Malls Contend With Store Closings In The First Quarter

Restaurants and retail landlords reported a mixed bag of first-quarter earnings results on Wednesday (May 2), beating analysts’ expectations in some cases and falling short at times. Looking forward to digital and retail transformations, companies such as Yum! Brands are optimistic about the future.

Restaurants are focusing on delivery through platforms such as Grubhub. Mall owners are looking to redevelop space left behind by anchor store closures, while outlet mall owners are confident there is room for expansion in their space.

Here’s how Yum! Brands and Tanger Factory Outlet Centers Inc. saw success in the first quarter and how The Pennsylvania Real Estate Investment Trust slipped slightly short of estimates. Executives weigh in on what’s “in store” for the future.

Yum! Looks to Delivery

Yum! Brands — which owns KFC, Pizza Hut and Taco Bell — delivered strong first-quarter earnings. The restaurant operator recorded earnings per share of $0.90 and revenues of $1.37 billion, beating analysts’ expectations of $0.68 and $1.09 million respectively.

The company also reported 1 percent growth in same-store sales and 3 percent net new unit growth. It also opened 239 net new units and refranchised 144 restaurants, including 52 KFC, 43 Pizza Hut and 49 Taco Bell units.

The report comes as company begins its second full year of its “transformation journey,” Yum! Brands CEO Greg Creed said in the company’s post-earnings conference call. While the company is on track with its efforts, Creed said turnaround in the U.S. will be a “gradual build.”

“We continue to see positive momentum as a result of the Transformation Agreement and focus on being hot, fast and reliable,” Creed said in the call. “Our investment in digital, operations, advertising and delivery drivers is paying off, with improvements in internal operating metrics, including online conversion and delivery times.”

Creed also referenced the company’s partnership with Grubhub in the call, which comes as fast food chains have increased their appetite for delivery: McDonald’s, for example, has rolled out delivery to 5,000 of its approximately 14,000 U.S. stores. According to McDonald’s, customers typically spend more when they order delivery.

While Creed did not offer specific metrics on the call, he said the partnership is off to a good start. “As our teams work to complete this integration, we are testing with Grubhub in a few select KFC and Taco Bell markets and are encouraged by initial results,” Creed said.

PREIT Has Plans for Anchor Tenants

The Pennsylvania Real Estate Investment Trust (PREIT) narrowly missed first-quarter earnings expectations, reporting earnings per share of $0.29 compared to analysts’ estimates of $0.33. The publicly traded real estate investment trust (REIT) also fell short of analysts’ top-line estimates, reporting revenues of $55.98 million compared to analysts’ expectations of $57.82 million.

The first quarter comes at a time when a number of department stores are “in transition,” PREIT Chairman and CEO Joseph Coradino said on the REIT’s post-earnings conference call. But the trust is optimistic about the future.

“Anchor closures have provided an opportunity to bring exciting new — in many cases new-to-market — retail, dining, entertainment, health and wealth and destinations that are reflective of our shoppers’ lifestyle,” Coradino said. “We expect the new anchors we have disparaged through our portfolio will generate at least 3x the sales volumes that the previous tenants did, highlighting the continued opportunity to draw new customers and increase productivity for our existing tenants.”

Coradino added that by dividing up the space left by anchor tenants, the REIT is taking in market rents that are, on average, 8x higher than its previous income stream for those properties.

The news comes as malls are seeking out all sorts of new tenants — even brick-and-mortar outposts of eCommerce retailers such as Bonobos, Rent the Runway, BaubleBar, Google and Amazon. Group fitness continues to grow, with studios like CycleBar, Soul Cycle, Core Power Yoga, Orange Theory Fitness, Pure Barre and Club Pilates infiltrating shopping centers as experiential retailers.

Of course, food also plays a vital role in the consumer experience. Research shows that by 2020, there will be approximately 200 food halls in the U.S., which is more than double the current number. In fact, Eataly, the leading food hall developer, has 35 locations and has plans for several additional food halls in the coming years.

Outlet Malls Are Underdeveloped

Tanger Factory Outlet Stores Inc. reported slightly stronger-than-expected first-quarter earnings. The company reported earnings per share of $0.60 and revenues of $123.54 million, beating analysts’ estimates of $0.58 and $122.23 million respectively.

Still, Tanger Factory Outlet Centers Inc. CEO Steven Tanger said in the company’s post-conference earnings call that the firm is dealing with store closures and is “budgeting for potential additional store closures and lease adjustments still to come this year.” Tanger added that outlet centers were impacted by harsh winter weather, which led to center closures as well as snow removal expenses.

The CEO said his company has been tracking eCommerce sales for about 20 years. And while some might say that the country is “over retail,” he still sees opportunity in the outlet space. While there’s more than 1 billion square feet of retail space in regional malls, there’s only about 70 million square feet of outlet centers.

In addition, Tanger said there are only about 175 outlet centers in the U.S., and the way Tanger outlets are built allows for flexibility that more traditional malls might not have.

“We don’t have multiple level boxes, department stores, category killer-type of stores,” Tanger said in the earnings call. “We have property type and a structure that’s easily adaptable to new trends. And that’s why we’ve been able to, for 37 years, never end the year less than 95 percent occupied.”

The Road Ahead

Earnings season is still not over: There are still about 400 companies that will report their earnings between Thursday (May 3) and Friday (May 4), including Blue Apron and Alibaba Group Holding Ltd.

Will they fare as well as Yum! Brands or Tanger Outlet Centers? Tune in to find out.