mall footprint, the results could be downright devastating.
Furthermore, Macy's has been increasingly taking its stores off-mall and plans to uphold that trend in 2021. If these standalone locations perform well, it could result in an even more troubling shift away from malls. As such, while a strong fourth quarter for Macy's is good news from a viability standpoint, investors still have plenty of reason to worry that the department store giant may no longer be the reliable tenant so many malls once banked on.