Closing stores may not be the saving grace retailers think it is

By Daphne Howland | January 13, 2016

Dive Brief:

• Many retailers are closing stores in an effort to boost profitability, but the move can have a short-term hit to profits without any guarantee of long-term improvement to performance.
• Macy’s, Gap, Aeropostale, Target, Finish Line, and perhaps most infamously Sears, among others, have all closed stores in recent years and in many cases plan on closing more.
• Yet investors expect struggling retailers to close even more unprofitable stores to improve returns.

Dive Insight:

Many retailers are under pressure to close underperforming stores in a tough retail environment, as e-commerce continues to surge and as consumers opt to spend on experiences rather than stuff. 

Don Ingham, director at Tenth Avenue Holdings and portfolio manager of the TAH Core Fund, which have investments in Sears, told Retail Dive last year that the retailer’s willingness to close some 600 underperforming stores in just a year was a bold one. 

“If they didn’t invest heavily online and invested more in the stores, sales and profits would have looked better,” Inghamsaid, “but they would still be irrelevant because it would have been a waste of money.”

Yet Sears continues to see same-store sales fall, dipping 8.6% in Q3 alone.

Closing stores means losing sales and market share, and for omnichannel retailers it can mean loss of fulfillment opportunities. And it’s an expensive process in itself, with early exit from leases just one of the costs. In a way, those early exits can mean that a retailer is helping ease the way for a competitor that might take up the lease.

"It's a delicate balance," Michael Burden, executive managing director at Excess Space Retail Services, an advisory firm that specializes in real estate disposition and lease restructuring,told CNBC. "I don't think any retailers are in real rushes to close their stores."