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Time was when a big, recognizable store name and a good placement in a popular mall was a pretty sure formula for a successful specialty store business.
But that’s no longer so true these days, and while we often blame competition from online retailers, one other major factor is the decline of the American mall. Even while new high-end malls are being erected in some parts of the country, many more are closing or suffering the slower death of declining traffic. By some estimates, as many as half of all the malls in the country will close in the coming decades.
It’s unclear how much of a factor these mall troubles were in The Gap’s (NYSE: GPS) recent news that it would close a quarter of its retail stores. But even if poor design or stiff competition played a bigger role, declining foot traffic in many malls certainly could not have helped.
Well-Positioned Specialty Retailers
Can brick-and-mortar specialty stores still make for good investments at a time of such uncertainty for the American mall? The answer is yes, but with the traditional model for retail success being challenged, investors will have to apply considerable scrutiny.
Specialty stores can and do exist outside of traditional malls, as both standalones on Main Street and in other retail clusters, but fewer malls will ultimately mean fewer stores.
Here are some tips for finding the specialty stores most likely to weather these tough times for malls.
Most Shoppers Still Love a Discount
Just like major discount chains like Target (NYSE: TGT) are successfully challenging traditional department stores, some of the most enduring specialty stores are the ones that are also offering a discount.
Shoe and handbag lovers love DSW Inc. (NYSE: DSW), which offers a broad selection of merchandise across 450 retail stores nationwide. And if you’d bought the stock five years ago you might have a lot more money for accessories. Shares of DSW have risen more than 200% in the past five years.
Likewise, Ross Stores (NASDAQ: ROST), the 58-year old retailer that sells a bit of a hodgepodge of discount merchandise from apparel to home goods in more than 1,200 stores, seems to have hit on that sweet spot between fashion and affordability. It has shown steady sales and earnings growth in recent years, and its stock price has risen more than 200% in the last year alone.
Big Ticket Items Sell Best in Physical Spaces
“Kicking the tires,” is more than an empty expression. It means that shoppers are not likely to spend a lot of money without being able to see, touch and feel the item in question. And it applies to a lot more than cars.
Earlier this month, furniture retailer Restoration Hardware (NYSE: RH) issued a strong first-quarter earnings report that showed revenues rising 15% to $422.5 million, and increased its second-quarter revenue estimate to the $495 million to $505 million range. Analysts are encouraged by the company’s ability to innovate with the recent launch of a new more modern line of furniture.
Think Outside of the Box
If you’re looking for some really promising specialty store investments, research some of the things beyond apparel and accessories that consumers buy. You might find a successful retailer.
Vitamins, anyone? GNC Holdings (NYSE: GNC) produces a line of vitamins, supplements and other health and wellness products that it sells across a network of almost 9,000 stores worldwide. Last year, its net income came in just shy of $110 million, up from $88.5 million the year before. And over the past year, its stock has risen more than 33%.
Look at Where Teens Are Shopping
Some things never change: Teens still love to hang out in malls and some of the best-positioned stores will be those that cater to a younger crowd, with inexpensive and trendy items.
Five Below (NASDAQ: FIVE) is a chain of 385 stores that sell things like scarves, sunglasses and trendy socks … all priced at $5 or less, and it is growing fast. In the most recent quarter, its revenues grew 22%. The company has plans to expand its current base of 400 stores to 2,000.
Trends come and go, but this store could be on to something.
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